<PAGE>
As Filed with the Securities and Exchange Commission on October 10, 1995.
Registration No. 33-94536
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
AMENDMENT NO. 2* TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_________________________
PEASE OIL AND GAS COMPANY
(Name of small business issuer in its charter)
Nevada 1311 87-0285520
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
751 Horizon Court, Suite 203 WILLARD H. PEASE, JR.
P. O. Box 1874 751 Horizon Court, Suite 203
Grand Junction, Colorado 81506 P. O. Box 1874
(970) 245-5917 Grand Junction, Colorado 81506
(Address and telephone number (970) 245-5917
of principal executive offices (Name, address and telephone
and address of principal place number of agent for service)
of business)
With Copies to:
Alan W. Peryam, Esq.
Annita M. Menogan, Esq.
Hopper and Kanouff, P.C.
1610 Wynkoop Street, Suite 200
Denver, Colorado 80202
(303) 892-6000
Approximate date of proposed sale to the public: As soon as practicable
following the date on which the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
*Pursuant to Rule 429 adopted under the Securities Act of 1933, this
Registration Statement also constitutes Post-Effective Amendment No. 2 to
Registration Statement No. 33-64448.
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Title of Each Maximum Maximum
Class of Amount Offering Aggregate Amount of
Securities To Be to be Price Offering Registration
Registered(5)(6) Registered Per Share Price Fee
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 2,005,219 $ .8125(2) $1,629,240(2) $ 561.81 (2)
Shares(1)
Common Stock 933,063 $ (3)(4) $2,640,474(4) $ 910.51 (4)
Underlying Shares(3)
Warrants
Common Stock 82,353 $ .85 $ 70,000 $ 24.14
Underlying Shares(7)
Convertible
Debentures
Series A 90,000 $ 5.25 $ 472,500(2) $ 162.93
Cumulative Shares
Convertible
Preferred
Stock
Common Stock(1) 80,000 $ .6874(8) $ 54,996(8) $ 18.96
Shares --------- --------- --------
Total XXXX XXX XXX $1,678.35
- -------------------------------------------------------------------------------
<FN>
(1) Consists of shares of common stock ("Common Stock") previously issued
in private placements and 241,875 shares issuable upon conversion of
90,000 shares of Common Stock Underlying Series A Cumulative
Convertible Preferred Stock ("Preferred Stock").
(2) The registration fee was calculated in accordance with Rule 457 (c)
and is based on the average of the high and low prices of Registrant's
Common Stock and Preferred Stock, respectively, as reported on the
NASDAQ Small-Cap Market on July 5, 1995.
(3) Includes Common Stock underlying (i) purchase warrants ("Warrants")
for 50,000 shares exercisable at $.85, (ii) Warrants exercisable for
40,000 shares at $.70, (iii) Warrants exercisable for 18,000 shares at
$.83, (iv) Warrants for 83,188 shares exercisable at $1.92 per share;
(v) Warrants for 400,000 shares exercisable at $1.25, and (vi)
Warrants exercisable for 241,875 shares exercisable at $7.50 per share
by the Representative of the underwriters in the Company's Preferred
Stock offering; and 100,000 Warrants exercisable at $.8125 per share.
Does not include 3,082,429 shares underlying Common Stock Warrants
exercisable at $6.00 per share, such Warrants issued or issuable upon
conversion of Preferred Stock, previously registered pursuant to
Registration Statement No. 33-64448.
(4) The registration fee was calculated in accordance with Rule 457(g)(1)
and is based on the proposed respective exercise prices of the respec-
tive Warrants.
(5) Not included are 3,566,179 shares of Common Stock underlying Preferred
Stock, Warrants and Convertible Debentures; 241,875 Warrants; and
90,000 Shares of Preferred Stock, of which the initial issuance or
exercise or conversion was previously registered pursuant to
Registration Statement No. 33-64448.
(6) In accordance with Rule 416, there are hereby being registered an
indeterminate number of additional shares of Common Stock which may be
issued as a result of the anti-dilution provisions of the Preferred
Stock and Warrants or as a result of any future stock split or stock
dividend.
(7) The shares of Common Stock are issuable at $.85 per share upon
conversion of $70,000 of Convertible Debentures issued in 1990.
(8) The registration fee was calculated in accordance with Rule 457(c) and
is based on the average of the high and low prices of Registrant's
Common Stock and Preferred Stock, respectively, as reported on the
NASDAQ Small-Cap Market on September 7, 1995.
</TABLE>
The Registrant hereby deregisters 365,000 shares of Preferred Stock that
were registered pursuant to Registration Statement No. 33-64448 but were not
issued because the amount of the Registrant's offering was reduced and the over-
allotment Option of the Representative of the Underwriters was not exercised.
The Registrant also hereby deregisters 200,000 Convertible Preferred Stock
Purchase Warrants ("Preferred Stock Warrants"), and 20,000 shares of Preferred
Stock that were registered pursuant to Registration Statement No. 33-64448. The
20,000 Preferred Stock Warrants were registered to be issued to the
Representative of the Underwriters but were not issued when the amount of the
Registrant's offering was reduced.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
PEASE OIL AND GAS COMPANY
Cross Reference Sheet
PART I
INFORMATION REQUIRED IN THE PROSPECTUS
Item
Number Form SB-2 Item Number Caption or Location in Prospectus
1. Front of Registration Statement Front of Registration Statement and
and Outside Front Cover of Outside Front Cover of Prospectus
Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back Cover
Cover Pages of Prospectus Pages of Prospectus
3. Summary Information and Risk Prospectus Summary and Risk Factors
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Securityholders
8. Plan of Distribution Front Cover and Inside Front Cover
of Prospectus, Plan of Distribution
9. Legal Proceedings Not Applicable
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain Security Ownership of Certain
Beneficial Owners and Management Beneficial Owners and Management
12. Description of Securities Description of Securities
13. Interests of Named Experts and Not Applicable
Counsel
14. Disclosure of Commission Position Not Applicable
on Indemnification for Securities
Act Liabilities
15. Organization Within Last Five Not Applicable
Years
16. Description of Business Business of the Company
17. Management's Discussion and Management's Discussion and
Analysis or Plan of Operation Analysis of Financial Condition and
Results of Operations
18. Description of Property Business of the Company
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Market Prices of Common Equity,
Related Stockholder Matters Dividend Policy and Related
Stockholder Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes In and Disagreements With Experts
Accountants on Accounting and
Financial Disclosure
<PAGE>
SUBJECT TO COMPLETION DATED OCTOBER __, 1995
PROSPECTUS
PEASE OIL AND GAS COMPANY
6,183,064 Shares of Common Stock and
241,875 Warrants to Purchase Shares of Common Stock and
90,000 Shares of Series A Cumulative Convertible Preferred Stock
This Prospectus relates to the resale by the holders (the "Selling
Securityholders") named herein of, or the exercise or conversion of other
securities of Pease Oil and Gas Company ("Company") of up to 5,699,314 Shares of
the $0.10 par value common stock ("Common Stock") of Pease Oil and Gas Company
("Company"), which are either currently issued and outstanding, or which are
issuable upon (i) the exercise of warrants ("Warrants") to purchase shares of
Common Stock ("Warrants"), which Warrants are currently outstanding or are
issuable upon conversion of shares of the Company's Series A Cumulative
Preferred Stock ("Preferred Stock"); and (ii) conversion of certain outstanding
convertible debentures of the Company. Of the 5,699,314 Shares of Common Stock
offered hereby for resale or upon exercise or conversion, 1,843,344 shares which
are currently outstanding are being offered by certain stockholders of the
Company, 3,082,429 shares are issuable upon exercise of Warrants that were
issued or which are issuable upon conversion of shares of Preferred Stock,
82,353 shares are offered for resale after conversion by holders of certain
convertible debentures of the Company, and 691,188 shares are offered for resale
after exercise by the holders of other outstanding warrants of the Company. See
"Selling Securityholders."
This Prospectus also relates to the resale of (i) 90,000 shares of
Preferred Stock which are issuable upon exercise of certain other outstanding
warrants which are held by the Representative of the underwriters of a previous
offering by the Company; (ii) 241,875 shares of Common Stock which are issuable
upon conversion of the 90,000 Shares of Preferred Stock; (iii) 241,875 Warrants
which are issuable upon conversion of the Preferred Stock; and (iv) 241,875
Shares of Common Stock issuable upon exercise of the Warrants. The Company will
not receive any proceeds from the sale of shares by the Selling Securityholders
or the Representative and will not receive any proceeds upon the conversion of
the Preferred Stock or convertible debentures, which are convertible without
payment of additional consideration into Common Stock or Common Stock and
Warrants. If all of the Warrants are exercised, of which there is no assurance,
the Company will receive proceeds of up to approximately $21,290,317. There is
no assurance that the all or any portion of the Warrants will be exercised.
However, the holders of the Warrants will have to exercise the Warrants in order
to sell the shares of Common Stock offered for resale hereby, excluding the
1,843,344 shares which are currently outstanding.
----------------------
FOR INFORMATION CONCERNING CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY AND BY PERSONS WHO CONVERT THEIR
PREFERRED STOCK OR CONVERTIBLE DEBENTURES OR WHO EXERCISE WARRANTS, SEE "RISK
FACTORS" COMMENCING ON PAGE 8 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ________________, 1995
1
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and in accordance with the Exchange
Act files periodic reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy and information
statements and other information filed by the Company with the Commission can be
inspected and copied (at prescribed rates) at the Commission's Public Reference
Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D. C.
20549, and at the Regional Offices of the Commission located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511
and 7 World Trade Center, Suite 1300, New York, New York 10048. In addition,
reports, proxy statements and other information concerning the Company can be
inspected and copied at the office of the National Association of Securities
Dealers, Inc. 9513 Key West Avenue, Rockville, Maryland 20850-3389.
The Company has filed with the Commission a registration statement (the
"Registration Statement") under the Securities Act of 1933 (the "Securities
Act") with respect to the securities offered hereby. This Prospectus, which is
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain items of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
securities offered hereby, reference is hereby made to the Registration
Statement and such exhibits and schedules.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN
THIS PROSPECTUS. ALL INFORMATION RELATING TO SHARES OF COMMON STOCK AND PER
SHARE AMOUNTS HAS BEEN RESTATED TO REFLECT A 1-FOR-5 REVERSE STOCK SPLIT
EFFECTED IN JUNE 1993. CERTAIN OIL AND GAS TERMS USED IN THIS PROSPECTUS ARE
DEFINED IN THE GLOSSARY AT PAGE 51.
The Company
Pease Oil and Gas Company, a Nevada corporation ("Company"), has been
engaged in the oil and gas exploration, development and production business
since 1972. The Company's operations have been conducted primarily in Colorado,
Nebraska, Utah and Wyoming.
In August 1993, the Company acquired Skaer Enterprises, Inc., a Colorado
corporation, its affiliated corporations and businesses and related oil and gas
properties and other assets, which are together referred to in this Prospectus
as "Skaer" or the "Skaer Assets." The total cost to the Company of the Skaer
Acquisition was $12,200,000, including various costs of 300,000 associated with
the acquisition. The acquisition of Skaer was financed primarily by proceeds
from the sale in a public offering of 900,000 shares of the Company's Series A
Cumulative Convertible Preferred Stock ("Preferred Stock"), which generated net
proceeds of approximately 7,965,000; the issuance by the Company of 117,647
Shares of restricted common stock with an agreed upon value of $400,000; the
issuance of 150,000 shares of Preferred Stock in a later private offering with
an agreed value of $1,500,000; and bank borrowings of $2,400,000. See "Business
of the Company -- Acquisitions."
As of June 30, 1995, the Company had varying ownership interests in 245
gross productive wells (212 net) located in five states. The Company operates
240 of the wells, with the other wells being operated by independent operators
under contracts that are standard in the industry.
The Company's general business strategy is to increase reserves and cash
flow by: (a) establishing and building upon a regional base of operations and
technical expertise; (b) pursuing low risk acquisitions, which contain proven
reserves, established production history, and significant undeveloped reserve
potential; (c) pursuing acquisitions of family-owned and private companies,
while the competition's focus is on major-company divestitures; (d) enhancing
production and reserves by employing advanced technical procedures and utilizing
the Company's regional database; and (e) expanding the throughput of the
natural gas processed by the Company's Gas Plant. The Company does not intend
to conduct a significant amount of exploratory drilling.
In May 1995, the Company restructured its operations by substantially
downsizing its oil field service and supply store operations as well as closing
its administrative office in Denver, Colorado. As a result of this
restructuring, the Company terminated 40 of its 71 employees. Management of the
Company does not expect any material negative impact in its financial condition
as a result of the restructuring.
Prior to its actions in May 1995, and due to the Company's cash position,
in December 1994, the Board of Directors of the Company voted not to declare the
quarterly dividend on the Company's Preferred Stock. In March 1995, the Board
of Directors voted to suspend indefinitely the payment of any future Preferred
Stock dividends, although dividends will continue to accrue on a monthly basis.
In January 1995, the Company commenced a tender offer to the Preferred
Stockholders to convert each share of Preferred Stock and all then accrued
dividends through March 31, 1995 into 4.5 shares of Common Stock and warrants to
purchase 2.625 shares of Common Stock. Prior to the tender offer, the Preferred
Stock would have been convertible into 2.625 shares of Common Stock. As a
result of the tender offer, 933,492 shares of Preferred Stock were converted
into 4,200,716 shares of Common Stock and warrants to purchase 2,450,416 shares
of Common Stock.
3
<PAGE>
The Company is required to reduce earnings available to Common Stockholders
by the fair value of the additional shares which were issued to induce the
Preferred Stockholders to convert their shares of Preferred Stock. Because the
Company issued an additional 1,750,000 shares of Common Stock in the tender
offer compared to the number of shares that would have been issued under the
original terms of the Preferred Stock, the Company was required to deduct the
fair value of these additional shares of $1,640,000 from earnings available to
Common Stockholders. This non-cash off balance sheet charge resulted in the
reduction of earnings per share by $.32.
While this charge is intended to show the cost of the inducement to the
owners of the Company's Common Stock immediately before the tender offer,
management does not believe that it accurately reflects the impact of the tender
offer on the Company's Common Stockholders. As disclosed to the Preferred
Stockholders in connection with the tender offer, the book value per share of
Common Stock increased from a negative amount to over $1.00 per share as a
result of the tender offer. Therefore, management believes that even though the
current accounting rules require the $.32 charge per share of Common Stock,
there are other significant offsetting factors by which the Common Stockholders
benefitted from this conversion, which are not reflected in the financial
statements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Company - Preferred Stock" and "-Earnings Per
Share."
The Company's address is 751 Horizon Court, Suite 203, Grand Junction,
Colorado 81506 and its telephone number is (970) 245-5917.
4
<PAGE>
The Offering
Common Stock Outstanding Prior to the Offering 7,011,032 shares
Total Possible Shares of Common Stock Outstanding
After the Offering(1) 12,580,183 shares including
598,600 shares issuable upon
the exercise of outstanding
options, 4,075,599 shares
issuable upon exercise of
various Warrants, 786,599
shares issuable upon
conversion of outstanding
Preferred Stock and 108,353
shares issuable upon
conversion of currently
outstanding convertible debt.
Use of proceeds Proceeds from any exercise of
Warrants and options will be
used by the Company for
general corporate purposes.
Securities being offered by the Company 3,082,429 shares of Common
Stock issuable upon the
exercise or Warrants issued or
issuable upon conversion of
shares of Preferred Stock.
Securities being offered for resale by
Selling Securityholders 3,000,635 shares of Common
Stock; 90,000 shares of
Preferred Stock; 241,875
Warrants.
NASDAQ symbols WPOG for Common Stock;
WPOGP for Preferred Stock
- -----------------------
[FN]
(1) Includes 684,000 shares of Common Stock issuable upon conversion of
exercise of various convertible debentures or options and warrants,
respectively, which are not included in the registration statement of which
this Prospectus is a part.
The securities offered hereby involve a high degree of risk and should be
considered only by persons who can afford the loss of their entire investment.
See "Risk Factors."
5
<PAGE>
Summary Consolidated Financial Information
(dollars in thousands, except per share data)
The following summary consolidated financial information or the years
ended December 31, 1990 through December 1994, for the six months ended June 30,
1994 and 1995, respectively, for the Company and for the years ended January 31,
1991 through 1993 and the eight months ended August 31, 1993, for Skaer are
derived from the audited financial statements of the Company.
Company Information
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1990 1991 1992 1993(1) 1994(1)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $ 428 $ 566 $ 508 $ 4,387 $12,069
Expenses, Net 618 836 976 5,173 13,776
Net Loss (190) (270) (468) (786) (1,707)
Preferred Stock Dividends:
Declared -- -- -- 410 868
In Arrears -- -- -- -- 290
Net Loss Applicable to Common
Shareholders $ (190) $ (270) $ (468) $ (1,196) $ (2,865)
<CAPTION>
Six Months Ended
June 30,
------------------
1994(1) (1995(1)
<S> <C> <C>
Statement of Operations Data:
Revenue $ 6,361 $ 5,061
Expenses, Net 7,037 5,329
Net Loss (676) (268)
Preferred Stock Dividends:
Declared 579 --
In Arrears -- 101
Net Loss Applicable to Common
Shareholders $(1,255) $(2,010)
Net Loss per Common
Share:
Before Inducement $ (1.29) $ (0.07)
Non-Cash Inducement -- (0.32)
------ ------
Total $ (1.29) $ (0.39)
======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
1994 1995
<S> <C> <C>
Balance Sheet Data:
Working capital (Deficit) $ (429) $ (585)
Total assets $ 15,839 $14,426
Long-term debt,
net of current maturities $ 2,254 $ 1,658
Stockholders' equity $ 9,354 $ 9,408
_______________________
<FN>
(1) Consolidated financial information for the Company and Skaer, which was acquired by the Company in August 1993.
</TABLE>
Skaer Information
<TABLE>
<CAPTION>
Eight Months Ended
Year Ended January 31, August 31,
------------------------------------------- ------------------
1991 1992 1993 1993
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $ 8,944 $ 7,794 $ 7,669 $ 4,491
Expenses, net $ 8,304 $ 7,671 $ 7,520 $ 4,471
Net Earnings $ 640 $ 123 $ 149 $ 20
</TABLE>
6
<PAGE>
RISK FACTORS
Company's Continuing Losses and Financial Condition. As described in the
financial statements contained in the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994, and contained elsewhere in this
Prospectus the Company has sustained operating losses during each of the last
five years. The Company had net losses of approximately $785,911, $1,707,125
and $267,935 for the fiscal years ended December 31, 1993 and 1994 and the six
months ended June 30, 1995, respectively, and net losses applicable to common
shares of $1,195,907, $2,865,202 and $2,010,185 for fiscal years 1993 and 1994
and the six months ended June 30, 1995, respectively. Although the present
value of the Company s oil and gas reserves exceeded the Company s liabilities
as of December 31, 1994, there can be no assurance that the Company can produce
the oil and gas reserves or otherwise liquidate those assets. In addition, no
assurance can be made that the Company will operate profitably in the future as
an oil and gas exploration, development and production company. Any likelihood
of future profitability of the Company must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with the oil and natural gas exploration, development
and production business in which the Company will be engaged.
Need for Additional Capital. The Company's ability to complete its planned
drilling and development programs which is intended to expand its reserve base
and diversify its operations, is dependent upon the Company's ability to obtain
the necessary capital. The Company's cash flow and borrowing capacity, together
with any proceeds from this offering, will not be sufficient for the Company to
complete its planned drilling and development programs. Additional sources of
financing will be needed and there can be no assurance that additional sources
of financing will be available at all or at a reasonable cost. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations Financial Condition, Capital Resources and Liquidity."
Development Risks and Production. A portion of the Company's oil and gas
reserves are proved undeveloped reserves. Successful development and production
of such reserves, although they are categorized as "proved," cannot be assured.
Additional drilling will be necessary in future years both to maintain
production levels and to define the extent and recoverability of existing
reserves. There is no assurance that present oil and gas wells of the Company
will continue to produce at current or anticipated rates of production, that
development drilling will be successful, that production of oil and gas will
commence when expected, that there will be favorable markets for oil and gas
which may be produced in the future or that production rates achieved in early
periods can be maintained. See "Business of the Company."
Bank Loan Repayment Priority. As of June 30, 1995, the Company s
outstanding loan with Colorado National Bank ( Bank ) was $2,184,697. The loan
is secured by substantially all of the Company s oil and gas reserves as well as
the Company s Natural Gas Plant. If the Company s obligations under the terms
of its loan agreement are ever declared immediately due and payable, the Bank
would have a first lien on all of the Company s major assets and might sell a
significant portion of the assets to repay the loan.
Price Volatility. The Company s largest source of operating income is from
the sale of produced oil, natural gas and natural gas liquids. Therefore, the
level of the Company s revenues and earnings are affected by price at which
these commodities are sold. In the past, the Company's average annual sales
prices for oil, natural gas and natural gas liquids, has been erratic, with a
recent history of rising oil price per barrel but lower gas price per Mcf. It
is likely that these prices will continue to fluctuate in the future. From
December 1993 through August 1995, the average price per barrel of oil received
at the wellhead rose from approximately $15.00 to $16.87 in August in 1995.
Concurrently, however, average prices for gas per Mcf have dropped from $2.19 in
1993 to $1.14 in August 1995. On August 1, 1995 the price per barrel of oil was
$16.13 and per Mcf of gas was $.84. The Company expects the gas prices in the<PAGE>
Rocky Mountain region to continue to be depressed due to weak demand in
California, production in the Gulf Coast, constrictions on moving and selling
gas in eastern markets and other factors beyond the Company's control.
7
<PAGE>
Various factors beyond the Company's control affect prices of oil and natural
gas, including worldwide and domestic supplies of oil and natural gas, the
ability of the members of the Organization of Petroleum Exporting Countries
("OPEC") to agree to and maintain oil price and production controls, political
instability or armed conflict in oil-producing regions, the price of foreign
imports, the level of consumer demand, the price and availability of alternative
fuels, the availability of pipeline capacity and changes in existing federal
regulation and price controls. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business of the Company."
Limitations on Accuracy of Reserve Estimates. This Prospectus contains
estimates of reserves and of future net revenue which have been prepared by
petroleum engineers. Estimates of reserves and of future net revenue prepared
by different petroleum engineers may vary substantially depending, in part, on
the assumptions made and may be subject to adjustment either up or down in the
future. The actual amounts of production, revenue, taxes, development
expenditures, operating expenses, and quantities of recoverable oil and gas
reserves to be encountered may vary substantially from the engineers' estimates.
Oil and gas reserve estimates are necessarily inexact and involve matters of
subjective engineering judgment. In addition, any estimates of future net
revenue and the present value thereof are based on price and cost assumptions
made by the Company which only represent its best estimate. If these estimates
of quantities, prices and costs prove inaccurate, the Company is unsuccessful in
expanding its oil and gas reserves base with its capital expenditure program,
and/or declines in and instability of oil and gas prices occur, then write downs
in the capitalized costs associated with the Company's oil and gas assets may be
required. While the Company believes that its estimated proved oil and gas
reserves and estimated future net revenues are reasonable and accurate, there is
no assurance that certain revisions will not be made in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Business Risks. The Company must continually acquire and explore for and
develop new oil and gas reserves to replace those being depleted by production.
Without successful drilling or acquisition ventures, the Company's assets,
properties and revenues will decline. Oil and gas exploration and development
are speculative, involve a high degree of risk and are subject to all the
hazards typically associated with the search for, development of and production
of oil and gas. Although the Company has recently emphasized development
drilling in the Denver Julesburg ("DJ") Basin where drilling operations are
believed to be less risky than in some other areas, the process of drilling for
oil and gas can be hazardous and carry the risk that no commercially viable oil
or gas production will be obtained. The cost of drilling, completing and
operating wells is often uncertain. Moreover, drilling may be curtailed,
delayed or canceled as the result of many factors, including title problems,
weather conditions, shortages of or delays in delivery of equipment, as well as
the financial instability of well operators, major working interest owners and
well servicing companies. The availability of a ready market for the Company's
oil and gas depends on numerous factors beyond its control, including the demand
for and supply of oil and gas, the proximity of the Company's natural gas
reserves to pipelines, the capacity of such pipelines, fluctuations in
production and seasonal demand, the effects of inclement weather and
governmental regulation. New gas wells may be shut-in for lack of a market
until a gas pipeline or gathering system with available capacity is extended
into the area. New oil wells may have production curtailed until production
facilities and delivery arrangements are acquired or developed. The Company's
business will always be subject to these types of risks.
Operating Hazards and Uninsured Risks. The Company's operations are
subject to all of the risks incident to exploration for and production of oil
and gas, including blow-outs, cratering, pollution and fires, each of which
could result in damage to or destruction of oil and gas wells or production
facilities or injury to persons and property. The Company's insurance may not
fully cover certain of these risks and the occurrence of a significant event not
fully insured against could have a material adverse effect on the Company's
financial position.
8
<PAGE>
Dependence on Key Personnel. The success of the Company will largely be
dependent upon the efforts and active participation of Willard H. Pease, Jr. the
President of the Company, James N. Burkhalter, the Vice President of Engineering
and Production of the Company and Patrick J. Duncan the Chief Financial Officer
of the Company. The loss of the services of any of its officers may adversely
affect the Company's business. See "Management."
Competition. The oil and gas industry is highly competitive in many
respects, including identification of attractive oil and gas properties for
acquisition, drilling and development, securing financing for such activities
and obtaining the necessary equipment and personnel to conduct such operations
and activities. In seeking suitable opportunities, the Company competes with a
number of other companies, including large oil and gas companies and other
independent operators with greater financial resources and, in some cases, with
more experience. Many other oil and gas companies in the industry have
financial resources, personnel and facilities substantially greater than those
of the Company and there can be no assurance that the Company will continue to
be able to compete effectively with these larger entities. See
"Business Competition."
Government Regulation and Environmental Risks. The production and sale of
gas and oil are subject to a variety of federal, state and local government
regulations, including regulations concerning the prevention of waste, the
discharge of materials into the environment, the conservation of natural gas and
oil, pollution, permits for drilling operations, drilling bonds, reports
concerning operations, the spacing of wells, the unitization and pooling of
properties, and various other matters, including taxes. Many jurisdictions have
at various times imposed limitations on the production of gas and oil by
restricting the rate of flow for gas and oil wells below their actual capacity
to produce. In addition, many states have raised state taxes on energy sources
and additional increases may occur, although increases in state energy taxes
would have no predictable effect on natural gas and oil prices. The Company
believes it is in substantial compliance with applicable environmental and other
government laws and regulations. However, there can be no assurance that
significant costs for compliance will not be incurred in the future.
Anti-Takeover Protections. The Company's Articles of Incorporation and
Bylaws include certain provisions, the effect of which may be to inhibit a
change of control of the Company. These include the authorization of additional
classes of Preferred Stock and classification of the Board of Directors. In
addition, certain of the Company's officers have entered into employment
contracts providing for certain payments to be made upon termination. These
provisions may discourage a party from making a tender offer for or otherwise
attempting to obtain control of the Company. See "Description of Securi-
ties Certain Provisions of the Articles of Incorporation and Bylaws."
Preferred Stock. The Company is authorized to issue 2,000,000 shares of
preferred stock. See "Description of Securities." The shares of preferred
stock may be issued from time to time in one or more series as may be determined
by the Board of Directors without stockholder approval. Further, the voting
powers and preferences, the relative rights of each such series, and the
qualifications, limitations and restrictions may be established by the Board of
Directors without stockholder approval. As of August 31, 1995, the Company has
issued a total of 1,170,000 shares of Preferred Stock, 202,688 shares of which
are outstanding and currently are convertible into 544,724 shares of Common
Stock and 544,724 Warrants. The other 967,312 shares of Preferred Stock that
were issued were converted into 4,288,005 shares of Common Stock and 2,537,705
Warrants. Any issuance of Preferred Stock could affect the rights of the
holders of Common Stock and therefore reduce the value of the Common Stock.
Holders of the shares of Preferred Stock are entitled to preferences ahead of
holders of Common Stock as to dividends and at liquidation and any such
preferences could affect the value of the Common Stock. Any preferences will be
lost if the holders of the outstanding shares of Preferred Stock have conversion
rights and convert their Preferred Stock into Common Stock and Warrants.
9
<PAGE>
Election of Additional Directors by Preferred Stockholders. Whenever
dividends on the Preferred Stock or any outstanding shares of Parity Stock, as
defined, have not been paid in an aggregate amount equal to at least six
quarterly dividends on such shares (whether or not consecutive), the number of
directors of the Company will be increased by two, and the holders of the
Preferred Stock, voting separately as a class with the holders of any Parity
Stock on which any like voting rights have been conferred and are exercisable,
will be entitled to elect such two additional directors to the Board of
Directors and will have the same rights at any meeting of stockholders of the
Company at which directors are to be elected held during the period such
dividends remain in arrears. Such voting rights will terminate when all such
dividends accrued and in default have been paid in full or set apart for
payment. The term of office of all directors so elected will terminate
immediately upon such payment or setting apart for payment.
Dividend Policy. Holders of shares of Preferred Stock are entitled to
receive cumulative cash dividends in the amount 10% per year when, as and if
declared by the Board of Directors of the Company out of funds at the time
legally available therefor. Payment of dividends is subject to declaration by
the Board of Directors and if not declared, dividends will cumulate from quarter
to quarter without interest until declared and paid. Unpaid dividends accrue
and increase the number of shares of Common Stock into which Preferred Stock may
be converted. The Company s Board of Directors decided not to pay the 1994
fourth quarter dividend in December 1994. In March 1995, the Board of Directors
suspended the payment of preferred stock dividends indefinitely. As of March
31, 1995 there was $101,644 of preferred stock dividends in arrears. The
Company does not currently pay cash dividends on its Common Stock (into which
the Preferred Stock is convertible) and does not anticipate paying such
dividends in the foreseeable future. The Company's agreement with Colorado
National Bank restricts the payment of dividends on its Common Stock without
consent of the lender. See "Market Price of Common Equity, Dividend Policy and
Related Stockholder Matters."
Outstanding Options and Warrants. As of August 31, 1995, the Company has
outstanding options and warrants to purchase a total of 3,887,600 shares of the
Company's Common Stock. The exercise prices of the outstanding options and
warrants range from $.70 per share to $6.00 per share. The holders of the
outstanding options and warrants might have the opportunity to profit from a
rise in the market price (of which there is no assurance) of the shares of the
Company's Common Stock underlying the options and warrants and their exercise
may dilute the ownership interest in the Company held by other stockholders.
USE OF PROCEEDS
The Company has allocated the net proceeds, if any, from exercise of the
Warrants for general corporate purposes. Pending use of the proceeds, the
Company may invest the funds in short-term money market, government and federal
agency obligations, bank certificates of deposit and savings deposits. It is
uncertain when, if at all, the Company will receive proceeds from exercise of
the Warrants. See "Selling Securityholders," "Description of Securities" and
"Plan of Distribution."
MARKET PRICES OF COMMON EQUITY, DIVIDEND POLICY AND
RELATED STOCKHOLDER MATTERS
Market Information. The Company's Common Stock has been quoted on NASDAQ
Small-Cap Market under the symbol WPOG, since July 1980. The Company's
Preferred Stock has been quoted on the NASDAQ Small-Cap Market under the symbol
WPOGP since August 1993. All information below has been restated retroactively
to reflect the reverse stock split effected in 1993.
10
<PAGE>
The following table shows the range of high and low bid quotations for each
quarterly period commencing January 1, 1993, or in the case of Preferred Stock,
since trading began in August 1993, as reported by the National Association of
Securities Dealers, Inc. Such quotations represent prices between dealers and
do not include retail markups, markdowns, or commissions nor necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Bid Prices
---------------------------------------
Quarter Ended Common Stock Preferred Stock
------------- ----------------- ------------------
High Low High Low
<S> <C> <C> <C> <C>
June 30, 1995 31/32 5/8 5 7/8 4 3/4
March 31, 1995 1 3/4 23/32 5 7/8 3 5/8
December 31, 1994 3 5/8 1 5/8 8 1/2 4 3/4
September 30, 1994 3 1 3/4 8 1/2 6 7/8
June 30, 1994 2 3/8 2 8 3/8 7
March 31, 1994 2 3/8 1 7/8 8 1/2 7 1/2
December 31, 1993 3 2 1/2 9 3/8 8 3/8
September 30, 1993 4 1/4 3 5/16 9 3/8 8 7/8
June 30, 1993 4 13/16 3 1/4 N/A N/A
March 31, 1993 3 1/8 2 3/8 N/A N/A
</TABLE>
Stockholders. As of August 31, 1995, the Company had 1015 holders of
record of the Company s Common Stock and 28 holders of record of the Company s
Preferred Stock.
Dividends. The Company has not paid cash dividends on its Common Stock in
the past and does not anticipate doing so in the foreseeable future. The
Company is precluded from paying dividends on its Common Stock so long as
amounts are owed under the Company's secured bank loan agreement.
Holders of shares of Preferred Stock are entitled to receive, when, as and
if declared by the Board of Directors out of funds at the time legally available
therefor, cash dividends at an annual rate of 10% (equal to $1.00 per share
annually), payable quarterly in arrears. Cumulative dividends accrue and are
payable to holders of record as they appear on the stock books of the Company on
such record dates as are fixed by the Board of Directors.
Preferred Stock dividends are payable quarterly at a rate of $0.25 per
share ($1.00 per share annually). The Preferred Stock was issued in August 1993
and the Company declared and paid five consecutive dividends for the quarters
ended September 30, 1993 through September 30, 1994. In December 1994, the
Board of Directors voted not to declare the quarterly cash dividend to holders
of the Company s Preferred Stock for the fourth quarter of 1994. The decision
to not pay the quarterly dividend was a result of the Company s current cash
position and the Company s belief that its primary lender would not approve the
payment thereof. In March 1995, the Board of Director s voted to suspend
payment on any future Preferred Stock dividends indefinitely. However, pursuant
to the terms of the Preferred Stock, dividends will continue to accrue and
increase the number of shares of Common Stock into which shares of Preferred
Stock are convertible. Dividends paid in the future, if any, on the Preferred
Stock will be contingent on many factors including but not limited to whether a
dividend can be justified through the cash flow and earnings generated from
future operations.
11
<PAGE>
The Preferred Stock will have priority as to dividends over the Common
Stock and any series or class of the Company's stock hereafter issued, and no
dividend (other than dividends payable solely in Common Stock or any other
series or class of the Company's stock hereafter issued that ranks junior as to
dividends to the Preferred Stock) may be declared, paid or set apart for payment
on, and no purchase, redemption or other acquisition may be made by the Company
of, any Common Stock or other stock unless all accrued and unpaid dividends on
the Preferred Stock have been paid or declared and set apart for payment.
MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
Liquidity
At June 30, 1995, the Company s cash balance was $313,052 with a working
capital deficit of $584,523 compared to a cash balance of $532,916 and a working
capital deficit of $429,417 at December 31, 1994. This deterioration of cash
and working capital can be substantially attributed to the net loss from
operations, debt service and funds used for capital expenditures in the first
six months of 1995. The further deterioration of the Company's working capital
was offset by the net proceeds of $233,880 generated from the sale of Common
Stock issued in a private placement (this private placement is discussed later
in this section under the caption "Capital Resources") and proceeds of $309,606
generated from the sale of property and equipment. Significant effort has been
put forth by Management to increase the cash flow and earnings of its existing
asset base. For example, efforts to date have included the following:
1) A detailed evaluation of all its oil and gas properties in
December 1994. As a result of this evaluation and on-going analysis,
approximately 35 wells that lost approximately $134,000 in 1994 were
shut-in on February 2, 1995 and sold in the first half of 1995. The
sale of these properties generated net proceeds of $155,580 and the
Company recognized a gain of $59,349 on the transaction during the
first half of 1995. Because of the losses suffered by these
properties in 1994, Management does not expect any negative financial
impact on its future operations from the disposition of the properties
and Management believes that the actions taken will increase the net
margin generated from oil and gas operations;
2) The Company s Gas Plant has been connected to KN Front Range
Gathering Company s Wattenberg Field gathering system ( KN ). This
connection will provide access to more than 3,500 wells in one of the
most actively drilled gas fields in Colorado. In June 1995, the
Company was processing approximately 800 Mcf per day of natural gas
purchased from third party producers through the KN interconnect.
This is in addition to the 1,100 Mcf per day processed from Company-
owned wells. The Company is continually negotiating with other
producers on the KN system to further increase the Gas Plant s
utilization. Management believes the additional gas throughput will
increase the Gas Plant s efficiency and utilization, contributing to
increased profits and enhancing its long-term value;
3) In May 1995, the Company announced it would restructure its
operations by substantially downsizing its oil field service and
supply operations. As of June 30, 1995, the Company classified
$465,466 in its balance sheet as "Assets Held for Sale". These
assets consist of a portion of the Company's oil field service
equipment. The Company plans to sell most of these assets in an
auction in September 1995. Based on discussions with the auctioneer
hired for the sale of the assets, the Company expects the net proceeds
from the sale to be at or slightly above net book value. There is no
assurance of the amount which will be realized from the auction and
sale, if any at all; and
4) In connection with the restructuring, the Company also has
closed its administrative office in Denver, Colorado. The closing of
the Denver office has resulted in the Company eliminating annual
payroll costs associated with its accounting and administrative staff
of approximately $140,000. The Company also expects to save an
additional $60,000 annually from costs that were duplicated as a
result of the Company maintaining two administrative offices (such as
rent, telephone, insurance and office supplies).
12
<PAGE>
The restructuring was initiated to eliminate the areas of its business that
were losing money, reduce operating costs, increase efficiencies, and to
generate additional funds for working capital, drilling and development
activities. Management does not expect these restructuring activities to have
any negative impact on its financial condition. Historical financial
information and the potential effect on future restructuring are more fully
illustrated and discussed later, by category, in the Results of Operation
section for the six months ended June 30, 1994 and 1995.
Other than the funds anticipated from the September auction, the Company
has no immediate access to additional working capital. However, Management
believes the proceeds from the auction and the current cash flows of the Company
will support operations for at least six months. The Company has not yet
determined what actions it will take if the proceeds from the auction or current
cash flows will not support continued operations. Potential actions may include
(i) selling certain oil and gas properties; (ii) reducing, downsizing,
discontinuing and/or spinning-off other assets and operations of the Company;
and (iii) attempting to raise additional capital through private placements,
joint ventures or debt financing. In light of declining natural gas prices,
declining rig counts, lackluster margins, and the competitive environment
inherent in the oil and gas industry, management is continually exploring
alternatives and opportunities to control costs and improve the Company's cash
flow.
Preferred Stock. In December 1994, the Board of Directors of the Company
voted to not declare the quarterly cash dividend to holders of the Company s
Preferred Stock for the fourth quarter of 1994. The decision to not pay the
quarterly dividend was a result of the Company s cash position and the Company s
belief that its primary lender would not approve the payment thereof. In March
1995, the Board of Directors voted to suspend payment on any future Preferred
Stock dividends indefinitely. However, pursuant to the terms underlying the
Preferred Stock, dividends will continue to accrue on a monthly basis.
Dividends paid in the future, if any, on the Preferred Stock will be contingent
on many factors, including but not limited to, whether or not a dividend can be
justified through the cash flow and earnings generated from future operations.
Since the future payment of Preferred Stock dividends was so uncertain, and
the Company wanted to preserve its working capital for drilling and development
activities, in January 1995, the Company extended a tender offer to the
Preferred Stockholders. On February 28, 1995, the Company completed the tender
offer whereby the holders of the Company s Preferred Stock were given the
opportunity to convert each share of Preferred Stock, and all then accrued and
undeclared dividends (including the full dividend for the quarters ending
December 31, 1994 and March 31, 1995) into 4.5 shares of the Company s Common
Stock and Warrants to purchase 2.625 shares of Common Stock exercisable at $5.00
per share through December 31, 1996 and $6.00 per share through August 13, 1998,
(the date the Warrants expire). As a result of the tender offer, 933,492 shares
of the Preferred Stock converted into 4,200,716 shares of the Company s Common
Stock and warrants to purchase 2,450,416 shares of Common Stock. In addition,
32,220 shares of Preferred Stock converted into 85,676 shares of Common Stock
prior to the tender offer and 600 shares of Preferred Stock were converted into
1,613 shares of Common Stock after the tender offer. Accordingly, as of August
31, 1995 there remain 202,688 shares of Preferred Stock outstanding. These
events substantially changed the capital structure of the Company and alleviated
the burden of approximately 83% of Preferred Stock dividends. The Company has
indicated to its Preferred Stockholders that it has indefinitely suspended
payment of dividends on the Preferred Stock.
Capital Resources. On September 30, 1994, the Company completed a private
placement of a total of $1,454,750 of 12% Convertible Unsecured Promissory Notes
("Notes") from which the Company realized net proceeds of approximately
$1,307,403. The Notes were automatically converted into 909,219 shares of the<PAGE>
Company's Common Stock effective September 30, 1994. The Company also issued
warrants to purchase 63,188 shares of the Company's Common Stock at an exercise
price of $1.92 per share to brokers who sold the Notes in the private placement.
13
<PAGE>
On December 19, 1994, the Company completed a private placement selling a
total of 289,125 shares of Common Stock for $1.60 per share. The Company
generated net proceeds from this offering of approximately $358,000. In
connection with the offering, the Company also issued warrants to purchase
20,000 shares of common stock at an exercise price of $1.92 per share to brokers
who sold the shares in the Private Placement.
On June 15, 1995, the Company completed a private placement selling a total
of 250,000 units for $1.50 per unit. Each unit consisted of two shares of
Common Stock and one Warrant to purchase one share of Common Stock.
As discussed previously, the Company anticipates that it will sell a
portion of its oil field service equipment at an auction in September 1995. The
Company estimates the net proceeds to be approximately $460,000 and expects
these funds will be sufficient to support the Company's operation for at least
six months.
Long-term Debt. During the year ended December 31, 1994, the Company
borrowed $1,460,000 and repaid principal of $1,031,042 plus $218,365 of interest
on its bank credit facility. The amount owed on the Company's bank facility at
December 31, 1994 was $2,588,958. The proceeds of the loan advances during this
period have been utilized by the Company in its 1994 exploration, development
and recompletion program in Loveland Field, Colorado, as well as other working
capital needs. The loan is scheduled to be repaid in monthly installments
through August 1997.
In March 1995, the Company restructured this bank debt. The Company had
violated certain financial covenants under the prior debt agreement. However,
the bank agreed to waive any covenant violations that may have occurred in the
past and restructure the new financial covenants. In addition, in order to
assist the Company in rebuilding its working capital, the bank agreed to reduce
the monthly principal payment by approximately one-half for a six month period
beginning in March 1995. In connection with this restructuring, the bank
increased the interest rate from prime plus 1% to prime plus 3% beginning in
April 1995. The amount owed on the Company s bank facility at June 30, 1995 was
$2,184,697.
Capital Expenditures. The Company s total 1994 capital expenditures were
approximately $2.5 million. Of this amount approximately $2.1 million was used
for drilling, workover and recompletion activities. During 1994, the Company
performed major workovers in two fields; drilled one dry hole in western
Colorado; successfully completed four new wells in Loveland Field; and
recompleted 10 existing wells in the Codell formation (a reservoir previously
not successfully exploited in the Loveland Field.) As a result of these
activities and changes in the estimates used in computing oil and gas reserves,
the Company s total proved reserves at December 31, 1994 increased by 285,300
BOE (as compared to the total proved reserves at December 31, 1993).
For the first six months of 1995, the Company invested $264,000 in property
and equipment. Approximately $160,000 of these costs were incurred in
connection with the Gas Plant expansion activities intended to accommodate and<PAGE>
process additional third party gas through KN. $38,000 was spent on workovers
and equipment acquisitions related to the operations of the Company's oil and
gas properties. $37,000 was incurred for acquiring oil field service equipment
and administrative furniture and fixtures.
Currently, the Company s drilling, development and recompletion activities
have been curtailed significantly. Capital expenditures, at least in the near
future, will be limited to the Gas Plant expansion activities which are expected
to be an additional $250,000. These costs are expected to be incurred in the
third and fourth quarters of 1995. The drilling, development and recompletion
activities will be resumed as soon as funds are available through cash flow from
operations or other financing vehicles.
Results of Operations for the Six Months Ended June 30, 1994 and 1995
Overview. The Company's largest source of operating income is from the
sale of produced oil, gas, and natural gas liquids. Therefore, the level of the
Company's revenues and earnings are affected by prices at which natural gas, oil
and natural gas liquids are sold. As a result, the Company's operating results
for any prior period are not necessarily indicative of future operating results
because of the fluctuations in natural gas, oil and natural gas liquid prices
and the lack of predictability of those fluctuations as well as changes in
production levels.
14
<PAGE>
Total Revenue. Total revenue from all operations was $5,061,047 for the
six months ended June 30, 1995, compared to $6,361,195 for the six months ended
June 30, 1994. The decrease in total revenue is primarily a result of lower
volume of natural gas delivered and lower natural gas prices which are discussed
in more detail on a line-by-line basis in the following paragraphs.
Gas Plant Marketing and Trading. The Company has a take-or-pay contract
with Public Service Company of Colorado ( PSCo ) which calls for PSCo to
purchase from the Company a minimum of 2.92 billion cubic feet ( BCF ) of
natural gas annually. The price paid the Company by PSCo is based on the
Colorado Interstate Gas Commission s spot price plus a fixed price bonus. The
contract expires in June of 1996 and is currently filled by the Company by two
different methods. The Company fills a portion of this contract with marketing
and trading activities which represent gas purchased from third parties and sold
to PSCo under the terms of the contract. In both 1995 and 1994, the price
between the amount paid the third party producers and the amount received from
PSCo under the "take-or-pay" contract was a constant price per MMBtu. However,
the volumes sold and the price paid by PSCo do vary on a monthly basis.
Operating statistics for the two periods are as follows:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1995 1994
<S> <C> <C>
Total Volume Sold (Mcf) 1,345,742 1,603,506
Average Price $ 1.51 $ 2.16
---------- ---------
Total Revenue $2,045,520 $3,456,299
Costs (1,801,570) (3,162,909)
---------- ---------
Gross Margin $ 243,950 $ 293,390
========== =========
</TABLE>
The lower volumes sold and prices received in 1995 as compared to 1994 are
primarily related to lower demand in the natural gas markets. The demand for
natural gas, as with any commodity, is subject to supply and demand. The
Company expects gas prices in the Rocky Mountain region to continue to be
depressed due to weak demand in California, production in the Gulf Coast,
constrictions on moving and selling gas in eastern markets and other factors
beyond the Company's control.
PSCo has informed the Company that it does not intend to renew the portion
of the contract in June 1996 that allows for Marketing and Trading activities.
Accordingly, these revenues and corresponding costs will most likely disappear
in July 1996. Since the gross margin represents the net cash flow and income
generated from this activity, the loss of this contract will have a material
negative impact on the Company's results of operations. However, PSCo has
advised the Company in informal discussions that the contract will be renewed at
a level equivalent to the throughput of the Company s Gas Plant at that time.
Therefore the Company is attempting to replace the revenues generated from the
marketing and trading activities by increasing the throughput of the Gas Plant
with third party gas. This expected activity is discussed in more detail in the
following paragraph under the caption "Gas Plant Liquids and Gas". It is
Management s intention to purchase and process as much third party gas in the
future (through the KN interconnect) that is economically feasible so that the
PSCo contract will be renewed at the highest level possible. However, there can
be no assurance that the PSCo contract will be renewed, or if renewed, will be
renewed at the same or higher levels.
15
<PAGE>
Gas Plant Liquids and Gas. These categories account for the natural gas
sold at the tailgate of the Gas Plant and the natural gas liquids extracted and
sold by the Gas Plant facility. During 1995 and 1994, the revenues generated
from these products were a result of the Company's own production from the
Loveland and Johnson's Corner Fields. However, in February 1995 the Company
began purchasing third party gas after being connected to KN Front Range
Gathering Company's Wattenburg Field gathering systems ("KN"). This connection
has provided the Company access to more than 3,500 producing oil and gas wells.
The Gas Plant has a design capacity of 6 MMcf per day (2.2 BCF annually), and in
1994, it processed an average of 1.29 MMcf per day (or .471 BCF annually).
Accordingly, Management believes the Gas Plant has historically been
underutilized. Therefore, in February 1995, the Company began utilizing the
Gas Plant's undercapacity by purchasing and processing third party gas through
KN. In June 1995, the Company was purchasing and processing an additional 800
Mcf per day of third party gas in addition to its own current production of
1,100 Mcf per day. It is Management's intention to purchase and process as much
third party gas in the future (through KN) that it economically feasible so that
the PSCo contract will be renewed at the highest level possible. Management is
continually searching and negotiating for more economically feasible third party
gas, however, at this time it is uncertain if the Company will be able to find<PAGE>
any more economically priced gas from third parties or if the current level can
be maintained.
Operating statistics for the two periods are as follows:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-----------------------------------------
1995 1994
----------------- --------------------
Average Average
Volumes Price Volume Price
<S> <C> <C> <C> <C>
Production:
Natural Gas Sold (Mcf) 217,600 $ 0.71 159,312 $ 0.77
B-G Mix (gallons) 673,600 $ 0.34 593,500 $ 0.26
Propane (gallons) 551,900 $ 0.33 430,000 $ 0.30
Operating Margin: Amount Amount
Revenue $ 567,202 $ 405,169
Costs (458,495) (234,359)
-------- --------
Gross Margin $ 108,707 $ 170,810
======== =========
Gross Margin Percent 19% 42%
</TABLE>
The increase in processing revenue can be substantially attributed to the
increase in natural gas liquids (BG mix and propane) produced from the
processing facility as a result of the drilling, development and recompletion
activities conducted by the Company in 1994 and the processing of third party
gas through KN that began in February 1995.
16
<PAGE>
Costs associated with these products consist of both semi-fixed and
variable costs. The semi-fixed costs consist of direct payroll, utilities,
operating supplies, general and administrative costs, and other items necessary
in the day-to-day operations. The semi-fixed costs average approximately
$400,000 annually and are not expected to change significantly regardless of the
volume processed by the Gas Plant. The variable costs consists primarily of
purchased gas from third parties, plant fuel and shrink, lubricants, and repairs
and maintenance. These costs are generally a direct function of the volume
processed by the Gas Plant and are expected to either increase or decrease with
the Gas Plant's total production. The costs in 1995 have increased both in
amount and as a percentage of revenue, when compared to 1994, as a result of the
Company purchasing and processing third party gas through KN beginning February
1995. Prior to that time, most of the gas processed by the Gas Plant was from
wells the Company owned. Accordingly, the variable costs, as a percentage of
revenue, have and are expected to increase significantly in future years.
Oil and Gas. Revenues generated from oil and gas sales for the six months
ended June 30, 1995 were $1,477,035, compared to $1,486,561 for the six months
ended June 30, 1994. Costs of oil and gas production were $900,592 for the six
months ended June 30, 1995, compared to $1,034,866 for the six months ended June
30, 1994. Operating statistics for the two periods are as follows:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------------------
1995 1994
<S> <C> <C>
Production:
Oil (bbls) 68,500 69,300
Gas (Mcf) 280,500 272,200
BOE 115,300 114,600
Average Collected Price:
Oil (per Bbl) $ 16.87 $ 16.00
Gas (per Mcf) 1.14 1.39
Per BOE 12.81 12.96
Operating Margin:
Revenue $1,477,035 $1,486,561
Costs (900,592) 1,034,866
--------- ---------
Gross Margin $ 576,443 $ 451,695
========= =========
Gross Margin Percent 39% 30%
Average Production Cost per
BOE before DD&A $ 7.81 $ 9.03
</TABLE>
As a result of Management s ongoing efforts to manage production and
control costs, the Company has been able to maintain its production levels while
decreasing its costs. Production was maintained as a result of the development
activities conducted in 1994. Costs are being monitored and controlled on a
lease-by-lease basis. Management of the Company performed a detailed evaluation
of all its properties in December 1994. As a result of this evaluation and on-
going analysis, 35 properties that lost approximately $134,000 in 1994 were
shut-in on February 2, 1995 and were sold by June 30, 1995. It is the intent of
Management to maintain and operate only those properties that will add value to
the Company in the future. Accordingly, Management believes that future costs
of production (per BOE) will be lower, although there can be no assurance of
lower future costs, because of the many uncertainties involved in the oil and
gas industry.
17
<PAGE>
Oil Field Services and Oil Field Supply. Operating statistics for the
Company's service and supply operations for the six months ended June 30, 1994
and 1995 are as follows:
<TABLE>
<CAPTION>
Service Operations Supply Operations
for the Six Months for the Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenue $ 590,981 $ 614,333 $ 332,583 $ 359,500
Costs (564,965) (581,129) (273,545) (364,824)
Depreciation (92,852) (88,365) (6,802) (13,777)
--------- ---------- ---------- ----------
Net Operating
Margin $ (66,836) $ (55,161) $ 49,236 $ (19,101)
========= ========== ========== =========
Net Operating
Margin % (11%) (9%) 15% 15%
</TABLE>
Management of the Company recognized that the margins in the oil field
service and supply business have been historically low. The burden of these low
margins is compounded with the risks inherent in these operations, the capital
investment required to maintain and operate, and the uncertainty of the future
prospects in light of the overall decrease in natural gas prices and drilling
activity. Accordingly, as stated previously, the Company announced a plan of
restructuring during the second quarter of 1995 that included a significant
downsizing of its service and supply operations.
Service Operations. Historically, the Company's service business has
operated out of two locations - Loveland and Sterling, Colorado. The operations
serviced both the Company's needs and those of third parties. The restructuring
is focused on reducing the operations to a point where the Company can service
its own needs efficiently and at the lowest possible cost while performing only
limited services to third parties. Services to third parties will be limited to
those circumstances when the equipment and manpower is not needed in the
Company's operations. Consequently, Management anticipates the revenues
generated in the future from the service operations will be approximately 70%
lower than the historical amounts. However, it is not expected to have a
material effect on the Company's overall results of operations in light of the
historically low margins.
Supply Operations. Historically, the Company's supply business has
operated out of two locations - Loveland and Sterling, Colorado. The
restructuring is focused on consolidating the operations to one location
(Loveland, Colorado), eliminating duplicate costs and ultimately reducing the
amount of inventory. Although Management expects total revenues generated from
the supply operations to decrease in the future approximately 50% from the
historical amounts, it is not expected to have a material effect on the
Company's overall results of operations in light of the historically low
margins.
18
<PAGE>
Well Administration and Other Income. This revenue primarily represents
the revenue generated by the Company for operating oil and gas properties.
There has been no significant change in the average monthly revenue between 1995
and 1994 and Management does not expect any significant change in the future.
General and Administrative Expenses. General and administrative costs for
the six months of 1995 were $580,768 compared to $885,370 for the same period in
1994. The decrease can be substantially attributed to considerable efforts
begun in 1994 by Management of the Company to decrease and control general and
administrative expenses for 1995. For example, Management has taken the
following measures:
a) Downsizing personnel, using contract services for temporary
assignments, eliminating unnecessary services or supplies, and
evaluating certain costs for efficiency and need;
b) not replacing two officers who resigned in 1994;
c) closing the Denver, Colorado administrative office resulting in the
elimination of annual payroll costs of approximately $140,000
associated with the Company's accounting and administrative staff; and
d) also in connection with closing the Denver, Colorado office, the
anticipated savings of $60,000 from costs that were duplicated as a
result of two administrative offices (such as rent, telephone,
insurance and office supplies).
Management is continually evaluating ways to further cut general and
administrative costs, However, there can be no assurance that future general
and administrative costs will be further curtailed nor can there be any
assurance that general and administrative costs may not increase in future
periods.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization ("DD&A") for the respective periods consisted of the following:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
----------------------------
1995 1994
<S> <C> <C>
Oil and Gas Properties $394,672 $396,462
Gas Plant and Other Buildings 121,920 104,687
Rolling Stock 81,332 68,537
Other Field Equipment 26,139 23,696
Furniture and Fixtures 23,143 20,433
Non-Compete Agreements 48,000 48,000<PAGE>
------- -------
Total $695,206 $661,815
======= =======
</TABLE>
19
<PAGE>
The increase can be substantially attributed to the increase in the
depreciable basis of the Gas Plant as a result of the expansion activities and
the addition of new rolling stock. Total DD&A for oil and gas properties
remained relatively constant at $3.58 per BOE in 1995 and $3.46 in 1994.
Dry Hole Plugging and Abandonment of Oil and Gas Properties. Dry holes,
plugging and abandonment costs incurred by the Company in the six months ended
June 30, 1995 were $5,291 compared to $87,038 for the first six months of 1994.
The costs in both periods were related to plugging and abandonment costs of
certain oil and gas properties. The Company does not anticipate that any
additional significant plugging and abandonment charges will be incurred in
1995. However, because of the many uncertainties involving oil and gas
producing activities, including future prices of oil and gas, lifting costs,
actual production and other economic factors, there can be no assurance of the
actual charges that will be incurred in the future related to plugging and
abandonments.
Interest Expense. Total interest expense for the six months ended June 30,
1995 was $161,385, compared to $146,139 for the six months ended June 30, 1994.
The increase can be substantially attributed to higher interest rates in 1995.
The interest expense is related primarily to the Company's bank facility. The
outstanding balance under the facility at June 30, 1995 was $2,184,697 and is
payable in monthly installments of principal and interest (at prime plus 3%)
through August 1997. The facility was restructured in March 1995. See
"Liquidity - Long-term Debt."
Restructuring Charges. The Company has recognized $79,719 as restructuring
charges for the first six months of 1995. $19,254 of these costs were incurred
in connection with the preferred stock tender offer. See "Liquidity-Preferred
Stock." The remaining costs of $60,465 were incurred in connection with the
restructuring announced in the second quarter of 1995 and consist primarily of
severance pay and a loss on abandonment of the office lease in Denver, Colorado.
Gain on Sale of Assets. The Company recognized a gain on the sale of
assets in the first six months of 1995 of $51,454 compared to $8,700 for the six
months ended June 30, 1994. The gain in 1995 is primarily related to the sale
of various oil and gas properties, including 35 wells which were shut-in in
1994, and the gain in 1994 was attributed to the sale of three vehicles and oil
field service equipment.
Earnings Per Share. As discussed previously, the Company completed a
tender offer to the Company's Preferred Stockholders during the three months
ended March 31, 1995. In connection therewith, the Company offered the
Preferred Stockholders 4.5 shares of Common Stock for each share of Preferred
Stock owned. The 4.5 shares represented an increase from the original terms of
the Preferred Stock which provided for 2.625 shares of Common Stock for each
share of Preferred Stock. Under a recently issued accounting pronouncement, the
Company was required to reduce earnings available to Common Stockholders by the
fair value of the additional shares which were issued to induce the Preferred
Stockholders to convert their shares. Since the Company issued an additional
1,750,000 shares of Common Stock in the tender offer compared to the shares that
would have been issued under the original terms of the Preferred Stock, the
Company was required to deduct the fair value of these additional shares of
$1,640,000 from earnings available to Common Stockholders. This non-cash off
balance sheet charge resulted in the reduction of earnings per share by $.32.
20
<PAGE>
While this charge is intended to show the cost of the inducement to the
owners of the Company's Common Stock immediately before the tender offer,
management does not believe that it accurately reflects the impact of the tender
offer on the Company's Common Stockholders. As disclosed to the Preferred
Stockholders in connection with the tender offer, the book value per share of
Common Stock increased from a negative amount to over $1.00 per share as a
result of the tender offer. Therefore, management believes that even though the
current accounting rules require the $.32 charge per share of Common Stock,
there are other significant offsetting factors by which the Common Stockholders
benefited from this conversion, which are not reflected in the financial
statements.
Results of Operations for the Years Ended 1993 and 1994
Overview. The Company's largest source of operating income is from the
sale of produced oil, gas, and natural gas liquids. Therefore, the level of the
Company's revenues and earnings are affected by prices at which natural gas, oil
and natural gas liquids are sold. As a result, the Company's operating results
for any prior period are not necessarily indicative of future operating results
because of the fluctuations in natural gas, oil and natural gas liquid prices
and the lack of predictability of those fluctuations as well as changes in
production levels.
Acquisition of Skaer. In August 1993, the Company acquired Skaer
Enterprises, Inc., its related businesses, and its related assets (collectively
referred to as "Skaer") in a transaction which dramatically changed the
complexion of the Company. Skaer was a diversified oil and gas company with
assets, operations, and oil and gas reserves substantially greater than the
Company prior to the acquisition.
Skaer was acquired for $12,200,000, including various costs associated with
the acquisition of $300,000. This acquisition was financed through: (i) the
issuance of 900,000 shares of Preferred Stock in a public offering which
generated net proceeds of $7,965,000; (ii) the issuance of restricted Common
and Preferred Stock to the sellers with an agreed upon value of $1,900,000; and
(iii) a $2,400,000 loan from a bank.
The acquisition of Skaer significantly increased the Company's reserves,
production, and business capabilities. Substantially all of the changes between
1993 and 1994 in the Company's results of operations can be attributed to the
acquisition of Skaer. Therefore, Management believes the comparisons between
1993 and 1994 may not be useful or relevant.
Total Revenue. Total revenue from all operations was $12,068,699 for the
year ended December 31, 1994, compared to $4,387,287 for the year ended December
31, 1993. This increase in total revenue is primarily a result of the
acquisition of Skaer in August of 1993. As stated previously, because of this
acquisition, comparisons between years may not be relevant or useful. However,
any known trends or changes that effect revenue on a line-by-line basis are
discussed in following paragraphs.
Gas Plant Marketing and Trading. Currently, under the "take-or-pay"
contract with PSCo, the Company delivers to PSCo approximately 12% to 15% of
this contract through its own production through the tailgate of the Gas Plant
(see "Gas Plant Liquids and Gas"). The marketing and trading revenues are
derived from the gas purchased from third parties and sold to PSCo under the
terms of the contract. The Company never takes possession of the third party
gas but rather brokers the transaction. In both 1993 and 1994, the price
between the amount paid the third party producers and the amount received from
PSCo was a constant price per MMBtu.
21
<PAGE>
PSCo has informed the Company that it does not intend to renew the portion
of the contract in June 1996 that allows for "Marketing and Trading" activities.
Accordingly, this revenue and the corresponding costs will most likely disappear
in July 1996. If this contract is terminated in July 1996, it could cost the
Company under present operating conditions between $500,000 and $600,000
annually. This amount represents the current net revenue generated from this
activity on an annual basis. However, PSCo has advised the Company in informal
discussions that the contract will be renewed at a level equivalent to the
throughput of the Company's Gas Plant at that time. Therefore, as previously
discussed, the Company is taking steps to increase the throughput of the Gas
Plant by purchasing and processing third party gas. It is Management's
intention to purchase and process as much third party gas in the future (through
the KN interconnect) that is economically feasible so that the PSCo contract
will be renewed at the highest level possible. However, there can be no
assurance that the PSCo contract will be renewed, or if renewed, will be renewed
at the same or higher levels.
The Gas Plant has a design capacity of 6 MMcf per day (2.2 BCF annually).
In 1994, the Gas Plant processed an average of 1.29 MMcf per day (or .471 BCF
annually). In April 1995, the Company was purchasing and processing an
additional 1,100 Mcf per day of third party gas in addition to its own current
production of 1,100 Mcf per day. Management is continually searching and
negotiating for more economically feasible third party gas. However, at this
time it is uncertain if the Company will be able to find any more economically
priced gas from third parties or if the current level can be maintained.
Gas Plant Liquids and Gas. These categories account for the natural gas
sold at the tailgate of the Gas Plant and the natural gas liquids extracted and
sold by the Gas Plant facility. During 1993 and 1994, the revenues generated
from these products were a result of the Company s own production from the
Loveland and Johnson s Corner Fields. During 1994, the Gas Plant sold 329,044
Mcf of natural gas, 1,270,770 gallons of butane-gasoline mix, and 960,310
gallons of propane.
Costs associated with these products consist of both semi-fixed and
variable costs. The semi-fixed costs consist of direct payroll, utilities,
operating supplies, general and administrative costs, and other items necessary
in the day-to-day operations. The semi-fixed costs average approximately
$435,000 annually and are not expected to change significantly regardless of the
volume processed by the Gas Plant. The variable costs consist primarily of
purchased gas, plant fuel and shrink, lubricants, repair and maintenance, and
costs of gas marketing and buying. These costs are generally a direct function
of the volume processed by the Gas Plant and are expected to either increase or
decrease proportionately with the corresponding plant production. However, it
should be noted that, because the Company began purchasing and processing third
party gas in 1995, that the variable costs, as a percentage of revenue, are
expected to increase significantly in future years.
Oil and Gas. Revenues generated from oil and gas sales for the year ended
December 31, 1994 were $3,220,761, compared to $1,131,938 for the year ended
December 31, 1993. Costs of oil and gas production were $2,189,780 for the year
ended December 31, 1994, compared to $765,757 for the year ended December 31,
1993. Again, these increases are attributable to the acquisition of Skaer in
August of 1993. However, operating statistics for the two years are as follows:
22
<PAGE>
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Production:
Oil (bbls) 155,500 55,459
Gas (Mcf) 543,750 189,664
Average Collected Price:
Oil (per Bbl) $ 15.11 $ 15.00
Gas (per Mcf) $ 1.55 $ 2.19
Operating Margin:
Revenue $3,220,761 $1,131,938
Costs (2,189,780) (765,757)
Gross Margin $1,030,981 $ 366,181
Gross Margin Percent 32% 32%
Average Production Cost per
BOE before DD&A $ 8.90 $ 8.79
</TABLE>
It should be noted that the Company was able to maintain approximately the
same gross margin (as a percentage of revenue) on oil and gas production
activities in spite of the 30% decrease in the average gas price (per Mcf)
between 1993 and 1994. This is a result of Management s ongoing efforts to
manage production and control costs. As stated previously, Management of the
Company performed a detailed evaluation of all its properties in December 1994.
As a result of this evaluation and on-going analysis, many properties have been
shut-in and will either be worked-over, sold, or plugged and abandoned. It is
the intent of Management to maintain and operate only those properties that will
add value to the Company in the future. Accordingly, Management believes that
the costs of production (per BOE) will be lower in the future. However, because
of the many uncertainties involved in the oil and gas industry, there can be no
assurance whether or not this assertion can or will come to fruition.
Oil Field Services and Oil Field Supply. Operating statistics for the
Company's service and supply operations for the years ended December 31, 1993
and 1994 are as follows:
<TABLE>
<CAPTION>
Service Operations Supply Operations
------------------------ -------------------
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Revenue $1,279,013 $709,057 $720,928 $448,600
Costs (1,183,501) (665,300) (663,500) (411,854)
Depreciation (294,860) (98,230) (12,120) (4,040)
--------- ------- ------- -------
Net Operating
Margin $ (199,348) $(54,473) $ 45,308 $ 32,706
========= ======= ======= =======
Net Operating
Margin % (16%) (8%) 6% 7%
</TABLE>
23
<PAGE>
The average monthly revenue for the service and supply operations decreased
in 1994 by approximately 40% to 45% as a result of Management focusing its
efforts on the Company s drilling, development and recompletion activities. In
addition, there was a substantial decrease in drilling activity in the DJ Basin
in 1994 as a result of depressed gas prices. However, because the net
operations margins are relatively low, this decrease in revenue did not have a
significant impact on the Company s overall results of operations.
Well Administration and Other Income. This revenue primarily represents
the revenue generated by the Company for operating oil and gas properties.
There has been no significant change in the average monthly revenue between 1993
and 1994 subsequent to the acquisition of Skaer and Management does not expect
any significant change in the future.
General and Administrative Expenses. General and Administrative Costs for
1994 were $1.6 million compared to approximately $700,000 for 1993. The
increase can be substantially attributed to the acquisition of Skaer.
Management of the Company has exerted considerable effort to decrease and
control general and administrative expenses for 1995. Measures taken in the
fourth quarter of 1994 include downsizing personnel, using contract services for
temporary assignments, eliminating unnecessary services or supplies, and
evaluating certain types of costs for efficiency and need. Many of the costs
that are anticipated to be eliminated in 1995 are payroll related. For example,
two officers resigned in 1994 and will not be replaced and the Company has
eliminated approximately 20% of the payroll costs associated with its accounting
and administrative staff. Management is continually evaluating ways to cut
general and administrative costs. However, there can be no assurance that
future general and administrative costs will be curtailed below the 1994 level
or that general and administrative costs may not increase in future years.
Depreciation, Depletion and Amortization. DD&A consisted of the following
for 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Oil and Gas Properties $ 884,100 $ 300,415
Gas Plant and Other Buildings 270,640 48,140
Rolling Stock 215,930 64,241
Other Field Equipment 105,050 30,530
Furniture and Fixtures 42,870 39,444
Non-Compete Agreements 96,000 19,500
-------- -------
Total $1,614,590 $ 502,270
========= ========
</TABLE>
The increase can be substantially attributed to the acquisition of Skaer
and that the estimated useful life of the Gas Plant was changed from 25 years in
1993 to 15 years in 1994. DD&A for oil and gas properties remained relatively
constant at $3.59 per BOE in 1994 compared to $3.46 per BOE in 1993. Total
reserves at December 31, 1994 increased 285,300 BOE as compared to the reserves
at December 31, 1993 as a result of different prices for oil and gas used to
compute the reserves and the drilling, development and recompletion activities
conducted in 1994.
Dry Hole and Abandonment of Oil and Gas Properties. Dry hole and
abandonment costs incurred by the Company in 1994 were $315,809 compared to
$335,715 in 1993. In 1994, the Company drilled one dry hole at the cost of
approximately $213,000. The remaining costs were incurred in connection with
plugging and abandonment charges for seven other properties. In 1993, these
charges related to plugging and abandonment costs incurred with eight properties
that had become uneconomical.
24
<PAGE>
Because of the adoption of the new accounting policy and the corresponding
impairment charge discussed later in this section under the caption Impairment
of Oil and Gas Properties , the Company does not anticipate that any significant
abandonment charges will be incurred in 1995. However, because of the many
uncertainties involving oil and gas producing activities, including future
prices of oil and gas, lifting costs, actual production and other economic
factors, there can be no assurance of the actual charges that will be incurred
in the future related to abandonments.
Currently, the Company s drilling, development, and recompletion programs
have been significantly curtailed and will resume when they can be funded
through cash flow from operations or other financing vehicles. At that time, as
in the past, Management will take every precaution to drill, develop or
recomplete projects that appear to have the highest rate of success and highest
estimated rate of return. Accordingly, it is impossible to estimate the future
dry hole costs with any reasonable amount of certainty.
Impairment of Oil and Gas Properties. In March 1995, the Financial
Accounting Standards Board issued a new statement titled Accounting for
Impairment of Long-lived Assets . This new standard changes the Company's
method of determining impairment of proved oil and gas properties. Under the
new policy, the Company computed the estimated undiscounted cash flows using
constant prices and costs on a field-by-field basis. Using this method, the
Company recognized a 1994 fourth quarter non-cash impairment charge totaling
approximately $900,000. The adoption of this new accounting policy will have no
effect on the Company s compliance with the financial covenants of the Company's
loan agreements.
Interest Expense. Total interest expense for 1994 was $324,251 compared to
$123,932 in 1993. The increase can be substantially attributed to higher
interest rates in 1994 and the credit facility with the Company s primary lender
which was established in August 1993 in connection with the acquisition of
Skaer. The balance of this loan at December 31, 1994 was $2,588,958 and is
payable in monthly installments of principal and interest at the rate of prime
plus 3% through August 1997.
Gain on Sale of Assets. The Company recognized a gain on the sale of
assets in 1994 of $55,372 of which $55,000 was related to the sale of one lease
in November 1994. The gain of $29,995 recognized by the Company on the sale of
assets in 1993 was primarily related to the disposition of oil and gas
production equipment.
Federal Income Tax. The Company s oil and gas operations are significantly
affected by certain provisions of the Internal Revenue Code of 1986, as amended,
applicable to the oil and gas industry. Current law permits the Company to
deduct currently, rather than capitalize, intangible drilling and development
costs ( IDC ) incurred or borne by it. The Company, as an independent
producer, is also entitled to a deduction for percentage depletion with respect
to the first 1,000 barrels per day of domestic crude oil (and/or equivalent
units of domestic natural gas) produced by it (if such percentage depletion
exceeds cost depletion.) Generally this deduction is 15% of gross income if the
national average crude oil price is $20.00 or more. The percentage increases 1%
for each whole dollar that the previous year s average price is below $20.00.
Currently, the percentage depletion allowance is 15%. The percentage depletion
deduction may not exceed 100% of the taxable income from a given property.
Further, percentage depletion is limited in the aggregate to 65% of the
Company s taxable income. Any depletion disallowed under the 65% limitation,
however, may be carried over indefinitely.
25
<PAGE>
BUSINESS OF THE COMPANY
Overview
Pease Oil and Gas Company ("Company"), was incorporated under the laws of
the state of Nevada on September 11, 1968. The Company s address is 751 Horizon
Court, Suite 203, Grand Junction, Colorado 81506 and its telephone number is
(970) 245-5917. The Company is engaged in the oil and gas acquisition,
exploration, development and production business in the western United States,
primarily in Colorado, Utah, and Wyoming. During 1993, the Company
substantially expanded its operations (through an acquisition of an
independently owned company) into providing oil field services, oil field
supplies, natural gas processing and natural gas marketing.
Operations
The Company is primarily engaged in oil and gas property acquisition,
exploration, development and production activities. Through acquisitions in
1993, the Company expanded its operations to include extensive oil field
servicing, sales of new and used oil field equipment, and natural gas processing
and marketing. The Company's principal activities are conducted in the Rocky
Mountain region of the United States.
The Company's general business strategy is to increase reserves and cash
flow through strategic implementation of the following: (a) establish and build
upon a regional base of operations and technical expertise; (b) pursue low risk
acquisitions, which contain proven reserves, established production history, and
significant undeveloped reserve potential (c) pursue acquisitions of family-
owned and private companies, while the competition's focus is on the major
company divestitures; (d) enhance production and reserves by employing advanced
technical procedures and utilizing the Company's regional database; and (e)
expand the throughput of the natural gas processed by its Gas Plant. The
Company does not intend to conduct a significant amount of exploratory drilling.
It is an objective of the Company to operate the oil and gas properties in
which it has economic interests. The Company believes, with the responsibility
and authority as operator, it is in a better position to control costs, safety,
and timeliness of work, as well as other critical factors affecting the
economics of a well.
As of June 30, 1995, the Company had varying ownership interests in 245
gross productive wells (212 net) located in five states. The Company operates
240 of the 245 wells, with the other wells being operated by independent
operators under contracts that are standard in the industry.
The Company presently maintains an inventory of undeveloped oil and gas
lease acreage. From time-to-time the Company will conduct geological,
geophysical, engineering, and economic studies on the basis of what it generates
or acquires in oil and gas drilling prospects. These efforts are intended to
lead to increased exploration, development, and production.
The Company s immediate efforts and resources are focusing on increasing
the utilization of it s existing assets by:
Increasing the volume of natural gas processed through its Gas Plant by
purchasing gas from third party producers. This became possible in January
1995 when the Gas Plant was connected to KN s gathering system. This
connection provides access to more than 3,500 wells in one of the most
actively drilled gas fields in Colorado.
26
<PAGE>
Reducing operating costs to improve the overall margins in each revenue
center.
All other development activities have been curtailed significantly.
However, to the extent funds are available in the future, the Company will
pursue the following activities:
Infill drilling of proved reserves in the Loveland Field.
Use new drilling technology (i.e., cased hole lateral drilling), to
increase recoverability of oil and gas in the Loveland Field. The Company
believes there are 35 wells in the Loveland Field with casing of the
optimum size for drilling horizontal or lateral drainholes in the Niobrara
formation.
Use new exploration technology (3-D seismic) to exploit other zones in the
Loveland Field that have not been fully developed.
Use new technology in the other fields acquired from Skaer to further
develop current producing reservoirs and to identify new reserves in other
formations.
Properties
Principal Oil and Gas Interests
Developed Acreage - The Company currently owns producing oil and gas wells
in Arkansas, Colorado, Utah, Nebraska, and Wyoming. The Company's producing
properties as of June 30, 1995 are located in the following areas shown in the
table below:
<TABLE>
<CAPTION>
Oil Gas Developed Acreage
-------------- ------------- ------------------------------
Gross Net Gross Net
Wells (2) Wells (2) Gross Net(2)
Fields State (1) Wells (1) Wells Acreage Acreage
<S> <C> <C> <C> <C> <C> <C> <C>
Loveland Unit Colorado 74 73 3,563 3,488
Loveland Field Colorado 14 13 1,476 1,386
Pod Field Colorado 6 6 640 640
Yenter Field Colorado 6 6 695 695
Johnson's Corner Colorado 5 5 1,120 1,052
Twin Mills Field Colorado 1 1 160 80
Rago North Field Colorado 2 1 400 75
Peetz West Field Colorado 5 5 305 305
Weasel Field Colorado -- -- 400 325
Xenia North Field Colorado 1 1 120 81
Little Beaver Unit Colorado 15 14 3,080 3,003
Kenzie Field Colorado 1 1 320 320
Other Various Fields Colo/Neb 52 38 381 599
Cowboy Utah 1 1 1,200 319
Calf Canyon Unit Utah 10 7 560 409
Cisco Springs Utah 10 6 1,403 327
Westwater Utah 1 1 360 220
Enos Creek Wyoming 3 2 280 215
Arkansas Arkansas 2 1 400 40
Roan Cliffs West Utah 2 1 960 480
Cisco Dome Utah 1 1 39 35 8,877 8,267
Willow Creek Wyoming 1 160 0
-- -- -- -- ------ ------
Totals 203 175 42 37 27,078 22,108
=== === == == ====== ======
____________________
27
<PAGE>
<FN>
* May not total due to rounding.
(1) Wells which produce both gas and oil in commercial quantities are classified as "oil" wells for disclosure purposes.
(2) "Net" wells and "net" acres refer to the Company's fractional working interests multiplied by the number of wells or
number of acres.
</TABLE>
The majority of the Company's producing oil and gas properties are located
on leases held by the Company for as long as production is maintained.
Undeveloped Acreage - The Company s gross and net working interests in
leased undeveloped acreage as of June 30, 1995 is 1,212 and 889 acres,
respectively. All these properties are located in Colorado and the Company's
interests will expire at various times through 1997 unless production has been
obtained.
Colorado Properties
The Denver-Julesburg ("DJ") Basin, encompasses most of northeast Colorado
and parts of southeast Wyoming, southwest Nebraska and western Kansas. Gas and
oil are produced from cretaceous sandstones and limestones, with the "D" and the
"J" sandstones being the most prolific producers in the Basin. The Company's
activities have focused on the historically better producing zones, the "D" and
the "J" sandstones and the Niobrara formation. Ninety percent of the Company's
reserves are now in the DJ Basin. A summary of the fields in the DJ Basin are
as follows:
Loveland Field, Larimer and Weld Counties - The Loveland Field, 40 miles
north of Denver, Colorado, contains the Company's most prolific properties,
producing both oil and gas at an average rate of approximately 326 barrels of
oil equivalent ( BOE ) per day (266 BOE net to the Company). Loveland Field has
produced about 2 million barrels of oil ( MMBO ) and 10 billion cubic feet of
natural gas ( BCFG ) from the Niobrara formation. The gas is extremely rich in
natural gas liquids (approximately 1,430 BTU) which are extracted from the Gas
Plant.
The Niobrara formation is one of the richest oil and gas source rock
formations in Colorado and at Loveland Field has three producing reservoir
benches or layers. Generally, the limestone benches in the Niobrara are
naturally fractured and range from 20 to 50 feet thick. Wells in the field are
typically completed in all three benches to attempt to optimize production from
each well. The Loveland Field area is on a large-monoclinal fold on the west
edge of the DJ basin.
The Company's ability to utilize increased density drilling and horizontal
drilling in the Loveland Field was limited by state spacing rules. In December
1993, the Company successfully obtained approval from the Colorado Oil and Gas
Commission, and more than 95% of the royalty owners, to unitize 3,563 acres in
Loveland Field. The unitization of Loveland Field became effective in March
1994. This enables the Company to proceed with increased density drilling to
recover additional oil and gas reserves from the Niobrara fractured reservoir.
While 20-acre spaced wells and possibly 10-acre spaced wells could be used for
additional economic recovery, the Company has investigated the potential for
using cased hole lateral (horizontal) drilling as a more economically efficient
method of maximizing the ultimate field recovery.
28
<PAGE>
In 1993, the Company computerized the well and production data for Loveland
Field in a geological mapping program. Analyses on this program provided
tremendous insight in connection with the Company s drilling, development and
recompletion activities in Loveland Field in 1994. The Company utilized this
information and drilled four new wells in the Loveland Field in early 1994,
including one 20-acre spaced well and recompleted an additional 10 wells in the
Codell Formation of the Loveland Field. Excluding the value of the natural gas
liquids extracted from the Gas Plant, this drilling and development activity
added 60,000 BOE to the proved producing reserves as of December 31, 1994. In
addition, Management believes information from this program can be used to
further explore and exploit other formations which previously have been
productive.
The Company is exploring the feasibility of using new technology to more
efficiently and economically produce oil and gas from the Loveland Field.
Horizontal drilling technology, one of the fastest developing oil and gas
technologies, will be used where appropriate. This includes cased hole lateral
(horizontal) drilling in the oil bearing reservoirs from existing wellbores.
Thirty-five wells in the Loveland Field completed with 5-1/2-inch casing are now
identified for this technology. Also, open hole short radius lateral drilling
is being investigated as an alternative to new vertical in-fill wells with 20-
or 40-acre spacing. In 1994, the Company utilized advanced geophysical well
logging technology (formation micro-image logs) to determine the dominant
direction of open fractures in the Loveland Field. Management believes this
information is extremely valuable for it will allow the Company to increase the
possibility of oil and gas recovery from each wellbore by drilling horizontal
wells across the maximum number of open fractures. Other rapidly developing oil
field technology which the Company will use includes new well stimulation
techniques and three-dimensional (3-D) seismic surveys. 3-D seismic technology
has been successful in other Niobrara fields in delineating areas of greatest
fracture potential.
Pod Field, Washington County, Colorado - In Pod Field, the Company has a
100% working interest and operates five wells which produce from the "J" sand.
Yenter Field, Logan County, Colorado - Yenter Field is a structural trap
which has produced more than 10 MMBO and 24 BCFG since the 1950s from the "J"
sandstone. Approximately 80% of wells in the field have been plugged and
abandoned. The Company owns and operates five wells with production of about 35
barrels of oil per day ( BOPD ). Water produced with oil from these five wells
is injected back into the reservoir to help maintain reservoir pressures for
continued production. Skaer acquired this production from Chevron USA and
increased production by resizing downhole equipment and installing larger volume
pumping units. The Company has commenced a complete geological and engineering
study of Yenter Field and will explore undeveloped potential in additional
sandstone reservoirs, reworking "J" sandstone wells which have been shut in
since the mid-1970s, and upgrading the pressure maintenance program.
Johnson's Corner Field, Larimer County, Colorado - Johnson's Corner Field
is an extension of the Wattenberg Field with muddy "J" sandstone gas production
and is connected to the Company s Gas Plant through a gathering system. The
wells produce approximately 40 BOE per day from the "J" sandstone. One well has
also been completed in the Codell and Niobrara formations and production from
all three zones is co-mingled. There are three additional in-fill development
locations as well as Niobrara/Codell behind pipe reserves in four wells.
North Minto Field, Logan County, Colorado - North Minto is a "J" sandstone
field and was unitized for secondary recovery in 1989. One well was producing
approximately 8 BOPD during 1993. The injection well had been shut-in during
October 1992. The Company completed geologic and engineering reviews of the
field after the acquisition and consequently re-established the injection
program which increased production to 32 BOPD. Additional leases have been
acquired as a result of this study and two additional drill sites have reserve
potential in the North Minto Unit.
29
<PAGE>
Little Beaver "D" Sandstone Unit, Washington County, Colorado - Little
Beaver "D" Sandstone Waterflood Unit has 15 wells producing approximately 77 BOE
per day. The Company has commenced a geologic study and a waterflood study
using ORBIS Engineering of Denver, Colorado. Three to four additional "D"
sandstone drill sites have been identified. Since acquiring this property, the
Company has reduced monthly operating costs 15% by replacing electric motors
with gas engines from the Company's inventory and using lease gas to operate
these wells.
Lower Horse Draw Field, Rio Blanco County, Colorado - The Company has
interests in two wells that produce gas from the Mancos B fractured silty shale
in the Lower Horse Draw Field. Proved developed reserves include 162 BCFG net
to the Company, and one undeveloped location has 350 BCFG in reserves.
Utah Properties
Calf Canyon Field, Grand County, Utah - Calf Canyon Field is located on the
southeast flank of the Uinta Basin in Utah. In December 1993, the Company
formed a federal unit in the field and commenced a waterflood for secondary
recovery from the Cretaceous Cedar Mountain Formation. Independent reservoir
engineers have estimated an additional 350,000 to 750,000 barrels of oil may be
recoverable with a successful water flood project. Because no comparable
project has been undertaken in the immediate area, these estimates are not
considered proved reserves. Cretaceous Dakota, and Jurassic Morrison and Salt
Wash sandstones are also prospective at Calf Canyon, with both behind pipe
reserves and three undrilled development locations.
Cisco Springs Field, Grand County, Utah - Cisco Springs adjoins Calf Canyon
Field, and produces from both the Cedar Mountain and Dakota formations. The
Company operates 16 wells and has 890 additional undeveloped net acres. The
Company sold Cisco Springs Field in July 1995 and consolidated the Calf Canyon
Field operations with the newly acquired Cisco Dome Field operations. See
"Acquisitions-Cisco Dome Field."
Cowboy Field, San Juan County, Utah - The Company has a 100% interest in
four oil wells in Cowboy Field in southeast Utah. The field is within the
Paradox Basin and production is from the Pennsylvanian Ismay Formation. The
Company has behind pipe potential and at least one development drillsite.
Wyoming Properties
Enos Creek Field, Hot Springs County, Wyoming - Enos Creek Field is located
in the southwestern Big Horn Basin of central Wyoming. In early 1992, the
Company entered into a farmout agreement with an industry partner to co-develop
Enos Creek Prospect. During the summer of 1992, the Company and its partners
drilled a side track well from an existing wellbore targeted at a separate fault
block in the geologic structure. The well penetrated three oil zones while
drilling, one in the Curtis Formation and two in the Phosphoria Formation.
Present production is approximately 10 barrels of oil per day (5 barrels
net to the Company s interest) from the Phosphoria Formation. The Company
intends to recomplete the well in the Curtis Formation sometime in the future.
Enos Creek Field has additional drilling potential for the Pennsylvania
Tensleep Formation which was not penetrated in the 1992 drilling. In addition,
the Company will continue to investigate the potential development of this field
by using 3-D seismic technology at such time in the future, if at all, as funds
maybe available.
30
<PAGE>
Title to Properties
As is customary in the oil and gas industry, only a perfunctory title
examination is conducted at the time oil and gas leases are acquired by the
Company. Prior to the commencement of drilling operations, a thorough title
examination is conducted. The Company believes that title to its properties is
good and indefeasible in accordance with standards generally accepted in the oil
and gas industry, subject to such exceptions, which Management believes are not
so material as to detract substantially from the property economics. In
addition, some prospects may be burdened by customary royalty interests, liens
incident to oil and gas operations and liens for taxes and other governmental
charges as well as encumbrances, easements and restrictions. The Company does
not believe that any of these burdens will materially interfere with the use of
the property.
Estimated Proved Reserves
The oil and gas reserve and reserve value information set forth below and
in the consolidated financial statements included elsewhere is this Prospectus,
was prepared pursuant to Statement of Financial Accounting Standards No. 69,
which includes the estimated net quantities of the Company's "proved" oil and
gas reserves and the standardized measure of discounted future net cash flows.
See Note 10, Supplemental Oil and Gas Disclosures, in the Notes to the
Consolidated Financial Statements included elsewhere in this Prospectus. The
reserve information is based upon an independent engineering evaluation by
McCartney Engineering, Inc. The Company has not filed any reports containing
oil and gas reserve estimates with any federal authority or agency other than
the Securities and Exchange Commission and the Department of Energy. There were
no differences in the reserve estimates reported to these two agencies.
The table below sets forth the Company's estimated quantities of proved
reserves all of which are located in the Continental United States, and the
present value of estimated future net revenues from these reserves on a
non-escalated basis using year-end prices ($15.73 per barrel and $1.95 per MCF
as of December 31, 1994) discounted by 10 percent per year as of the end of each
of the last three fiscal years:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1994 1993 1992
<S> <C> <C> <C>
Estimated Proved Oil Reserves (Bbls) 1,352,000 1,045,000 825,000
Estimated Proved Gas Reserves (Mcf) 5,724,000 5,854,000 2,652,000
Estimated Total Future Cash Inflows $32,422,000 $24,836,000 $19,784,000
Present Value of Estimated Future
Net Revenues (Before future
income tax expenses) $ 8,519,000 $ 6,636,000 $ 5,972,000
</TABLE>
The table above does not include the reserve values associated with the Gas
Plant. The Gas Plant reserves are disclosed in Note 10, Supplemental Oil and
Gas Disclosures, in the Notes to the Consolidated Financial Statements included
elsewhere in this Prospectus.
31
<PAGE>
There has been no major discovery or other favorable or adverse event that
is believed to have caused a significant change in the estimated proved reserves
subsequent to December 31, 1994.
Net Quantities of Oil and Gas Produced
The Company's net oil and gas production for each of the last three years
(all of which was from properties located in the United States) was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1994 1993 1992
<S> <C> <C> <C>
Oil (Bbls) 155,000 55,000 17,000
Gas (Mcf) 544,000 190,000 36,000
</TABLE>
The average sales price per barrel of oil and Mcf of gas, and average
production costs per barrel of oil equivalent ( BOE ) excluding depreciation,
depletion and amortization were as follows:
<TABLE>
<CAPTION>
Average Average
Year Sales Sales Average
Ended Price Price Production
December Oil Gas Cost
31, (Bbls) (Mcf) Per BOE
<S> <C> <C> <C>
1994 $15.11 $1.55 $8.90
1993 $15.00 $2.19 $8.79
1992 $19.06 $2.06 $8.30
</TABLE>
The above table represents activities related only to oil and gas
production. It does not include any activity or residual value added from the
Gas Plant.
Drilling Activity
The following table summarizes the Company s oil and gas drilling
activities, all of which were located in the continental United States, during
the last three fiscal years:
32
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1994 1993 1992
------------ ------------ --------------
Wells
Drilled Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
Exploratory
Oil - - - - 1 .29
Gas - - - - - -
Non-productive 1 .25 - - - -
-- --- -- -- -- ---
Total 1 .25 - - 1 .29
== === == == == ===
Development
Oil 4 3.92 - - - -
Gas - - - - - -
Non-productive - - - - - -
-- ---- -- -- -- --
Total 4 3.92 - - - -
== ==== == == == ==
</TABLE>
The Company was not participating in any drilling activity at December 31,
1994 or at June 30, 1995.
Processing of Additional Third Party Gas - The Company s natural gas
processing plant ( Gas Plant ) located near Loveland, Colorado has been
connected to KN Front Range Gathering Company s Wattenberg Field gathering
system ( KN ). This connection will provide access to more than 3500 wells in
one of the most actively drilled gas fields in Colorado. In March 1995, the
Company was processing approximately 570 Mcf per day of natural gas purchased
from third party producers and delivered through the KN interconnect. In April
1995, this increased to 1,100 Mcf per day. This processing is in addition to
the 1,100 Mcf per day processed from Company owned wells. The Company is
continually negotiating with other producers on the KN system to further
increase the Gas Plant production. Management believes the additional gas
throughput will increase the Gas Plant s efficiency and utilization,
contributing to increased profits and enhancing the long-term value of the
facility.
Acquisitions
Skaer Enterprises, Inc.
On August 23, 1993, the Company acquired Skaer Enterprises, Inc. a Colorado
corporation, its related businesses and related oil and gas properties
(collectively "Skaer"). Skaer was privately owned and operated, and was
considered one of the largest private independent oil and gas companies in
Colorado, operating exclusively in the DJ Basin of northeastern Colorado.
Skaer was acquired for $12,200,000, including various costs associated with
the acquisition of $300,000. This acquisition was financed through: i) the
issuance of 900,000 shares of preferred stock in a public offering which
generated net proceeds of $7,965,000; ii) the issuance of restricted common and
preferred stock to the sellers with an agreed value of $1,900,000; and iii) a
$2,400,000 loan from a bank.
33
<PAGE>
Skaer conducted its operations directly and through a wholly-owned
subsidiary corporation, an affiliated corporation, a limited partnership, and
through assets owned by Skaer affiliates.
The acquisition of Skaer dramatically changed the complexion of the Company
for Skaer was a very diversified independent oil and gas company. In conducting
its business, Skaer acquired oil and gas prospects and leases, drilled for oil
and gas, performed oil and gas well completion and operation services,
transported natural gas through a gathering system and pipeline, processed and
sold natural gas at a gas processing plant and traded natural gas. Skaer also
sold oil and gas equipment and supplies and repaired equipment through two
retail stores, and provided its well completion and support services to others.
Skaer also had historically retained a large majority working and net revenue
interest in most of its oil and gas drilling prospects.
Skaer had been a private family owned and operated business for more than
20 years, had executive offices in Denver, Colorado, a gas processing plant near
Loveland, Colorado, and oil field servicing and supply businesses located in
both Loveland and Sterling, Colorado. Skaer's producing oil and gas properties
and reserves were in 43 fields including Loveland Field with 80 wells and 64% of
Skaer's reserves. The gas gathering and pipeline system transported natural
gas from two fields within four miles of the Loveland Gas processing plant.
The businesses and assets acquired from Skaer consisted of the following:
Skaer Enterprises Inc. ( SEI ). SEI was a Colorado corporation
engaged in oil and gas exploration, production, operations, marketing,
and oil and gas field servicing in the DJ Basin where Skaer owned oil
and gas interests.
Loveland Gas Processing Co. ("LGPCo"). LGPCo, a Colorado limited
partnership, was 95% owned by Skaer at the time of the acquisition (in
August 1994, a subsidiary of the Company purchased the remaining 5%
for $225,000). LGPCo owns and operates the natural gas refrigeration
and compression facility ("Gas Plant") with a design capacity to
process up to six million cubic feet of natural gas per day. The Gas
Plant purchases, gathers, processes and sells natural gas and natural
gas liquids ("NGLs") from two fields.
ATSCO Inc. ( ATSCO ). ATSCO, a wholly-owned subsidiary of Skaer,
operated all oil and gas wells in which Skaer held an interest and was
designated as the "operator."
Well Services Division. The well services division was an operating
division of SEI and provided a wide range of oil field services,
including workover rigs, hot oil trucks, vacuum trucks, oil field
trucking and other associated services to SEI and to third parties.
Vacuum Truck Services. Colorado Vacuum Truck Company ("CVTC"), an
affiliate corporation, provided oil field services to SEI and to third
parties. The Company acquired all the assets and related business of
CVTC, including two vacuum trucks.
Equipment Business. A.T. Skaer Company, an affiliated business of
SEI, provided new and used oil field equipment and supplies to SEI and
to third parties through two retail outlets. A.T. Skaer also had one
magneto repair shop, a downhole pump shop and an oil field equipment
and rolling stock repair shop.
34
<PAGE>
Other Oil Properties. The Company also acquired all working interests
in SEI oil and gas wells, which were owned by members of the SEI
family prior to acquisition by the Company.
In June 1993, the Company acquired Grand Junction Well Service ( GJWS )
from the Company s President and CEO, Willard H. Pease, Jr. The transaction was
consummated by merging GJWS into a newly-formed subsidiary corporation, Rocky
Mountain Well Services, Inc. In the merger, the Company issued Mr. Pease 46,667
shares of its Common Stock and a 6% secured convertible promissory note in the
principal amount of $175,000 for a total value of $350,000 (the estimated fair
market value of GJWS s assets and business.) The note is payable in three
principal installments of $45,000 on October 1, 1994, $65,000 on April 1, 1995
(which has not yet been paid) and $65,000 April 1, 1996. The unpaid principal
of the note is convertible at the election of the Company s President into
Common Stock at $5.00 per share. The transaction was approved unanimously by
the disinterested directors of the Company.
In November 1993, the operating company acquired in the Skaer acquisition,
ATSCO, Inc., changed its name to Pease Operating Company, Inc. All Skaer
producing oil and gas properties were merged into the Company on January 1,
1994. Two wholly owned subsidiaries, Pease Oil Field Services, Inc. and Pease
Oil Field Supply, Inc. were formed to operate the oil field service and supply
businesses. Rocky Mountain Well Services, Inc. was merged into Pease Oil Field
Services, Inc. on January 1, 1994. The Company continues to operate its natural
gas refrigeration processing plant through Loveland Gas Processing Co., Ltd.
Cisco Dome Field
On April 24, 1995, effective January 1, 1995, the Company purchased an 80%
working interest in approximately 8,160 acres in the Cisco Dome Field in Grand
County, Utah from unaffiliated parties in exchange for 65,000 shares of the
Company s Common Stock. The Cisco Dome Field is located adjacent to the Calf
Canyon Field in which the Company has an interest. The property in the Cisco
Dome Field contains 38 wells of which 21 are currently producing gas from
intervals ranging from 2,000 to 3,200 feet. Currently, the average aggregate
production from these properties is approximately 500 Mcf per day as well as a
small amount of oil. Management of the Company has extensive knowledge and
experience with operations in and near this field. Accordingly, Management
believes that this acquisition will benefit the Company by increasing production
and reducing the cost of current operations on a well-by-well basis when the
operations are combined with the Calf Canyon Field.
Competition
The oil and gas industry is highly competitive in all phases. The Company
encounters strong competition from other independent oil companies in acquiring
economically desirable prospects as well as in marketing production therefrom
and obtaining external financing. Many of the Company's competitors may have
financial resources, personnel, and facilities substantially greater than those
of the Company.
Because there has been a decrease in exploration for and development of oil
and gas properties, there is increased competition for lower risk development
opportunities and for available sources of financing. In addition, the
marketing and sale of natural gas and processed gas are competitive.
Accordingly, the competitive environment in which the Company will operate will
be unsettled.
35
<PAGE>
Markets
Overview - The three principal products currently produced and marketed by
the Company are crude oil, natural gas and natural gas liquids. The Company
does not currently use commodity futures contracts and price swaps in the
marketing of its natural gas and crude oil. Total revenues from the sales of
crude oil, natural gas and natural gas liquids which are produced and/or
marketed by the Company constituted 21%, 56%, and 6%, respectively, of the
Company's total revenues for the year ended December 31, 1994.
Crude Oil - Oil produced from the Company's properties is generally sold
by truck to unaffiliated third-party purchasers at the prevailing field price
( the posted price ). Currently, the three primary purchasers of the Company's
crude oil are Total Petroleum, Inc., Texaco Trading and Transportation, Inc. and
Scurlock-Permian Corporation. Together these three purchasers buy more than 80%
of the Company's annual crude oil sales. The market for the Company's crude oil
is competitive, which has resulted in bonuses above posted price. In 1994 the
Company negotiated an increase in the bonus paid for its crude oil from $0.35 to
$0.65 per barrel above the posted price. The contracts are month-to-month and
subject to change. The Company does not believe that the loss of one of its
primary purchasers would have a material adverse effect on the Company's
business because other arrangements could be made to market the Company's crude
oil products. The Company does not anticipate problems in selling future oil
production since purchases are made based on then current market conditions and
pricing. However, oil prices are subject to volatility due to several factors
beyond the Company's control including: political turmoil; domestic and foreign
production levels; OPEC's ability to adhere to production quotas; and possible
governmental control or regulation.
Natural Gas - The Company sells its natural gas production in two principal
ways: at the wellhead to various pipeline purchasers or natural gas marketing
companies; and at the tailgate of its Gas Plant to a large natural gas utility,
PSCo. The wellhead contracts have various terms and conditions, including
contract duration. Under each wellhead contract the purchaser is generally
responsible for gathering, transporting, processing and selling the natural gas
and natural gas liquids and the Company receives a net price at the wellhead.
The residue gas sold at the tailgate of the Company's Gas Plant is subject
to a contract with PSCo that expires on June 30, 1996. The gas is priced on an
MMBtu basis at a premium above the Colorado Interstate Gas Company's northern
pipeline index spot price. The Company believes this pricing arrangement will
provide it with a premium above the local market price for natural gas through
the term of the contract.
Natural Gas Liquids - The Company produces two natural gas liquid products
at its Gas Plant, butane-gasoline mix and propane. The butane gasoline mix is
sold to an unaffiliated party at prevailing market prices on a month-to-month
basis. The propane is sold under a month-to-month arrangement with a local
propane wholesaler for resale to the local propane market. The Company does not
believe that the loss of the current purchasers of these products would have a
material adverse effect on the Company's business because it believes other,
similar arrangements could be made to market the Company's natural gas liquids.
Regulation
General - All aspects of the oil and gas industry are extensively regulated
by federal, state, and local governments in all areas in which the Company has
operations. Regulations govern such things as drilling permits, production
rates, environmental protection and pollution control, royalty rates, and
taxation rates. These regulations may substantially increase the cost of doing
business and sometimes prevent or delay the start or continuation of any given
exploration or development project.
36
<PAGE>
Regulations are subject to future changes by legislative and administrative
action and by judicial decisions, which may adversely affect the petroleum
industry. Over the past several months, legislation has been proposed in the
Colorado state legislature dealing with many regulations affecting the oil and
gas industry. Additionally, Weld County, Colorado, where a significant portion
of the Company s operations are conducted, has recently released proposed
amendments to its county zoning ordinances and building codes. These proposed
regulations, if enacted, could curtail proposed production and transportation of
product, force wells to be shut in and could severely impact future drilling
operations. Additionally, certain municipalities have either proposed or
adopted regulations that affect oil and gas operations within their city limits.
At the present time, it is impossible to predict what effect current and future
proposals or changes in existing laws or regulations will have on the Company s
operations, estimates of oil and natural gas reserves, or future revenues.
The Company believes that its operations comply with all applicable
legislation and regulations in all material respects, and that the existence of
such regulations has had no more restrictive effect on the Company's method of
operations than other similar companies in the industry. Although the Company
does not believe its business operations presently impair environmental quality,
compliance with federal, state and local regulations which have been enacted or
adopted regulating the discharge of materials into the environment could have an
adverse effect upon the capital expenditures, earnings and competitive position
of the Company, the extent of which the Company now is unable to assess. Since
inception, the Company has not made any material capital expenditures for
environmental control facilities and is not currently aware of any need to make
any such expenditures in the future.
Regulation of Production - In most areas which the Company may conduct
activities in the United States, there may be statutory provisions regulating
the production of oil and natural gas, and under which state administrative
agencies may promulgate rules in connection with the operation of both oil and
gas, and/or establish allowable rates of production. For wells in which the
Company owns an interest, such rules may restrict the oil and gas production
rate to below the rate such wells could be produced in the absence of such
regulations.
Environmental Regulations - Operations of the Company are subject to
numerous laws and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. These laws and
regulations may require the acquisition of a permit before drilling commences,
prohibit drilling activities on certain lands lying within wilderness areas or
where pollution arises, and/or impose substantial liabilities for pollution
resulting from drilling operations, particularly operations where underground
fresh water may be polluted or in offshore waters or submerged lands. Future
regulations may impose additional restrictions on the Company's activities. It
is impossible to predict if, or in what form, the regulations will be adopted
and hence their potential impact upon the Company's operations.
State Regulation - State regulatory authorities have established rules and
regulations requiring permits for drilling operations, drilling bonds and/or
reports concerning operations. All states in which the Company operates also
have statutes and regulations concerning spacing of wells, environmental matters
and conservation. In addition, state authorities have established regulations
that affect the unitization and pooling of properties and permit the state to
regulate the number of oil and gas wells in order to conserve oil and gas and
prevent waste.
Administration
Office Facilities - The Company currently rents approximately 4,000 square
feet in an office facility in Grand Junction, Colorado owned by an unrelated
party. The rental rate is $20,653 per year through June 30, 1997. The company
recently closed its Denver office for which it rents the space for $5,000 per
month through October 1996. The Company currently is attempting to sublease the
space.
37
<PAGE>
Employees - As of August 31, 1995, the Company had 31 full time employees,
none of whom is covered by a collective bargaining agreement. The Company
considers its relations with its employees satisfactory.
MANAGEMENT
The following table sets forth the names and ages of the current directors
and executive officers of the Company, the principal offices and positions with
the Company held by each person and the date such person became a director or
executive officer of the Company. The executive officers of the Company are
elected annually by the Board of Directors. The Board of Directors is divided
into three approximately equal classes. The directors serve three year terms
and until their successors are elected. Each year the stockholders elect one
class of directors. The executive officers serve terms of one year or until
their death, resignation or removal by the Board of Directors.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Served
as Director
or Executive
Name Age Position With Company Officer Since
<S> <C> <C> <C>
Willard H. Pease, Jr.(1) 35 President, Chief Executive 1983
Officer and Director,
Term Expires 1996
James N. Burkhalter 59 Vice President of Engineering 1993
and Production and Director,
Term Expires 1997
Patrick J. Duncan (1) 32 Chief Financial Officer, 1994
Corporate Secretary and
Director, Term Expires 1997
Homer C. Osborne (2) 66 Director, Term Expires 1998 1994
James C. Ruane(2) 61 Director, Term Expires 1998 1980
Robert V. Timlin 64 Director, Term Expires 1997 1981
William F. Warnick(2) 48 Director, Term Expires 1996 1988
______________________
<FN>
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee.
</TABLE>
Willard H. Pease, Jr. has been President and Chief Executive Officer of the
Company since 1990. Mr. Pease was Executive Vice President and Chief Operating
Officer of the Company from 1983 to 1990. Mr. Pease manages the day-to-day
operations of the Company and is principally responsible for the Company's oil
and gas exploration and production activities. Mr. Pease has worked in the oil
field business for over 15 years. Mr. Pease received a B.A. degree in
management with additional educational focuses in geology in 1983.
James N. Burkhalter has been the Vice President of Engineering and
Production of the Company since 1993, and is responsible for the Company's
engineering and production functions. Prior to joining the Company Mr.
Burkhalter was owner and president of Burkhalter Engineering, an engineering
firm which he formed in 1975. Mr. Burkhalter has been Chairman of the Colorado
Board of Registration for Professional Engineers and Surveyors, serving eight
years. From 1959 to 1975 Mr. Burkhalter worked for Amoco and Rocky Mountain
Natural Gas as a petroleum engineer. Mr. Burkhalter received a B.S. degree in
petroleum engineering in 1959.
38
<PAGE>
Patrick J. Duncan, has been the Chief Financial Officer of the Company
since September, 1994. Mr. Duncan was an Audit Manager with HEIN & ASSOCIATES,
Certified Public Accountants, from 1991 until joining the Company as the
Company's Controller in April 1994. From 1988 until 1991, Mr. Duncan was an
Audit Supervisor with Coopers & Lybrand, Certified Public Accountants.
Homer C. Osborne was an officer and director of Garrett Computing System,
Inc., a petroleum engineering and computing firm, from 1967 until 1976, at which
time he organized Osborne Oil Company as a wholly-owned subsidiary of Garrett
Computing Systems, Inc. Mr. Osborne has operated Osborne Oil Company as a
separate entity since 1976.
James C. Ruane has owned and operated Goodall's Charter Bus Service, Inc.,
a bus chartering business, since 1958. Mr. Ruane has been an oil and gas
investor for over 20 years.
Robert V. Timlin has been self-employed as a consulting petroleum engineer
since 1989. Mr. Timlin has been involved in the oil and gas industry for over
30 years and has served in a managerial capacity with several companies,
including HMT Management Inc., an oil and gas management firm, from 1983 to
1988; T&M Casing Service, Inc. from 1975 to 1983; Dowell Studer, Inc. and Husky
Oil Company. Mr. Timlin has received an Associates Degree in petroleum
engineering in 1957.
William F. Warnick is a practicing attorney in Lubbock, Texas. Mr. Warnick
serves as the Texas Attorney General's appointee to the Texas School Board Land
Commission and is a member of the American, Texas and Lubbock Bar Associations.
He is an oil and gas investor and has served in various management positions of
private independent oil and gas companies. Mr. Warnick received a B.A. degree
in finance and a J.D. degree in 1971.
EXECUTIVE COMPENSATION
Summary Compensation Table
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities during each of the last three fiscal years
by the Chief Executive Officer. No executive officer's salary and bonus
exceeded $100,000 in 1994. The following information for the Chief Executive
Officer includes the dollar value of base salaries, bonus awards, the number of
stock options granted and certain other compensation, if any, whether paid or
deferred.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation(1)
-----------------------------------------------------------------
Other
Name and Principal Annual
Position at 12/31/94 Year Salary Bonus Compensation
<S> <C> <C> <C> <C>
Willard H. Pease, Jr. 1994 $75,176 None None
President and Chief 1993 $75,000 None None
Executive Officer 1992 $62,500 None None
39
<PAGE>
<CAPTION>
Number
Restricted of
Name and Principal Stock Options Other
Position at 12/31/94 Year Awards Granted Compensation
<S> <C> <C> <C> <C>
Willard H. Pease, Jr. 1994 None -- None
President and Chief 1993 None 62,000 None
Executive Officer 1992 None 25,000 None
______________________
<FN>
(1) No bonuses have been paid to Mr. Pease. In addition, no amounts have been
shown as Other Annual Compensation because the aggregate incremental cost
to the Company of personal benefits provided to Mr. Pease did not exceed
the lesser of $50,000 or 10% of his annual salary in any given year.
</TABLE>
Option Grants in the Last Fiscal Year
No stock options were granted to Willard H. Pease, Jr. during 1994.
Aggregated Option Exercises in the Last Fiscal Year and the Fiscal Year-End
Option Values
Set forth below is information with respect to the unexercised options to
purchase the Company's Common Stock held by Willard H. Pease, Jr. at December
31, 1994. No options were exercised during fiscal 1994.
<TABLE>
<CAPTION>
Number of Unexercised in-the-Money Options
Options at FY-End(#) at FY-End($)(1)(2)
----------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Willard H. Pease, Jr. 118,000 -0- -0- -0-
___________________
<FN>
(1) Mr. Pease did not exercise any options during 1994.
(2) None of the exercisable options held by Mr. Pease were in-the-money at
December 31, 1994.
</TABLE>
40
<PAGE>
Compensation of Directors
Directors who are employees do not receive additional compensation for
service as directors. Other directors each receive $350 per meeting attended
and $50 per meeting conducted via telephone conference. Directors may elect to
receive the compensation either in cash or stock.
Employment Contract with a Director
The Company has entered into an employment agreement with Willard Pease,
Jr. The employment agreement may be terminated by the Company without cause on
30 days notice provided the Company continues to pay the salary of Mr. Pease for
36 months. The salary must be paid in a lump sum if the termination occurs
after a change in control of the Company as defined in the employment agreement.
Mr. Pease may terminate the employment agreement on 90 days written notice. The
base salary of Mr. Pease under the employment agreement is $75,000 per year.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, its only class of outstanding voting
securities as of August 31, 1995, by (i) each person who is known to the Company
to own beneficially more than 5% of the outstanding Common Stock with the
address of each such person, (ii) each of the Company's directors and officers,
and (iii) all officers and directors as a group:
<TABLE>
<CAPTION>
Name and
Address of Amount and
Beneficial Owner Nature of
or Name of Beneficial Percent
Officer or Director Ownership(1) of Class
<S> <C> <C>
Willard H. Pease, Jr.
P.O. Box 1874
Grand Junction, CO 81502 586,739 Shares(2) 8.2%
James C. Ruane
5010 Market St.
San Diego, CA 92102 204,814 Shares(3) 2.9%
Patrick J. Duncan
P.O. Box 1874
Grand Junction, CO 81502 100,531 Shares(4) 1.4%
James N. Burkhalter
P.O. Box 1874
Grand Junction, CO 81502 98,709 Shares(5) 1.4%
William F. Warnick
2022 Broadway
Lubbock, TX 79401 41,708 Shares(6) 0.6%
Robert V. Timlin
1989 South Balsam
Lakewood, CO 80277 31,995 Shares(7) 0.5%
Homer C. Osborne
1200 Preston Road #900
Dallas, TX 75230 17,242 Shares(8) 0.2%
All Officers and Directors
as a group (seven persons) 1,081,738 Shares(9) 14.2%
Chester LF Paulson & Jacqueline
M. Paulson JTWROS
811 SW Front Avenue
Suite 200
Portland, OR 97204-3376 1,007,500 Shares(10) 13.0%
_________________
41
<PAGE>
<FN>
(1) Beneficial owners listed have sole voting and investment power with respect
to the shares unless otherwise indicated.
(2) Includes 56,173 shares that are owned directly by Mr. Pease, over which
shares Mr. Pease has sole voting and investment power, 364,966 shares are
owned by entities affiliated with Mr. Pease over which shares Mr. Pease has
sole voting and investment power, 139,600 shares underlying presently
exercisable options owned by Mr. Pease and 26,000 shares underlying a
convertible promissory note owned by Mr. Pease.
(3) Includes 4,560 shares held by Mr. Ruane as trustee for two trusts, over
which shares Mr. Ruane may be deemed to have shared voting and investment
power, 44,083 shares underlying presently exercisable warrants to purchase
Common Stock and 59,675 shares underlying presently exercisable options,
and 10,750 shares of Common Stocks underlying convertible Preferred Stock.
(4) Includes 3,281 shares underlying presently exercisable warrants and 76,000
shares underlying presently exercisable options.
(5) Includes 88,000 shares underlying presently exercisable options.
(6) Includes 31,675 shares underlying presently exercisable options.
(7) Includes 31,675 shares underlying presently exercisable options.
(8) Represents 16,975 shares underlying presently exercisable options.
(9) Includes 443,600 shares underlying presently exercisable options, 47,364
shares underlying presently exercisable warrants, 26,000 shares underlying
a convertible note and 10,750 shares underlying convertible Preferred
Stock.
(10) Includes 210,000 shares underlying presently exercisable warrants, owned of
record by Mr. and Mrs. Paulson; 241,875 shares underlying 90,000 shares of
Preferred Stock and 2451,875 shares underlying Warrants issuable upon
conversion of the Preferred Stock beneficially owned by Paulson Investment
Company, Inc., the representative of which Mr. Paulson is a principal and
over which Mr. Paulson may be deemed to have shared investment and voting
power.
</TABLE>
CERTAIN TRANSACTIONS
From time to time, various officers and directors of the Company and their
affiliates have participated in the drilling of oil and gas wells which were
drilled and operated by the Company. All such persons and entities have taken
working interests in the wells and have paid the drilling, completion and
related costs of the wells on the same basis as the Company and all other
working interest owners. On occasions of such participation the Company
retained the maximum interest in the well that it could justify, given its cash
availability and the risk involved.
42
<PAGE>
In May 1995, James C. Ruane, a director of the Company, purchased 66,667
shares of Common Stock and 33,334 Warrants to purchase shares of Common Stock
for $50,000 on the same terms as other nonaffiliated purchasers. Mr. Ruane is a
Selling Securityholder as set forth herein. See "Selling Securityholders."
At December 31, 1994, the Company owed certain affiliates of Willard H.
Pease, Jr. $116,717 plus $17,233 in accrued interest for oil and gas revenue
attributable to interests in wells operated by the Company that are owned by the
individuals and related entities. Of such amount $2,877 was incurred in 1994,
$4,603 was incurred in 1993, $20,992 was incurred in 1992, $85,518 was incurred
in 1991 and $2,728 was incurred in 1990. At December 31, 1994, the Company also
owed $60,000 to Willard H. Pease, Jr. This loan is unsecured, bears interest at
8% per annum and is due January 1997.
Until June 1993, Willard H. Pease, Jr. owned an oil well servicing
business, Grand Junction Well Services, Inc. ( GJWS ), which operated a workover
and completion rig. In June 1993, the Company acquired GJWS from Mr. Pease by
merging GJWS into a newly-formed subsidiary of the Company. In the merger, the
Company issued Mr. Pease 46,667 shares of Common Stock and the Company s 6%
secured convertible promissory note in the principal amount of $175,000, for a
total value of $350,000, which was the estimated fair market value of the GJWS
assets and business. The note is payable in three annual principal installments
of $45,000, on October 1, 1994, $65,000 on April 1, 1995 and $65,000 on April 1,
1996. The October 1, 1994 principal payment of $45,000 has been paid. Mr.
Pease has elected to defer the Company's payment which was due April, 1995. The
unpaid principal portion of $130,000 is convertible at the election of Mr. Pease
into Common Stock at $5.00 per share. The transaction was approved unanimously
by the disinterested directors of the Company. Mr. Pease remained a guarantor
of the GJWS debt, which totaled $37,000 on the date of acquisition, to a bank.
As a result of the transaction, the obligation of the Company to GJWS, totaling
approximately $188,000 at March 31, 1993, was eliminated, reducing the Company s
obligation to Mr. Pease and affiliates by approximately $13,000.
In August 1994, Willard H. Pease, Jr. and entities affiliated with Mr.
Pease, exchanged promissory notes with an aggregate principal balance of
$150,000 for $150,000 principal amount of 12% Convertible Unsecured Promissory
Notes ( Notes ). The Notes were automatically converted by their terms into
93,750 shares of the Company s Common Stock on September 30, 1994. The Notes
and the conversion thereof were on the exact same terms as the Company s 12%
Convertible Unsecured Promissory Notes ( Private Notes ) that the Company sold
in a private offering during August and September, 1994. An entity affiliated
with Mr. Pease also purchased on the same terms as other unaffiliated purchasers
$50,000 principal amount of the Private Notes. These Private Notes were
automatically converted by their terms into 31,250 shares of the Company's
Common Stock on September 30, 1994.
In August 1994, Patrick J. Duncan the Chief Financial Officer and Corporate
Secretary of the Company, purchased $25,000 of the Private Notes on the same
terms as other nonaffiliated purchasers. Mr. Duncan's Private Notes were
automatically converted by their terms into 15,625 shares of the Company's
Common Stock on September 30, 1994.
In August 1994, Robbie R. Gries, the Company's former Vice President of
Exploration and a former director, purchased $50,000 of the Private Notes on the
same terms as other nonaffiliated purchasers. Ms. Gries Private Notes were
automatically converted by their terms into 31,250 shares of the Company s
Common Stock on September 30, 1994. Ms. Gries resigned her positions with the
Company in November 1994. In connection with her resignation, the Company
agreed to a severance package consisting of cash and an extension of her
existing options.
43
<PAGE>
All existing loans or similar advances to, and transactions with, officers
and their affiliates were approved or ratified by the independent and
disinterested directors. Any future material transactions with officers,
directors and owners of 5% or more of the Company's outstanding Common Stock or
any affiliate of any such person shall be on terms no less favorable to the
Company than could be obtained from independent unaffiliated third parties and
must be approved by a majority of the independent disinterested directors.
SELLING SECURITYHOLDERS
The following table sets forth certain information regarding the shares of
Common Stock beneficially owned as of August 31, 1995, by each Selling
Securityholder herein as adjusted to reflect the sale by all Selling
Securityholders of the shares offered hereby by each Selling Securityholder.
This list indicates any position, office or other material relationship with the
Company that the Selling Securityholder had within the past three (3) years, the
number of Common Shares owned by such Selling Securityholder prior to the
offering, the maximum number of shares to be offered for such Selling
Securityholder's account and the amount of the class owned by the Selling
Securityholder after completion of the offering (assuming the Selling
Securityholder sold the maximum number of shares of Common Stock). The Selling
Securityholders are not required, and may choose not, to sell any of their
shares of Common Stock.
44
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
Owned Shares Owned
Prior to Being After
Name Offering Offering Offering
<S> <C> <C> <C>
Albarta Partnership (1) 17,647 17,647 0
Bell, Howard B. & Leslie R. 9,375 9,375 0
Bronstein, Irwin I. (2) 60,000 60,000 0
Broadbent, Robert C. & Helena 15,625 15,625 0
Broadbent, Robert N. & Marjie
Sue Family Trust 15,625 15,625 0
Buehler, John J. & Jeri L. 31,250 31,250 0
Burkhalter, James N. (3) 98,709 3,906 94,803
Crownover, Enid E. & Clyde 62,500 62,500 0
Dagner, Hans (Bank of Commerce C/F) 15,625 15,625 0
Damerin Trust 15,625 15,625 0
Dawes, Steven A. 31,250 31,250 0
Dawson, Kent J. & Ruth W. 15,625 15,625 0
Duncan, Pat & Eilleen M. (4) 100,531 15,625 84,906
Duncan, Paul M. & Christine L. 31,250 31,250 0
Ellis, Robert P. & Sandra D. 15,625 15,625 0
Findlay, Clifford O. IRA 15,625 15,625 0
Findlay, Pete Olds Profit Sharing 15,625 15,625 0
Flood, Laurence B. (5) 58,824 58,824 0
Flynn, Timothy P. & Terri L. 62,500 62,500 0
Fried, Stanley and Helen Fried
Family Trust 15,625 15,625 0
Gleave, Rodney S. & Kelly 15,625 15,625 0
Gleave, Kelly W. (6) 45,000 45,000 0
Greene Clark & Associates, (P/S
Trust FBO A. Kent Greene) 15,625 15,625 0
Gries, Robbie R. (7) 107,500 31,250 76,250
Harris, Webb & Garrison (8) 11,250 11,250 0
Hutchings, Darryl & Birgit 9,375 9,375 0
Invest L'Inc. 31,250 31,250 0
LaFace, Del & Birgit 15,625 15,625 0
Losacano, John Anthony 7,813 7,813 0
Mcferran, Sam (9) 5,882 5,882 0
Mart Warehousing & Storage Inc. (10) 31,250 31,250 0
Michelas, Michael T. (11) 105,625 105,625 0
Moleton, Gerald P. (Southwest
Securities CF IRA Rollover) 15,625 15,625 0
Paris, T. Mark and Janiel 15,625 15,625 0
Paulson Investment Company, Inc.(12) 797,500 483,750 313,750
Pfeiffer, Gene F. & Jeanne 15,625 15,625 0
Plasso, Frank 9,375 9,375 0
Presidential Securities (13) 5,000 5,000 0
Pruitt, Gushee & Bachtell 80,000 80,000 0
Ritger, William J (14) 153,750 153,750 0
Ronin Group, Ltd. (15) 200,000 200,000 0
Ruane, James C (16) 204,814 100,000 104,814
Rufty, Archibald 15,625 15,625 0
Rufty, Frances F. C/F Sara F.
Parkton UTNUGMA 15,625 15,625 0
45
<PAGE>
Stock, Lincoln F. and Helen,
TTESS Lincoln F. and Helen
Revocable Trust (17) 73,125 73,125 0
Strain, Charles M. & Ruth A. 15,625 15,625 0
Jack D. and Maurine Swartz
Family Trust 15,625 15,625 0
Swartz, George C. 15,625 15,625 0
Tanner, Janet, First Trust
Corp. TTEE Janet J. Tanner IRA 15,625 15,625 0
Tanner, Max C. (Delaware Charter
C/F Max C. Tanner Profit
Sharing Keogh) 62,500 62,500 0
Tanner, Max C., Southwest
Securities Inc., FBO IRA (18) 50,000 50,000 0
Tanner, Max C. & Janet J.(19) 184,375 184,375 0
Tanner, Morris & Christi 11,250 11,250 0
Tanner, Mont E. 6,250 6,250 0
Thermo Cogeneration Partnership, L.P. 65,000 65,000 0
TNC Incorporated(20) 50,000 50,000 0
USA Capital Management (21) 3,125 3,125 0
Vance, Michael J. 12,500 12,500 0
Vance, William J., Jr. 18,750 18,750 0
Wagner Investment Management, Inc. (22) 50,000 50,000 0
Wagner, Rolf (23) 20,375 20,375 0
Wagner, W. Rolf, Scott & Stringfellow,
Inc., FBO IRA 25,000 25,000 0
Wagner, W. Rolf W. & Nancy Chin 15,625 15,625 0
Walker, Clemons F.(24) 171,813 171,813 0
Walker, Clemons F., First Trust Corp
TTEE IRA (25) 93,750 93,750 0
Walker, Clemons F. & Leslie A. Walker
Family Trust 75,000 75,000 0
Warren, Clark A. & Melissa M. 11,250 11,250 0
Weekley, Bob 31,250 31,250 0
Weekley, Richard 31,250 31,250 0
Witkowski, John J. & Carolyn A. 15,625 15,625 0
------- ------- -------
Totals 3,775,158 3,100,635 674,523
______________________
<FN>
(1) Consist of 17,647 shares issuable upon conversion of convertible notes
issued in 1990.
(2) Includes 20,000 shares issuable upon exercise of presently exercisable
warrants.
(3) Mr. Burkhalter is the Vice President of Engineering and Production for the
Company. Includes 88,000 shares underlying currently exercisable options.
(4) Mr. Duncan is the Company's Chief Financial Officer. Includes 3,281 shares
underlying presently exercisable warrants and 76,000 shares underlying
presently exercisable options.
(5) Consists of 58,824 shares issuable upon conversion of convertible notes
issued in 1990.
46
<PAGE>
(6) Includes 15,000 shares underlying presently exercisable warrants.
(7) Ms. Gries was the Company's Vice President of Exploration and a director of
the Company until her resignation in November 1994. Total includes 50,000
shares underlying presently exercisable options, and 26,250 shares
underlying presently exercisable warrants.
(8) Consists of 11,250 shares underlying presently exercisable warrants.
(9) Consists of 5,882 shares issuable upon conversion of convertible notes
issued in 1990.
(10) Willard H. Pease, Jr. owns approximately 30% of the outstanding common
stock of Mart Warehousing and Storage, Inc., and is President of Mart
Warehousing and Storage, Inc.
(11) Includes 30,000 shares underlying presently exercisable warrants.
(12) Includes 483,750 shares underlying Preferred Stock and Warrants issuable
upon converion of Preferred Stock.
(13) Consists of 5,000 shares underlying presently exercisable warrants.
(14) Includes 20,000 shares underlying presently exercisable warrants.
(15) Consists of 200,000 shares underlying presently exercisable warrants.
(16) Includes 4,560 shares held by Mr. Ruane as trustee for two trusts, over
which shares Mr. Ruane may be deemed to have shared voting and investment
power, 44,083 shares underlying presently exercisable warrants to purchase
Common Stock and 59,675 shares underlying presently exercisable options,
and 10,750 shares of Common Stocks underlying convertible preferred stock.
Mr. Ruane is a director of the Company.
(17) Includes 15,000 shares underlying presently exercisable warrants.
(18) Includes 16,667 shares underlying presently exercisable warrants.
(19) Includes 45,833 shares underlying presently exercisable warrants.
(20) Consists of 50,000 shares underlying presently exercisable warrants.
(21) Consists of 3,125 shares underlying presently exercisable warrants.
(22) Consists of 50,000 shares underlying presently exercisable warrants.
(23) Includes 12,500 shares underlying presently exercisable warrants.
(24) Includes 138,480 shares underlying presently exercisable warrants.
(25) Includes 25,000 shares underlying presently exercisable warrants.
</TABLE>
In addition to the shares of Common Stock listed above, the following sets
forth certain information regarding other securities beneficially owned and
offered hereby by the Representative. The Representative is not required to and
may choose not to sell any of its securities.
47
<PAGE>
<TABLE>
<CAPTION>
Securities Securities Securities
Owned Being Owned
Name Prior to Offering Offered After Offering
<S> <C> <C> <C>
Paulson Investment
Company, Inc. 90,000 Shares(1) 90,000 Shares - 0 -
Preferred Stock
241,875 Warrants(2) 241,875 Warrants - 0 -
<FN>
(1) Consists of shares of Preferred Stock issuable upon exercise of a preferred
stock warrant.
(2) Consists of Warrants issuable upon conversion of the 90,000 shares of
Preferred Stock.
</TABLE>
DESCRIPTION OF SECURITIES
The Company is authorized to issue 25,000,000 shares of $0.10 par value
Common Stock and 2,000,000 shares of Preferred Stock, $0.01 par value. As of
August 31, 1995, there were 7,011,032 shares of Common Stock outstanding and
202,688 shares of Preferred Stock outstanding.
Common Stock
Holders of shares of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders of the Company. Except as may
be required by applicable law, holders of shares of Common Stock will not vote
separately as a class, but will vote together with the holders of outstanding
shares of other classes of capital stock. There is no right to cumulate votes
in the election of directors. A majority of the issued and outstanding Common
Stock constitutes a quorum at any meeting of stockholders and the vote by the
holders of a majority of the outstanding shares is required to effect certain
fundamental corporate changes such as liquidation, merger or amendment of the
Articles of Incorporation.
Holders of shares of Common Stock are entitled to receive dividends, if,
as, and when declared by the Board of Directors out of funds available therefor,
after payment of dividends required to be paid on outstanding shares of
preferred stock. The Company's agreement with its bank lender prohibits payment
of Common Stock dividends without the consent of the lender. Upon liquidation
of the Company, holders of shares of Common Stock are entitled to share ratably
in all assets of the Company remaining after payment of liabilities, subject to
the liquidation preference rights of any outstanding shares of preferred stock.
Holders of shares of Common Stock have no conversion, redemption or preemptive
rights. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of preferred stock. The
outstanding shares of Common Stock are and all shares of Common Stock sold
pursuant to this offering will be, fully paid and nonassessable. The shares of
Common Stock issued upon conversion of preferred stock, or exercise of Warrants
and payment therefor, will be validly issued, fully paid and nonassessable.
48
<PAGE>
Preferred Stock
Under the Company's Articles of Incorporation, as amended ("Articles"), the
Board of Directors has the power, without further action by the holders of the
Common Stock, to designate the relative rights and preferences of the Company's
preferred stock, when and if issued. Such rights and preferences could include
preferences as to liquidation, redemption and conversion rights, voting rights,
dividends or other preferences, any of which may be dilutive of the interest of
the holders of the Common Stock. The issuance of preferred stock may have the
effect of delaying or preventing a change in control of the Company and may have
an adverse effect on the rights of the holders of Common Stock.
A total of 1,260,000 shares of the authorized preferred stock have been
designated as Series A Cumulative Convertible Preferred Stock ("Preferred
Stock"). Additional classes of preferred stock may be designated and issued
from time to time in one or more series with such designations, voting powers or
other preferences and relative other rights or qualifications as are determined
by resolution of the Board of Directors of the Company.
The Preferred Stock was authorized by the Board of Directors of the Company
as a new series of preferred stock. So long as any Preferred Stock is
outstanding, the Company is prohibited from issuing any series of stock having
rights senior to the Preferred Stock ("Senior Stock") without the approval of
the holders of 66 % of the outstanding Preferred Stock. Additionally, so long
as any Preferred Stock is outstanding, the Company, without the approval of the
holders of at least 50% of the outstanding Preferred Stock, may not issue any
series of stock ranking on parity with the Preferred Stock ("Parity Stock") as
to dividend or liquidation rights, or having a right to vote on matters as to
which the Preferred Stock is not entitled to vote, or if the Company's Adjusted
Stockholders' Equity (as defined) is less than the total liquidation preferences
of all outstanding Preferred Stock.
Dividends. Holders of shares of Preferred Stock are entitled to receive,
when, as and if declared by the Board of Directors out of funds at the time
legally available therefor, cash dividends at an annual rate of 10% (equal to
$1.00 per share annually), and no more, payable quarterly in arrears, except
that if any such date is a Saturday, Sunday or legal holiday, then such dividend
shall be payable on the next day that is not a Saturday, Sunday or legal
holiday. Dividends accrue and are cumulative from the date of first issuance of
the Preferred Stock and are payable to holders of record as they appear on the
stock books of the Company on such record dates as are fixed by the Board of
Directors.
Unless a class or series of Senior Stock or Parity Stock is authorized as
described above, the Preferred Stock will be senior as to dividends to any
series or class of the Company's stock, and if at any time the Company has
failed to pay or declare and set apart for payment accrued and unpaid dividends
on the Preferred Stock, the Company may not pay any other dividends. The
Preferred Stock has priority as to dividends over the Common Stock and any
series or class of the Company's stock hereafter issued, and no dividend (other
than dividends payable solely in Common Stock or any other series or class of
the Company's stock hereafter issued that ranks junior as to dividends to the
Preferred Stock) may be declared, paid or set apart for payment on, and no
purchase, redemption or other acquisition may be made by the Company of any
Common Stock or other stock unless all accrued and unpaid dividends on the
Preferred Stock have been paid or declared and set apart for payment. The
Company may not pay dividends on any Parity Stock unless it has paid or declared
and set apart for payment, or contemporaneously pays or declares and sets apart
for payment, all accrued and unpaid dividends for all prior periods on the
Preferred Stock; and the Company may not pay dividends on the Preferred Stock
unless it has paid or declared and set apart for payment, or contemporaneously
pays or declares and sets apart for payment, all accrued and unpaid dividends
for all prior periods on any outstanding Parity Stock. Whenever all accrued
dividends are not paid in full on the Preferred Stock or any Parity Stock, all
dividends declared on the Preferred Stock and any such Parity Stock will be
declared or made pro rata so that the amount of dividends declared per share on
the Preferred Stock and any such Parity Stock will bear the same ratio that
accrued and unpaid dividends per share on the Preferred Stock and such Parity
Stock bear to each other.
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The amount of dividends payable per share of Preferred Stock for each
quarterly dividend period is computed by dividing the annual dividend amount by
four. The amount of dividends payable for any period shorter than a full
dividend period will be computed on the basis of a 360 day year. No interest
will be payable in respect of any dividend payment on the Preferred Stock which
may be in arrears.
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Company, holders of shares of Preferred Stock are entitled to
receive a liquidation preference of $10.00 per share, plus an amount equal to
any accrued and unpaid dividends to the payment date, and no more, before any
payment or distribution is made to the holders of Common Stock, or any series or
class of the Company's stock hereafter issued that ranks junior as to
liquidation rights to the Preferred Stock. The holders of Preferred Stock and
any Parity Stock that ranks on a parity as to liquidation rights with the
Preferred Stock will be entitled to share ratably, in accordance with the
respective preferential amounts payable on such stock, in any distribution which
is not sufficient to pay in full the aggregate of the amounts payable thereon.
After payment in full of the liquidation preference of the shares of the
Preferred Stock, the holders of such shares will not be entitled to any further
participation in any distribution of assets by the Company. Neither a
consolidation, merger or other business combination of the Company with or into
another corporation or other entity nor a sale or transfer of all or part of the
Company's assets for cash, securities or other property will be considered a
liquidation, dissolution or winding up of the Company.
Voting Rights. The holders of the Preferred Stock will have no voting
rights except as described below or as required by law. In exercising any such
vote, each outstanding share of Preferred Stock will be entitled to one vote,
excluding shares held by the Company or any entity controlled by the Company,
which shares shall have no voting rights.
Whenever dividends on the Preferred Stock or any outstanding shares of
Parity Stock have not been paid in an aggregate amount equal to at least six
quarterly dividends on such shares (whether or not consecutive), the number of
directors of the Company will be increased by two, and the holders of the
Preferred Stock, voting separately as a class with the holders of any Parity
Stock on which any like voting rights have been conferred and are exercisable,
will be entitled to elect such two additional directors to the Board of
Directors and will have the same rights at any meeting of stockholders of the
Company at which directors are to be elected held during the period such
dividends remain in arrears. Such voting rights will terminate when all such
dividends accrued and in default have been paid in full or set apart for
payment. The term of office of all directors so elected will terminate
immediately upon such payment or setting apart for payment.
So long as any Preferred Stock is outstanding, the Company shall not,
without the affirmative vote of the holders of at least 66 % of all outstanding
shares of Preferred Stock, voting separately as a class, (i) amend, alter or
repeal any provision of the Certificate or the Bylaws of the Company so as to
adversely affect the relative rights, preferences, qualifications, limitations
or restrictions of the Preferred Stock, (ii) authorize or issue, or increase the
authorized amount of, any additional class or series of stock, or any security
convertible into stock of such class or series, ranking senior to the Preferred
Stock as to dividends or upon liquidation, dissolution or winding up of the
Company or (iii) effect any reclassification of the Preferred Stock.
So long as any Preferred Stock is outstanding the Company shall not,
without the affirmative vote of the holders of at least 50% of all outstanding
shares of Preferred Stock, voting separately as a class, (i) authorize, issue,
or increase the authorized amount of any additional class or series of stock, or
any security convertible into stock of such class or series, ranking on parity
with the Preferred Stock as to dividends or liquidation and having superior
voting rights, or (ii) authorize or issue, or increase the authorized amount of,
any additional class or series of stock, or any security convertible into stock
of such class or series, ranking on parity with the Preferred Stock as to
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dividend or liquidation rights if, immediately following such event, Adjusted
Stockholders' Equity is less than the aggregate liquidation preferences of all
Preferred Stock and stock ranking senior to or on parity with the Preferred
Stock as to liquidation. Adjusted Stockholders' Equity is the Company's
stockholders' equity as shown on its most recent balance sheet, increased by (a)
any amount of any liability or other reduction in stockholders' equity
attributable to the Preferred Stock and each series of stock senior to or on
parity with the Preferred Stock as to liquidation and (b) the net proceeds of
any equity financing since the date of the balance sheet, reduced by any
reduction in stockholders' equity resulting from certain dispositions of assets
since the date of the balance sheet.
Redemption. The Preferred Stock may not be redeemed prior to August 13,
1995. The Preferred Stock thereafter is redeemable for cash, in whole or in
part, at any time, at the option of the Company, at $10.00 per share plus any
accrued and unpaid dividends, whether or not declared.
If fewer than all of the outstanding shares of Preferred Stock are to be
redeemed, the Company will select those to be redeemed pro rata or by lot or in
such other manner as the Board of Directors may determine. There is no
mandatory redemption or sinking fund obligation with respect to the Preferred
Stock. In the event that the Company has failed to pay accrued dividends on the
Preferred Stock, it may not redeem any of the then outstanding shares of the
Preferred Stock until all such accrued and unpaid dividends and (except with
respect to shares to be redeemed) the then current quarterly dividend have been
paid in full.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of shares of Preferred
Stock to be redeemed at the holder's address shown on the stock transfer books
of the Company. After the redemption date, unless there shall have been a
default in payment of the redemption price, dividends will cease to accrue on
the shares of Preferred Stock called for redemption and all rights of the
holders of such shares will terminate, except the right to receive the
redemption price without interest.
Conversion Rights of Preferred Stock
Automatic Conversion. If at any time the closing price for the Preferred
Stock as reported on the NASDAQ System (or the closing sale price as reported on
any national securities exchange on which the Preferred Stock is then listed),
shall, for a period of 10 consecutive trading days, exceed $13.00, then,
effective as of the close of business on the tenth such trading day, all shares
of Preferred Stock then outstanding and all accrued and undeclared dividends
thereon shall immediately and automatically without further notice be converted
into shares of Common Stock at the Conversion Price then in effect with the same
effect and at the same result as if an optional conversion occurred as described
below.
Optional Conversion. At any time prior to the redemption of the Preferred
Stock, the holder of any shares of Preferred Stock will have the right, at the
holder's option, to convert any or all such shares and all accrued and
undeclared dividends thereon into Common Stock and, in addition, if such
conversion occurs prior to the close of business on August 13, 1998, Warrants to
purchase Common Stock at a price of $5.00 per share until December 31, 1996 and
$6.00 thereafter, subject to adjustments described below (hereafter the
"Conversion Price"). The amount which shall be convertible at the Conversion
Price shall be the total of the liquidation preference ($10.00 per share of
Preferred Stock) plus all accrued and declared dividends through the end of the
calendar quarter in which the conversion is effected. If the Preferred Stock
has been called for redemption, the conversion right shall terminate at the
close of business on the last business day prior to the date fixed for
redemption (unless the Company defaults in the payment of the redemption price).
One Warrant shall be issued for each share of Common Stock received upon
conversion of the Preferred Stock.
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No fractional shares of Common Stock or fractional Warrants will be issued
upon conversion, but, in lieu thereof, an appropriate amount will be paid in
cash by the Company based on the reported last sale price for the shares of
Common Stock on the business day prior to the date of conversion. See "Warrants
Issuable Upon Conversion of Preferred Stock."
The Conversion Price will be subject to adjustment in certain events,
including: the issuance of stock as a dividend on the Common Stock;
subdivisions or combinations of the Common Stock; the issuance to all holders of
Common Stock of certain rights or Warrants (expiring within 45 days after the
record date for determining stockholders entitled to receive them) to subscribe
for or purchase Common Stock at a price less than current market price; or the
distribution to all holders of Common Stock of evidences of indebtedness of the
Company, cash (excluding ordinary cash dividends), other assets or rights or
Warrants to subscribe for or purchase any securities (other than those referred
to above). No adjustment in the Conversion Price will be required to be made
until cumulative adjustments amount to 1% or more of the Conversion Price as
last adjusted; however, any adjustment not made shall be carried forward.
The Company from time to time may decrease the Conversion Price by any
amount for any period of at least 20 days, in which case the Company shall give
at least 15 days notice of such decrease. The Company may, at its option, make
such decreases in the Conversion Price, in addition to those set forth above, as
the Board of Directors of the Company deems advisable to avoid or diminish any
income tax to holders of Common Stock resulting from any dividend or
distribution of stock or issuance of rights or warrants to purchase or subscribe
for Common Stock or from any event treated as such for income tax purposes.
In case of any reclassification of the Common Stock, any consolidation of
the Company with, or merger of the Company into, any other person, any merger of
any person into the Company (other than a merger that does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock), any sale or transfer of all or substantially all of the assets of
the Company or any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or other properties, then provisions shall
be made that the holder of each share of Preferred Stock then outstanding shall
have the right thereafter, during the period such share of Preferred Stock shall
be convertible, to convert such share into the kind and amount of securities,
cash or other property receivable upon such reclassification, consolidation,
merger, sale, transfer or share exchange by a holder of the number of shares of
Common Stock into which such share of Preferred Stock might have been converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange.
Other Provisions. The holders of the shares of Preferred Stock have no
preemptive rights with respect to any securities of the Company.
Warrants Issuable Upon Conversion of Preferred Stock
Upon conversion of each share of Preferred Stock prior to the close of
business on August 13, 1998, whether conversion is automatic or at the option of
the holder, the holder will receive that number of Warrants equal to the number
of shares of Common Stock issuable upon conversion of one share of Preferred
Stock. The Warrants will expire on August 13, 1998. The Warrants are not
subject to redemption by the Company prior to August 13, 1995. Thereafter, the
Warrants will be redeemable, in whole or in part on a pro rata basis, at the
option of the Company, upon not fewer than 30 days notice, at a redemption price
equal to $0.25 per Warrant.
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Each Warrant will represent the right to purchase one share of Common Stock
on or before 5:00 p.m. Eastern Time on August 13, 1998 at an initial exercise
price of $5.00 per share until December 31, 1996 and, thereafter, $6.00 per
share. The exercise price and the number of shares underlying the Warrants are
subject to adjustment in certain events, including the issuance of Common Stock
as a dividend on shares of Common Stock; subdivisions, combinations and
reclassifications of the shares of the Common Stock; the distribution to all
holders of Common Stock of evidences of indebtedness of the Company or assets
(other than cash dividends); and certain mergers, a consolidation or a sale of
substantially all of the assets of the Company. Except as stated in the
preceding sentence, the Warrants do not contain provisions protecting against
dilution resulting from the sale of additional shares of Common Stock for less
than the exercise price of the Warrants or the current market price.
Holders of Warrants will be entitled to notice if (a) the Company grants
holders of its Common Stock rights to purchase any shares of capital stock or
any other rights, or (b) the Company authorizes a reclassification, capital
reorganization, consolidation, merger or sale of substantially all of its
assets.
The Warrants being offered by the Company will be issued pursuant to the
terms of a Warrant Agreement between the Company and American Securities
Transfer, Inc., as Warrant Agent, a copy of which has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part. The Company
and the Warrant Agent may from time to time supplement or amend the Warrant
Agreement, without the approval of any Warrant Holders, to correct or supplement
defective or inconsistent provisions or to make any other provisions in regard
to matters or questions arising under the Warrant Agreement which shall not
adversely affect the Warrant Holders, including (but not limited to) extending
the Expiration Date and any conditional or unconditional reduction in the
Exercise Price, as the Board of Directors may determine. The Company and the
Warrant Agent may make any other amendment to the Warrant Agreement upon
obtaining the consent of a majority of the holders of outstanding Warrants,
except that the consent of all Warrant Holders is necessary to shorten the time
of exercise of any Warrant or to increase the Exercise Price.
The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Common Stock for issuance on exercise of the
Warrants. Exercise of each Warrant may be effected by delivery of the Warrant,
duly endorsed for exercise and accompanied by payment of the exercise price, to
the Warrant Agent. The shares of Common Stock issuable on exercise of the
Warrants will be, when issued and paid for in the manner contemplated by the
Warrants, fully paid and nonassessable.
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market for the Company's Common Stock, with a
resulting dilution in the interest of all other stockholders. So long as the
Warrants are outstanding, the terms on which the Company could obtain additional
capital may be adversely affected. The holders of the Warrants might be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital by a new offering of securities on terms
more favorable than those provided for by the Warrants.
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Except as described above, the holders of the Warrants have no rights as
stockholders until they exercise their Warrants.
The Warrants are listed on NASDAQ Small Capital Market under the symbol
WPOW, but are not currently traded.
Debentures
At December 31, 1994, the Company also had outstanding $92,500 of
convertible debentures, held by four private investors, which bear interest at
10% per annum due in 1995. In May 1995, three of the holders agreed to extend
the due date of the debentures to May 31, 1996, in exchange for a higher
interest rate of 12% per annum. The holder who elected not to extend his note
was paid in full. Accordingly, as of June 30, 1995, there remains outstanding
$70,000 under these obligations. The debentures are unsecured and are
convertible at the option of the holder into Common Stock at $0.85 per share.
The debentures were originally issued in 1991.
Certain Provisions of the Articles of Incorporation, Bylaws and Nevada Law
Additional Preferred Stock. The Board of Directors' ability to issue
additional shares of Preferred Stock and to determine the rights, preferences,
privileges, designations and limitations of such stock, including the dividend
rights, dividend rate, conversion rights, voting rights, terms of redemption and
other terms of conditions of such stock, could make it more difficult for a
person to engage in, or discourage a person from engaging in, a change in
control transaction without the cooperation of management.
Bylaws. In May 1993 the Company adopted Bylaws pursuant to which the Board
of Directors has been classified such that in the future approximately one-third
of the directors will be elected at each annual meeting of stockholders for a
three year term. As a result of this "staggered" Board of Directors, it would
be more difficult for a person to assume control of the Company by changing the
Board of Directors without the cooperation of the Board of Directors.
Certain Provisions of Articles of Incorporation. The Company's Articles of
Incorporation contain a provision, authorized under Nevada law, which limits the
liability of directors or officers of the Company for monetary damages for
breach of fiduciary duty as an officer or director other than for intentional
misconduct, fraud or a knowing violation of law or for payment of a dividend in
violation of Nevada law. Such provision limits recourse for money damages which
might otherwise be available to the Company or stockholders for negligence by
individuals while acting as officers or directors of the Company. Although this
provision would not prohibit injunctive or similar actions against directors or
officers, the practical effect of such relief would be limited. This limitation
of liability under state law does not apply to any liabilities which may exist
under federal securities laws.
Transfer Agent and Registrar
American Securities Transfer, Inc., Denver, Colorado, is the transfer agent
and registrar for the Common Stock and Preferred Stock and Warrant Agent for the
Warrants.
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PLAN OF DISTRIBUTION
The shares of Common Stock issuable upon exercise of the Warrants and the
shares of Common Stock and Warrants issuable upon conversion of the shares of
Preferred Stock will be issued directly by the Company to the Warrant holders or
Preferred Stockholders upon submission of the particular Warrants and the
exercise price or upon submission of the shares of Preferred Stock to the
Company. The exercises or conversion are subject to the terms of the Warrants
or shares of Preferred Stock and such Warrants or shares of Preferred Stock may
be exercisable or convertible during different periods of time.
The Selling Securityholders intend to sell their shares directly, through
agents, dealers, or underwriters, in the over-the-counter market, or otherwise,
on terms and conditions determined at the time of sale by the Selling
Securityholders or as a result of private negotiations between buyer and seller.
Sales of the shares of Common Stock or Preferred Stock may be made pursuant to
this Prospectus and pursuant to Rule 144 adopted under the Securities Act of
1933, as amended. No underwriting arrangements exist as of the date of this
Prospectus for the Selling Securityholders to sell their shares. Upon being
advised of any underwriting arrangements that may be entered into by a Selling
Securityholder after the date of this Prospectus, the Company will prepare a
supplement to this Prospectus to disclose such arrangements. It is anticipated
that the per share selling price for the shares will be at/or between the "bid"
and "asked" prices of the Company's Common and Preferred Stock, respectively, as
quoted in the over-the-counter market immediately preceding the sale. Expenses
of any such sale will be borne by the parties as they may agree.
The Company will pay securities broker-dealers who are members of the
National Association of Securities Dealers, Inc. ("NASD") a solicitation fee of
5% of the exercise price of the shares of Common Stock issued upon exercise of
the Warrants of the Company that are exercisable at $5.00 per share until
December 1997 and, thereafter at $6.00 per share for soliciting the exercise and
assisting in the exercise of the Company's outstanding Warrants. In order to
qualify to receive the solicitation fee, the broker-dealer must be designated in
writing by the Warrant holder as having solicited the exercise of the Warrant
and the compensation payable to the broker-dealer in connection with the
exercise of the Warrant must have been disclosed to the Warrant holder. The
Company will pay the solicitation fee to qualifying broker-dealers through the
expiration of the Warrants. No solicitation fee will be paid with respect to
the exercise of Warrants directly by Warrant holders without the assistance or
participation of a broker-dealer.
No broker-dealers which are members of the NASD will be entitled to receive
the solicitation fee if (i) the exercise of the Warrants is made at a time when
the market price of the Company's Common Stock is lower than the exercise price
of the Warrants, (ii) the Warrants to be exercised are held in a discretionary
account or (iii) the solicitation of the exercise of such Warrants would violate
Rule 10b-6 promulgated under the Securities Exchange Act of 1934, as amended.
Further, unless granted an exemption by the Securities and Exchange
Commission to its Rule 10b-6, the soliciting broker-dealers might be prohibited
from engaging in any market making activities with regard to the Company's
securities for the period from two or nine business days prior to any
solicitation of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the soliciting broker-dealers may have to receive a fee for the
exercise of Warrants following the solicitation. As a result, the soliciting
broker-dealers may be unable to continue to provide a market for the Company's
securities during certain periods while the Warrants are exercisable.
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LEGAL MATTERS
The validity of the issuance of the Common Stock, Preferred Stock and
Warrants offered hereby has been passed upon for the Company by Hopper and
Kanouff, P.C., Denver, Colorado.
EXPERTS
The consolidated financial statements of the Company included in this
Prospectus and elsewhere in the registration statement, to the extent and for
the periods indicated in their report, have been audited by HEIN + ASSOCIATES
LLP, independent certified public accountants, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The information appearing herein with respect to the Company's Proved
Reserves at December 31, 1993 and 1994 to the extent stated herein, was
estimated by McCartney Engineering, Inc., independent petroleum engineers. Such
information is included herein on the authority of said firm as experts in
petroleum engineering.
GLOSSARY
The italicized terms in this section (which are used in this Prospectus)
have the meanings given them in this section.
Bbl. or barrel. Forty-two U.S. gallons liquid volume, usually used herein
in reference to crude oil or other liquid hydrocarbons.
BOE or barrels of oil equivalent. Converts gas to oil in a ratio of 6
million cubic feet of gas equals 1 barrel of oil, usually. Then oil and gas are
added together for total BOE.
Blowout. A sudden, violent escape of gas and oil and sometimes water from
a drilling well when high pressure is penetrated and the well flows out of
control.
BTU (British Thermal Unit). The amount of heat necessary to raise the
temperature of one pound of water one degree Fahrenheit. This is the standard
measure of gas in terms of heating potential.
Cased hole. A wellbore in which casing has been run.
Cased hole lateral. A wellbore drilled horizontally or laterally out of an
existing cased well bore. The casing is first milled out or cut through, then
the slim lateral hole is drilled.
Casing. Steel pipe threaded together and cemented into a wellbore to
prevent caving of the wall of the hole during production efforts.
Decline. The decrease in yield of oil and gas from a well, lease, pool or
field. The first yield is the "flush production" and for awhile decline is
rapid, then slows down to a steady rate. Decline curves are plotted against
time to show graphically the rate of production.
Depletion. The act of emptying, reducing, or exhausting, such as depletion
of a natural resource like oil and gas. Also means a reduction in income
reflecting the exhaustion of mineral deposits.
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Developed Acreage. The number of acres of oil and gas leases held by, or
if owned, which are allocated or assignable to, producing wells or wells capable
of production.
Development Well. A well which is drilled to and completed in a known
producing formation adjacent to a producing well in a previously discovered
field and in a stratigraphic horizon known to be productive.
Discovery well. An exploratory well that discovers a new oil or gas field.
Drill stem test. Method of testing a formation when it has been drilled.
A testing tool is attached to the bottom of the drill pipe and is placed
opposite the formation to be tested. The tool is isolated with packers and the
formation pressure and fluids can be sampled by the testing tool.
Dry hole. Generally refers to any well that does not produce oil or gas in
commercial quantities.
Exploration. The search for economic deposits of minerals, petroleum and
other natural earth resources by any geological, geophysical, or geochemical
technique.
Field. A geographical area in which a number of oil or gas wells produce
from a continuous reservoir.
Formation. A mappable unit of rock distinguished from surrounding rocks.
Names are usually given to formations based on the geographical location where
the formation was first described, i.e., Morrison Formation for Morrison, Co.
Fracture. A break in rocks along which there has been no movement.
Fractures are favorable in that they increase both porosity and permeability.
Fracturing. See hydrologic fracturing.
Gathering system (lines). Pipe connecting gas wells to main pipelines or
to gas plants or lines that connect oil tank batteries with a trucking line.
Gross Acres and Gross Wells. The total acres or wells, as the case may be,
in which an entity has an interest, either directly or through an affiliate.
Hot oil trucks. A truck that heats and pumps hot oil down a wellbore to
clean out the well.
Hydrologic fracturing (frac). A method of stimulating production by
increasing the permeability of the producing formation. Under high pressure, a
fluid (such as diesel fuel, crude oil, or water) is pumped into the formation
causing cracks to open in the formation. Propping agents, such as sand grains,
are carried in suspension by the fluid into the cracks and hole the cracks open
after the procedure is finished.
Infill well. A well drilled within an existing oil or gas field.
Injection well (water injector). A well that is used to pump water (or
gas) into a formation to maintain formation pressure which enables the operator
to pump more of the hydrocarbons out of the formation and up to the surface.
Intangible. That portion of an investment that does not represent a
lasting commodity, i.e., geophysical expenditures, platform construction costs.
Intangible costs are normally expensed.
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Lease. A lease is an agreement whereby the grantee receives for a period
of time the full or partial interest in oil and gas properties, oil and gas
mineral rights, fee rights, or other rights of grantor granting the grantee the
right to drill for, produce and sell oil and gas upon payment of rentals,
bonuses and/or royalties. Leases are generally acquired from private landowners
and federal and state government.
Lease operating expenses (LOE). The cost of operating a well, including
gas or electric bills for pumping, pumpers, well servicing, office overhead for
billing and paying partners and managing operations, etc.
Lifting Costs. The expenses of lifting oil from a producing formation to
the surface, consisting of the costs incurred to operate and maintain wells and
related equipment and facilities, including labor costs, repair and maintenance,
supplies, insurance, and production, severance and windfall profit taxes.
Limestone. A bedded sedimentary rock that is mainly calcium carbonate.
Excellent reservoir when fractured or when full of vugs and cavities which can
trap oil.
Location. The actual geographic spot on which a well is to be drilled.
Log. A record of the earth layers passed through in drilling a well,
usually recorded by geophysical tools that read the natural radioactivity,
electric conductivity or other natural characteristics of rocks.
Mcf. One thousand cubic feet of natural gas.
Mineral interest. Possessing the right to explore, right of ingress and
egress, right to lease, and right to receive part or all of the income from
mineral exploitation i.e., bonus, delay rentals and royalties.
Natural Gas Liquid. When natural gas is processed, the liquid hydrocarbons
(by-products) (a propane and enriched butane) that are separated from the gas
are called natural gas liquids.
Net Acres or Net Wells. A "net acre" or "net well" is deemed to exist when
the sum of fractional ownership working interests in gross acres or gross wells
equals one.
Oil Wells or Gas Wells. Oil wells are those wells which generate revenue
from oil production; gas wells are those wells which generate nearly all revenue
from gas production.
Operator. The person or company actually operating an oil or gas well.
Payout. The length of time required for cumulative cash position to reach
zero. Payout is on an after-tax basis unless otherwise designate.
Permeable. The ability of a rock to have fluid pass through it, increased
permeability means increased ability to "give up" fluid through production.
Promote. To ask partners in a venture (i.e. drilling a well) to pay more
than their working interest share of expenses.
Proved Reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known oil and gas
reservoirs under existing economic and operating conditions, that it, on the
basis of prices and costs as of the date the estimate is made and any price
changes provided for by existing contracts.
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Proved Developed Reserves Behind Pipe. Producing reserves which are
developed (drilled) but not producing because the zone is behind pipe and has
not been opened up for actual volume testing or for production.
Proved Developed Reserves. Proved Reserves which can be expected to be
recovered through existing wells with existing equipment and operating methods.
Proved Undeveloped Reserves. Proved Reserves which can be expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.
Pumping Unit. A device that raises or lifts, transfers or compresses
fluids or that attenuates gases especially by suction or pressure or both. Used
to move formation fluids (oil, gas, water) out of the formation, into the
wellbore and up to the surface. "Downhole pumps" are located in the wellbore.
Seismic. Sound waves generated by explosives or by hammering the earth's
surface which are recorded and translated into records of the earths layers.
Most seismic is done along a line or traverse and a two dimensional illustration
is created. Three dimensional (3-D) seismic is recording sound waves in a block
pattern on the surface which is translated into a 3 dimensional block
illustration of what is in the sub-surface.
Service rig. A small truck mounted rig which can be used to put casing,
tubing etc. into a wellbore, to work over wellbores and to test wells for
productibility.
Source rock. Organically rich deposits with high proportions of plant and
animal remains from which petroleum is derived.
Spacing. The number of acres per well or the distance between wells.
Stepout. A well some distance from producing wells that is considered
higher risk than an "infill" well.
Structure. Folding and dislocation of rock layers which can form traps for
hydrocarbons.
Tertiary. In oil and gas production, a means of producing more oil and gas
out of a reservoir by injecting gas, such as CO2.
Tubing. Small-diameter removable pipe through which oil and gas are
produced from the well.
Unitization. An agreement under which two or more persons owning operating
mineral properties agree to have the properties operated on a unified basis and
further agree to share in production from all of the properties on a stipulated
percentage or fractional basis regardless of which property the oil or gas is
produced from. All owners of the economic interests in the property should be
involved in the agreement.
Undeveloped Acreage or Properties. Oil and gas acreage (including, in
applicable instances, rights in one or more horizons thereunder, which may be
penetrated by existing well bores, but which have not been tested) or properties
to which Proved Reserves have not been assigned by independent petroleum
engineers.
59
<PAGE>
Vacuum truck. A vehicle designed to pump fluids from tanks or pits to
convey to an acceptable disposal area.
Waterflood. A program to pump water (inject) into a formation to increase
formation pressure and recoverability of hydrocarbons.
Working Interest. The operating interest under an oil and gas lease which
gives the owner the right to drill, produce and conduct operating activities on
the property and a share of production, subject to all royalties, overriding
royalties and other burdens and to all costs of exploration, development and
operations and all risks in connection therewith.
Workover. Performing one or more of a variety of remedial operations on a
producing oil or gas well with the aim of restoring or increasing production.
60
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Pease Oil and Gas Company:
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets - June 30, 1995 (Unaudited) and
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations - For the Six Months Ended June 30, 1995
and 1994 (Unaudited) and the Years Ended December 31, 1994 and 1993 . F-5
Consolidated Statements of Stockholders' Equity - For the Six Months Ended
June 30, 1995 (Unaudited) and the Years Ended December 31, 1994
and 1993. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows - For the Six Months Ended
June 30, 1995 and 1994 (Unaudited) and the Years Ended
December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-10
Skaer Enterprises, Inc. And Related Entities:
Combined Statement of Income - For the Eight Months Ended August 31, 1993
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
Combined Statement of Cash Flows - For the Eight Months Ended August 31, 1993
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-28
Notes to Combined Financial Statements (Unaudited) . . . . . . . . . . . . F-29
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Pease Oil and Gas Company
Grand Junction, Colorado
We have audited the accompanying consolidated balance sheet of Pease Oil and Gas
Company and subsidiaries as of December 31, 1994, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1994 and 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pease Oil and Gas
Company and subsidiaries as of December 31, 1994, and the results of their
operations and their cash flows for the years ended December 31, 1994 and 1993
in conformity with generally accepted accounting principles.
As discussed in Note 1, the Company changed its method of accounting for
impairment of its proved oil and gas properties during the fourth quarter of
1994.
/s/ HEIN + ASSOCIATES LLP
- -----------------------------------
HEIN + ASSOCIATES LLP
Denver, Colorado
March 31, 1995
F-2
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31,
199 1994
--------- ----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 313,052 $ 532,916
Trade receivables, net of allowance of $94,000
in 1994 1,009,739 1,623,777
Inventory 815,308 754,113
Prepaid expenses and other 108,469 91,845
--------- ---------
Total current assets 2,246,568 3,002,651
--------- ---------
OIL AND GAS PROPERTIES, at cost (successful efforts method):
Undeveloped properties 506,378 511,475
Developed properties 9,216,664 9,298,873
--------- ---------
Total oil and gas properties 9,723,042 9,810,348
Less accumulated depreciation and depletion (3,472,182) (3,201,901)
--------- ---------
Net oil and gas properties 6,250,860 6,608,447
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Gas plant 4,078,743 3,920,965
Service equipment and vehicles 921,395 1,651,063
Buildings and office equipment 528,443 632,932
--------- ---------
Total property, plant and equipment 5,528,581 6,204,960
Less accumulated depreciation (866,469) (878,874)
--------- ---------
Net property, plant and equipment 4,662,112 5,326,086
--------- ---------
ASSETS HELD FOR SALE 465,466 -
OTHER ASSETS:
Non-compete agreements, net of accumulated amortization
of $115,499 in 1994 396,501 444,501
Other 404,768 456,891
--------- ---------
Total other assets 801,269 901,392
--------- ---------
TOTAL ASSETS $14,426,275 $15,838,576
========== ==========
F-3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
June 30, December 31,
1995 1994
--------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt:
Related parties $ 65,000 $ 65,000
Other 1,089,297 962,000
Accounts payable, trade:
Natural gas purchases 298,514 1,010,400
Other 695,868 691,748
Accrued production taxes 313,038 313,838
Other accrued expenses 369,374 389,082
--------- ---------
Total current liabilities 2,831,091 3,432,068
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities:
Related parties 241,717 241,718
Other 1,416,459 2,011,808
Accrued production taxes 269,626 398,645
--------- ---------
Total long-term liabilities 1,927,802 2,652,171
--------- ---------
DEFERRED INCOME TAXES 258,900 400,000
--------- ---------
COMMITMENTS (NOTE 5)
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share,
2,000,000 shares authorized, 202,688 and 1,157,780
shares of Series A Cumulative Convertible Preferred
Stock issued and outstanding in 1995 and 1994,
respectively (liquidation preference of $2,178,896
in 1995 and $11,867,542 in 1994) 2,027 11,578
Common Stock, par value $.10 per share, 25,000,000 shares
authorized, 7,018,131 and 2,286,028 shares issued in
1995 and 1994, respectively 701,813 228,603
Additional paid-in capital 16,552,769 16,744,348
Accumulated deficit (7,765,539) (7,497,604)
Less 16,794 and 28,715 shares, respectively, of treasury
stock, at cost (82,588) (132,588)
---------- ----------
Total stockholders' equity 9,408,482 9,354,337
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,426,275 $15,838,576
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months For the Years Ended
Ended June 20, December 31,
-------------------------- --------------------------------
1995 1994 1994 1993
(Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Gas plant:
Marketing and trading $ 2,045,520 $ 3,456,299 $ 5,849,878 $ 1,658,901
Processing 567,202 405,169 888,743 373,242
--------- ---------- ---------- ----------
Total gas plant 2,612,722 3,861,468 6,738,621 2,032,143
Oil and gas sales 1,477,035 1,486,561 3,220,761 1,131,938
Oil field services 590,981 614,333 1,279,013 709,057
Oil field supply and equipment 332,583 359,500 720,928 448,600
Well administration and other income 47,726 39,333 109,376 65,549
--------- ----------- ---------- ---------
Total revenue 5,061,047 6,361,195 12,068,699 4,387,287
--------- ----------- ---------- ---------
OPERATING COSTS AND EXPENSES:
Gas plant:
Marketing and trading 1,801,570 3,162,909 5,315,241 1,453,248
Processing 458,495 234,359 573,206 255,108
---------- ---------- ---------- ---------
Total gas plant 2,260,065 3,397,268 5,888,447 1,708,356
Oil and gas production 900,592 1,034,866 2,189,780 765,757
Oil field services 564,965 581,129 1,183,501 665,300
Oil field supply and equipment 273,545 364,824 663,500 411,854
General and administrative 580,768 885,370 1,617,107 690,009
Depreciation, depletion and amortization 695,206 661,815 1,614,590 502,270
Impairment of oil and gas properties - - 934,211 -
Dry holes, plugging and abandonments 5,291 87,038 315,809 335,715
Restructuring costs 79,719 - - -
--------- ---------- ---------- ---------
Total operating costs and expenses 5,360,151 7,012,310 14,406,945 5,079,261
--------- --------- ---------- ---------
LOSS FROM OPERATIONS (299,104) (651,115) (2,338,246) (691,974)
OTHER INCOME (EXPENSES):
Interest expense (161,385) (146,139) (324,251) (123,932)
Gain on sale of assets 51,454 8,700 55,372 29,995
--------- --------- ---------- ---------
Net (109,931) (137,439) (268,879) (93,937)
---------- ---------- ----------- ----------
LOSS BEFORE INCOME TAXES (409,035) (788,554) (2,607,125) (785,911)
Deferred income tax benefit 141,100 112,500 900,000 -
--------- --------- ---------- ----------
NET LOSS $ (267,935) $ (676,054) $ (1,707,125) $ (785,911)
========== ========= ========== =========
F-5
<PAGE>
Preferred stock dividends:
Declared - (578,945) (868,335) (409,996)
In arrears (101,344) - (289,742) -
---------- --------- ---------- ---------
Total preferred stock dividends (101,344) (578,945) (1,158,077) (409,996)
---------- --------- ---------- ---------
Loss before non-cash inducement (369,279) (1,254,999) (2,865,202) (1,195,907)
Non-cash inducement in tender offer (Note 1) (1,640,906) - - -
---------- ---------- ---------- ---------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (2,010,185) $ (1,254,999) $ (2,865,202) $(1,195,907)
========== ========== ========== ==========
NET LOSS PER COMMON SHARE:
Before non-cash inducement $ (.07) $ (1.29) $ (2.32) $ (1.33)
Non-cash inducement (Note 1) (.32) - - -
---------- ---------- ----------- ----------
$ (.39) $ (1.29) $ (2.32) $ (1.33)
========== ========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,219,100 976,400 1,235,000 902,000
========= ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND THE YEARS
ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------------- ----------------------------- Paid-in
Shares Amount Shares Amount Capital
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1992 - $ - 791,466 $ 79,146 $ 6,232,310
Issuance of stock for equipment - - 7,498 750 19,250
Issuance of stock for GJWS
acquisition - - 46,667 4,667 7,620
Issuance of stock for converted
debentures 120,000 1,200 - - 598,800
Payment for stock subscription - - - - -
Issuance of stock for Skaer
acquisition 150,000 1,500 117,647 11,765 1,886,735
Issuance of stock in public offering 900,000 9,000 - - 8,991,000
Offering costs - - - - (1,395,739)
Conversion of preferred stock (12,220) (122) 30,656 3,066 (2,944)
Preferred dividends declared - - - - (409,996)
Net loss - - - - -
---------- ---------- --------- -------- -----------
BALANCES, December 31, 1993 1,157,780 11,578 993,934 99,394 15,927,036
Proceeds from sale of debentures converted
to common stock - - 909,219 90,922 1,363,828
Proceeds from sale of common
stock for cash - - 289,125 28,912 433,688
Offering costs - - - - (252,494)
Exchange of notes payable for
common stock - - 93,750 9,375 140,625
Return of common stock for
cancellation of receivables - - - - -
Preferred dividends declared for
$.75 per share - - - - (868,335)
Net loss - - - - -
---------- ---------- --------- --------- -----------
BALANCES, December 31, 1994 1,157,780 11,578 2,286,028 228,603 16,744,348
Conversion of preferred stock to
common (unaudited):
In tender offer (933,492) (9,335) 4,200,716 420,072 (410,737)
Other (21,600) (216) 56,739 5,673 (5,457)
Acquisition of oil and gas properties
for common stock (unaudited) - - 65,000 6,500 53,422
Proceeds from sale of common stock
for cash (unaudited) - - 408,333 40,833 265,417
Offering costs (unaudited) - - - - (53,623)
Issuance of common stock for services
and other (unaudited) - - 13,236 1,324 8,207
Cancellation of treasury shares (unaudited) - - (11,921) (1,192) (48,808)
Net loss (unaudited) - - - - -
---------- ---------- --------- ---------- ------------
BALANCES, June 30, 1995 (unaudited) 202,688 $ 2,027 7,018,131 $ 701,813 $ 16,552,769
========== ========= ========= ========== ===========
<PAGE>
<CAPTION>
Treasury Stock
----------------------------- Stock Total
Accumulated Subscriptions Stockholders'
Deficit Shares Amount Receivable Equity
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1992 $(5,004,568) 12,241 $ (52,600) $ (160,000) $ 1,094,288
Issuance of stock for equipment - - - - 20,000
Issuance of stock for GJWS
acquisition - - - - 12,287
Issuance of stock for converted
debentures - - - - 600,000
Payment for stock subscription - - - 50,291 50,291
Issuance of stock for Skaer
acquisition - - - - 1,900,000
Issuance of stock in public offering - - - - 9,000,000
Offering costs - - - - (1,395,739)
Conversion of preferred stock - - - - -
Preferred dividends declared - - - - (409,996)
Net loss (785,911) - - - (785,911)
---------- ---------- ----------- ---------- ----------
BALANCES, December 31, 1993 (5,790,479) 12,241 (52,600) (109,709) 10,085,220
Proceeds from sale of debentures converted
to common stock - - - - 1,454,750
Proceeds from sale of common
stock for cash - - - - 462,600
Offering costs - - - - (252,494)
Exchange of notes payable for
common stock - - - - 150,000
Return of common stock for cancellation
of receivables - 16,474 (79,988) 109,709 29,721
Preferred dividends declared
for $.75 per share - - - - (868,335)
Net loss (1,707,125) - - - (1,707,125)
---------- -------- -------- --------- ----------
BALANCES, December 31, 1994 (7,497,604) 28,715 (132,588) - 9,354,337
Conversion of preferred stock to
common (unaudited):
In tender offer - - - - -
Other - - - - -
Acquisition of oil and gas properties
for common stock (unaudited) - - - - 59,922
Proceeds from sale of common stock
for cash (unaudited) - - - - 306,250
Offering costs (unaudited) - - - - (53,623)
Issuance of common stock for
services and other (unaudited) - - - - 9,531
Cancellation of treasury shares (unaudited) - (11,921) 50,000 - -
Net loss (unaudited) (267,935) - - - (267,935)
---------- -------- -------- --------- ----------
BALANCES, June 30, 1995 (unaudited) $(7,765,539) 16,794 $ (82,588) $ - $ 9,408,482
========= ======== ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months For the Years Ended
Ended June 30, December 31,
----------------------------- --------------------------------
1995 1994 1994 1993
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (267,935) $ (676,054) $ (1,707,125) $ (785,911)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Provision for depreciation and
depletion 647,206 613,815 1,518,590 482,770
Amortization of intangible assets 59,301 60,300 120,588 31,599
Abandonment and impairment of oil and gas
properties - - 1,250,020 335,715
Deferred income taxes (141,100) (112,500) (900,000) -
Gain on sale of property and equipment(51,454) (8,700) (55,372) -
Provision for bad debts 3,773 54,078 101,755 44,200
Issuance of stock for services 9,531 - - -
Other (7,917) 45,001 (64,604) (33,353)
Changes in operating assets and liabilities,
net of effects from acquisitions:
(Increase) decrease in:
Trade receivables 610,265 245,175 (241,509) (556,000)
Inventory (61,195) (11,596) (57,170) 70,962
Prepaid expenses and other (7,004) (6,045) 12,683 80,596
Increase (decrease) in:
Accounts payable (707,766) 260,024 1,015,685 395,645
Accrued expenses (166,761) (385,775) (220,196) (65,643)
--------- ---------- ------------- ---------
Net cash provided by (used in) operating
activities (81,056) 77,723 773,345 580
--------- ---------- ------------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of acquisitions, net of cash acquired - - - (8,391,209)
Capital expenditures for property and
equipment (264,347) (1,391,831) (2,466,757) (635,385)
Purchase of restricted investments - - (160,000) (50,000)
Proceeds from redemption of certificate of
deposit 31,200 - 31,000 -
Proceeds from sale of property and
equipment 309,606 125,792 91,032 -
--------- --------- ----------- ----------
Net cash provided by (used in)
investing activities 76,459 (1,266,039) (2,504,725) (9,076,594)
--------- --------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 1,400,000 1,522,877 2,662,940
Repayment of long-term debt (449,147) (376,196) (1,139,028) (458,524)
Proceeds from stock subscription receivable - - - 50,291
Proceeds from sale of common stock - - 462,600 -
Net proceeds from sale of preferred stock 233,880 - - 7,965,000
Proceeds from sale of debentures - - 1,454,750 600,000
Offering and debenture costs - - (252,494) (360,739)
Preferred stock dividends paid - (578,945) (1,158,018) (120,254)
--------- --------- ----------- ----------
Net cash provided by (used in) financing
activities (215,267) 444,859 890,687 10,338,714
--------- --------- ----------- ----------
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS (219,864) (743,457) (840,693) 1,262,700
CASH AND EQUIVALENTS, beginning of period 532,916 1,423,609 1,373,609 110,909
--------- --------- ---------- ---------
CASH AND EQUIVALENTS, end of period $ 313,052 $ 680,152 $ 532,916 $ 1,373,609
========== ========= ========== =========
F-8
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 142,251 $ 96,948 $ 255,265 $ 62,406
========= ========= =========== =========
Cash paid for income taxes $ - $ - $ - $ -
========= ========= =========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for the acquisition of:
Skaer $ - $ - $ - $ 400,000
GJWS - - - 12,287
Equipment - - - 20,000
Issuance of preferred stock for the
acquisition of Skaer - - - 1,500,000
Issuance of convertible debt in
connection with GJWS acquisition - - - 175,000
Long-term debt incurred for purchase
of vehicles 24,992 84,028 96,667 -
Treasury stock acquired for cancellation
of trade receivables - - 9,988 -
Offset of trade receivables to reduce
related party debt - - 25,705 -
Offset of accrued expenses to reduce common
stock subscriptions receivable - - 109,709 -
Exchange of notes payable to former director
for 93,750 shares of common stock - - 150,000 -
Contract payable for purchase of minority
interest in LGPCo - - 160,000 -
Return of 14,000 shares of common stock by
director for stock subscription
receivable - - 70,000 -
Acquisition of oil and gas properties
for stock 59,922 - - -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Name Change - In June 1994, the Company's common stockholders approved to
change the Company's name from "Willard Pease Oil and Gas Company" to
"Pease Oil and Gas Company."
Organization - As a result of the acquisitions discussed in more detail in
Note 2, Pease Oil and Gas Company (the "Company") is a diversified
independent oil and gas company. The Company explores for, develops,
produces and sells oil and natural gas; transports, processes, sells,
markets and trades natural gas and natural gas liquids at a gas processing
plant; performs oil and gas well completion and operational services; and
sells new, used and reconditioned oil and gas production equipment and oil
field supplies. In January 1994, the Company reorganized its corporate
structure and currently conducts its business through the following wholly-
owned subsidiaries: Loveland Gas Processing Company, Ltd. ("LGPCo"); Pease
Oil Field Services, Inc.; Pease Oil Field Supply, Inc.; and Pease Operating
Company, Inc. The organizational structure prior to January 1994 is also
discussed in Note 2. In May 1995, the Company commenced actions to further
restructure the Company as discussed in Note 9.
Principles of Consolidation - The 1994 financial statements include the
accounts of the Company and its wholly-owned subsidiaries. The 1993
financial statements include the entities acquired in 1993 from their
respective effective dates of acquisition (see Note 2). All material
intercompany transactions and accounts have been eliminated in
consolidation.
Cash and Equivalents - For purposes of the statements of cash flows, the
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Oil and Gas Producing Activities - The Company follows the "successful
efforts" method of accounting for its oil and gas properties. Under this
method of accounting, all property acquisition costs and costs of
exploratory and development wells are capitalized when incurred, pending
determination of whether the well has found proved reserves. If an
exploratory well has not found proved reserves, the costs of drilling the
well are charged to expense. The costs of development wells are
capitalized whether productive or nonproductive. Geological and
geophysical costs and the costs of carrying and retaining undeveloped
properties are expensed as incurred.
Depletion, depreciation, and amortization of capitalized costs for
producing oil and gas properties is provided using the units-of-production
method based upon proved reserves. Depletion and depreciation expense for
the Company's oil and gas properties amounted to $884,100 and $300,415 for
the years ended December 31, 1994 and 1993, respectively.
In March 1995, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets." SFAS No. 121 changes the Company's method of
determining impairment of proved oil and gas properties. Prior to 1994,
the net capitalized costs of proved oil and gas properties were limited to
the aggregate undiscounted after-tax future net revenues related to all of
F-10
<PAGE>
the Company's proved properties as a group. During the fourth quarter of
1994, the Company adopted SFAS No. 121, which requires the Company to
assess impairment whenever events or changes in circumstances indicate that
the carrying amount of long-lived asset may not be recoverable. When an
assessment for impairment of oil and gas properties is performed, the
Company is required to compare the net carrying value of proved oil and
gas properties on a lease-by-lease basis (the lowest level at which cash
flows can be determined on a consistent basis) to the related estimates
of undiscounted future net cash flows for such properties. If the net
carrying value exceeds the net cash flows, then impairment is recognized to
reduce the carrying value to the estimated fair value. At December 31,
1994, the estimated fair value of the impaired properties was determined
by using 1994 year-end prices and costs and discounting the estimated cash
flows using a discount rate commensurate with the risks involved which
management estimated at 10% annually. As a result of this change, the
Company recognized impairment expense of approximately $900,000 in 1994,
which resulted in an increase in net loss per share of approximately
$.73. Management believes this impairment charge primarily results from
the change in accounting rather than a change in the economic and operating
conditions related to the properties. The allowance for impairment is
included in accumulated depreciation and depletion in the accompanying
balance sheet.
Property, Plant and Equipment - Property, plant, and equipment is stated at
cost. Depreciation of property, plant and equipment is calculated using
the straight-line method over the estimated useful lives of the assets, as
follows:
<TABLE>
<CAPTION>
Years
<S> <C>
Gas plant 15
Service equipment and vehicles 4-7
Buildings and office equipment 7-15
</TABLE>
Prior to 1994, the Company utilized an estimated useful life of 25 years
for the gas plant. Effective January 1, 1994, this estimate was revised to
reflect an estimated useful life of 15 years. As a result of this change
in estimate, the Company recognized additional depreciation expense of
approximately $100,000 in 1994, which resulted in an increase in net loss
per common share of approximately $.04. Depreciation expense related to
property, plant and equipment amounted to $634,490 and $182,355 for the
years ended December 31, 1994 and 1993, respectively.
The cost of normal maintenance and repairs is charged to operating expenses
as incurred. Material expenditures which increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of properties sold, or otherwise disposed of, and the
related accumulated depreciation or amortization are removed from the
accounts, and any gains or losses are reflected in current operations.
F-11
<PAGE>
Non-compete Agreements - The cost of the non-compete agreements were
incurred in connection with the acquisition of Skaer (see Note 2). These
costs are being amortized over the life of the agreements (2 to 10 years)
on a straight-line basis. Amortization expense related to the non-compete
agreements was $96,000 and $19,500 for the years ended December 31, 1994
and 1993, respectively.
Inventory - Inventory consists primarily of oil and gas production
equipment and oil field supplies. These items are generally held for
resale. Inventory is carried at the lower of cost or market, cost being
determined generally under the first-in, first-out (FIFO) method of
accounting, or where possible, by specific identification.
Income Taxes - Income taxes are provided for in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires an asset and liability approach in the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the
tax bases of the Company's assets and liabilities.
Revenue Recognition - The Company recognizes gas plant revenues and oil and
gas sales upon delivery to the purchaser. Revenues from oil field services
are recognized as the services are performed. Oil field supply and
equipment sales are recognized when the goods are shipped to the customer.
Net Loss Per Common Share - Net loss per common share is computed by
dividing the net loss applicable to common stockholders (which includes
preferred dividends declared and in arrears) by the weighted average number
of common shares outstanding during the year. All common stock equivalents
have been excluded from the computations because their effect would be
anti-dilutive.
In connection with the 1995 conversion of preferred stock to common stock
discussed in Note 6, the Company experienced a significant change in its
capital structure. The pro forma effect of these changes, as if the
conversions occurred on January 1, 1994, would have resulted in a reduction
in the 1994 loss applicable to common stockholders from ($2.32) per share
to ($.35) per share. The pro forma loss per share calculation gives effect
to 4,256,000 common shares which were issued in the conversion and the
elimination of 1994 dividends related to the converted preferred shares of
$955,000. However, the pro forma information does not give effect to the
inducement discussed in the following paragraph.
As discussed in Note 6, the Company completed a tender offer to the
Company's preferred stockholders during the three months ended March 31,
1995. In connection therewith, the Company offered the preferred holders
4.5 common shares for each preferred share owned. The 4.5 shares
represented an increase from the original terms of the preferred stock
which provided for 2.625 common shares for each preferred share. Under a
recently issued accounting pronouncement, the Company was required to
reduce earnings available to common stockholders by the fair value of the
additional shares which were issued to induce the preferred stockholders to
convert their shares. Since the Company issued an additional
1,750,000 common shares in the tender offer compared to the shares that
would have been issued under the original terms of the preferred stock, the
Company was required to deduct the fair value of these additional shares of
$1,640,000 (unaudited) from earnings available to common stockholders.
This non-cash charge resulted in the reduction of earnings per share by
$.32 (unaudited) for the six months ended June 30, 1995.
F-12
<PAGE>
While this charge is intended to show the cost of the inducement to the
owners of the Company's common shares immediately before the tender offer,
management does not believe that it accurately reflects the impact of the
tender offer on the Company's common stockholders. As disclosed to the
preferred stockholders in connection with the tender offer, the book value
per share of common stock increased from a negative amount to over $1.00
(unaudited) per share as a result of the tender offer. Therefore,
management believes that, even though the current accounting rules require
the $.32 (unaudited) charge per common share, there are other significant
offsetting factors by which the common shareholders benefited from this
conversion which are not reflected in the financial statements.
Unaudited Financial Statements - In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring items) necessary to
present fairly the Company's financial position as of June 30, 1995 and the
results of operations and cash flows for the six months ended June 30, 1995
and 1994. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations. The results of
operations for the six months ended June 30, 1995 are not necessarily
indicative of the results to be expected for the full year.
Reclassifications - Certain reclassifications have been made to the 1993
financial statements to conform to the presentation in 1994. The
reclassifications had no effect on the 1993 net loss.
2. ACQUISITIONS:
Skaer Enterprises, Inc. ("SEI") - On August 23, 1993, Pease acquired all
of the outstanding common stock of SEI, its related oil and gas businesses
and certain oil and gas properties in the Denver-Julesburg Basin of
northeastern Colorado (collectively "Skaer"). The purchase price was
$12,200,000, including various costs associated with the acquisition of
$300,000. This acquisition was financed primarily from the proceeds of a
public offering in which 900,000 shares of the Company's Series A
Cumulative Convertible Preferred Stock were sold, resulting in net proceeds
of approximately $7,965,000. The balance was financed through the issuance
of 150,000 shares of Series A Cumulative Convertible Preferred Stock with
an agreed upon value of $1,500,000, the issuance of 117,647 shares of
restricted common stock with an agreed upon value of $400,000, and a bank
loan of $2,400,000.
Grand Junction Well Service ("GJWS") - In June 1993, the Company acquired
GJWS from the Company's president and CEO. The transaction was consummated
by merging GJWS into a newly-formed subsidiary corporation, Rocky Mountain
Well Services, Inc. In connection with this acquisition, the Company
issued 46,667 shares of its common stock and a 6% convertible promissory
note for $175,000, resulting in a total value of $350,000, the estimated
fair market value of GJWS assets and business. The unpaid balance of the
note is convertible into common stock at $5.00 per share. As a result of
the acquisition, an obligation of the Company to GJWS totaling approxi-
mately $157,000 was eliminated. For financial reporting purposes, this
acquisition was recorded based upon GJWS's historical cost basis resulting
in approximately $12,000 being recorded as the value of the common stock
issued.
F-13
<PAGE>
Restructuring - In November 1993, the operating company acquired in the
Skaer acquisition, ATSCO, Inc., changed its name to Pease Operating
Company, Inc. All Skaer producing oil and gas properties were merged into
Pease Operating Company on January 1, 1994. Two wholly-owned subsidiaries,
Pease Oil Field Services, Inc. and Pease Oil Field Supply, Inc. were formed
to operate the oil field service and supply businesses. Rocky Mountain
Well Services, Inc. was merged into Pease Oil Field Services, Inc., on
January 1, 1994. The Company continues to operate its natural gas
refrigeration processing plant through Loveland Gas Processing Co., Ltd.
In May 1995, the Company commenced actions to further restructure the
Company as discussed in Note 9.
Pro Forma Revenues and Net Loss - The following table summarizes on an
unaudited pro forma basis, the historical combined results of the Company,
as if the public offering of preferred stock and the purchase of Skaer and
GJWS's interest had taken place at the beginning of the year ended
December 31, 1993:
Net revenues $ 9,235,000
==========
Net loss $ (771,000)
==========
Net loss applicable to common stockholders $(1,941,000)
==========
Net loss per common share $ (2.06)
==========
The above pro forma results are not necessarily indicative of the actual
results had the acquisitions occurred at the beginning of the year, nor of
future operating results.
3. LONG-TERM DEBT:
Long-term debt at December 31, 1994 consists of the following:
Unaffiliated Parties:
Note payable to a bank, which was restructured in March 1995 as
described below. Interest was computed at the bank's prime rate
plus 1% (9.5% at December 31, 1994). Collateralized by substantially
all of the Company's oil and gas properties and the gas plant. The note
prohibits the payment of dividends to common stockholders, has other
financial covenants and limits the total borrowings to a borrowing base,
as defined in the agreement. $2,588,958
Convertible 10% debentures due May 1995. The debentures are
unsecured and are convertible into 14,800 shares of common stock
(see Note 9). 92,500
Other installment notes. Interest at 6.9% to 9.75%, monthly principal
and interest payments of approximately $3,414 through June 1999. All
the notes are collateralized by vehicles. 118,066
Contract payable, $4,444 credited monthly against gas purchases, due
July 1997, collateralized by certificate of deposit. 120,000
Note payable to a bank, 10%, monthly payments of $1,204 including
interest, due February 1998, collateralized by service equipment,
personally guaranteed by the Company's president and CEO. 37,052
---------
Total unaffiliated parties 2,956,576
---------
F-14
<PAGE>
Related Parties:
Note payable to the Company's president and CEO for the purchase of
GJWS. Annual principal payments of $65,000 plus interest at 6% through
April 1996. The note is convertible into common stock at
$5.00 per share and is collateralized by equipment. 130,000
Unsecured notes payable to the Company's president and CEO and
various entities controlled by him. Interest at 8% to 10% with
principal and interest due January 1, 1997. 176,717
Accrued interest 17,233
-------
Total related parties 323,950
-------
Total long-term debt 3,280,526
Less current maturities (1,027,000)
----------
Total long-term debt, less current maturities $ 2,253,526
==========
In March 1995, the credit agreement related to the $2,588,958 note payable
described above was restructured. Previously, the Company was making
monthly principal payments of $88,090 plus interest. Under the revised
agreement, the monthly principal payments are as follows:
<TABLE>
<CAPTION>
Period Amount
<S> <C>
March 1995 through August 1995 $ 44,045
September 1995 $ 88,090
October 1995 through September 1996
(as adjusted below) $ 81,905
October 1996 to September 1997 $ 69,167
</TABLE>
After September 1995 through maturity in September 1997 the Company is
required to pay the greater of the amount indicated above, or 40% of net
oil and gas revenues from properties acquired in the Skaer acquisition plus
$60,000 per month.
The bank also agreed to waive covenant violations related to the previous
agreement and to modify certain covenants to provide for less restrictive
provisions. Additionally, the interest rate was revised to prime plus 3%
beginning in April 1995.
After giving effect to the restructuring of the debt agreement described
above (excluding possible additional contingent payments based on net oil
and gas revenues from the Skaer acquisition), the aggregate maturities of
long-term debt are as follows:
F-15
<PAGE>
<TABLE>
<CAPTION>
Year Ending Related
December 31, Parties Others Total
<S> <C> <C> <C>
1995 $ 65,000 $ 962,000 $1,027,000
1996 65,000 1,056,778 1,121,778
1997 193,950 916,701 1,110,651
1998 - 15,419 15,419
1999 - 5,678 5,678
------- --------- ---------
$323,950 $2,956,576 $3,280,526
======= ========= =========
</TABLE>
4. INCOME TAXES:
Deferred tax assets (liabilities) as of December 31, 1994 are comprised of
the following:
<TABLE>
<CAPTION>
<S> <C>
Long-term Assets:
Net operating loss carryforwards $ 2,750,000
Tax credit carryforwards 151,000
Percentage depletion carryforwards 58,000
Other 27,000
----------
Total 2,986,000
Less valuation allowance (928,000)
----------
2,058,000
Long-term liability for property and equipment (2,458,000)
----------
Net long-term liability $ (400,000)
==========
</TABLE>
The Company has provided a valuation allowance for the net operating loss
and credit carryforwards based upon the various expiration dates and the
limitations which exist under IRS Sections 382 and 384.
At December 31, 1994, the Company has net operating loss carryforwards for
income tax purposes of approximately $7,400,000, which expire in 1995
through 2009. Approximately $3,600,000 of these net operating losses are
subject to limitations under IRS Sections 382 and 384. These losses may
only offset future taxable income to the extent of approximately
$350,000 per year and generally may not offset any gain on the sale of
assets acquired in the acquisition of SEI. Additionally, the Company has
tax credit carryforwards at December 31, 1994 of approximately $151,000 and
percentage depletion carryforwards of approximately $160,000.
F-16
<PAGE>
Income tax benefits at approximately the Federal tax rate of 34% have been
recorded in 1994. For fiscal 1993, no tax benefits were taken as the Skaer
acquisition was not fully completed and integrated into the Company until
1994 and the Company determined not to record a tax benefit by reducing the
deferred liability which was recorded as a result of this acquisition.
5. COMMITMENTS:
Gas Contracts - The Company operates a natural gas processing plant (the
"Gas Plant"). The Gas Plant has a contract with a major utility which
calls for the major utility to purchase a minimum of 2.92 billion cubic
feet ("BCF") and a maximum of 3.65 BCF of natural gas annually. The price
paid by the major utility is on an MMBTU basis at a premium above the
Colorado Interstate Gas Company's Northern Pipeline "spot" price. The
contract expires on June 30, 1996.
The Company also has contracts with independent producers that require
purchases of gas quantities at a fixed margin per MMBTU for any difference
between plant sales and the contract volumes with the utility. This
contract also expires in June 1996, and is subject to standard industry
cancellation provisions. The revenue and corresponding costs incurred
pursuant to this contract have been reflected as Gas Marketing and Trading
in the consolidated statements of operations.
Leases - The Company leases its office facilities under noncancellable
operating leases. The total minimum commitments under these leases are as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1995 $ 79,884
1996 73,284
1997 14,983
--------
Total $ 168,151
========
</TABLE>
Total rent expense for the years ended December 31, 1994 and 1993 was
$62,423 and $25,492, respectively.
Employment Agreements - During 1994, the Board of Directors approved
employment agreements with the Company's executive officers. The
agreements may be terminated by the officers upon 90 days notice or by the
Company without cause upon 30 days notice. In the event of a termination
by the Company without cause, the Company would be required to pay the
officers their respective salaries for one to three years. If the
termination occurs following a change in control, the Company would be
required to make lump sum payments equivalent to two to three years salary
for each of the officers.
F-17
<PAGE>
Profit Sharing Plan - The Company has established a 401(k) profit sharing
plan that covers all employees with one month of service who elect to
participate in the Plan. The Plan provides that the employees may elect to
contribute a portion of their salary to the Plan. All of the Company's
contributions are discretionary and amounted to $9,648 and $3,410 for the
years ended December 31, 1994 and 1993, respectively.
6. STOCKHOLDERS' EQUITY:
Authorized Shares - In December 1994, the Company's common shareholders
approved an increase in the number of authorized shares of $0.10 par value
common stock from 10 million to 25 million.
Stock Split - In June 1993, the par value per share of the Company's common
stock was changed from $0.05 to $0.10 in connection with the adoption by
its stockholders of a Plan of Recapitalization resulting in a 1 for 5 share
reverse stock split. All shares and per share amounts included in the
financial statements have been retroactively restated for this stock split.
Preferred Stock - The Company has the authority to issue up to
2,000,000 shares of Preferred Stock, which may be issued in such series and
with such preferences as determined by the Board of Directors. During
1993, the Company issued 1,170,000 shares of Series A Cumulative
Convertible Preferred Stock (the "Preferred Stock"), resulting in
830,000 authorized but unissued shares.
The Preferred Stock has a liquidation preference of $10 per share and each
share is convertible into 2.625 shares of common stock and warrants to
purchase 2.625 common shares. Each warrant currently entitles the holders
to purchase one share of common stock at $5.00 per share through 1996, and
at $6.00 per share through August 13, 1998, when the warrants expire. The
Preferred Stock will automatically convert into common stock if the
reported sale of Preferred Stock equals or exceeds $13.00 per share for ten
consecutive days. The Company may redeem the Preferred Stock at $10.00 per
share at any time after August 13, 1995. The preferred stockholders have
no voting rights; however, the Company is prohibited from entering into
certain transactions without an affirmative vote of the preferred
stockholders. Each share of Preferred Stock is entitled to receive, when,
as and if declared by the Company, dividends at 10% per annum. Unpaid
dividends will accrue and be cumulative.
At December 31, 1994, there were 1,157,780 shares of Preferred Stock issued
and outstanding. The Board of Directors elected to forego the declaration
of the regular quarterly dividend for the fourth quarter of 1994, resulting
in preferred dividends in arrears of $.25 per share for an aggregate of
$289,742.
During 1995, the Company completed a tender offer to its preferred
stockholders whereby the holders of the Preferred Stock were given the
opportunity to convert each share of Preferred Stock and all accrued and
undeclared dividends (including the full dividend for the quarters ended
December 31, 1994 and March 31, 1995) into 4.5 shares of the Company's
common stock. As a result of this tender offer, 933,492 shares of the
preferred stock converted into 4,200,716 shares of the Company's common
stock. Additionally, prior to the tender offer, holders of 21,000 shares
of Preferred Stock elected to convert their shares into 55,126 shares of
common stock. As of March 31, 1995, 203,288 shares of Preferred Stock
remain outstanding.
F-18
<PAGE>
In connection with the tender offer, for each share of preferred stock that
was converted, warrants to purchase 2.625 shares of the Company's common
stock were issued, resulting in the issuance of warrants for an aggregate
of 2,450,000 shares. The exercise price of the warrants is $5.00 per share
through 1996 and increases to $6.00 per share through August 13, 1998 when
the warrants expire.
Private Placements - On September 30, 1994, the Company completed a private
placement of a total of $1,454,750 (including a total of $231,250 purchased
by officers, directors, and affiliates) of 12% Convertible Unsecured
Promissory Notes (the "Notes") from which the Company realized net proceeds
of approximately $1,307,403. Effective September 30, 1994, the Notes were
automatically converted into 909,219 shares of the Company's Common Stock,
with a fair value of $1.60 per share. In October 1994, the Company
completed a private placement of 289,125 shares of Common Stock at a price
of $1.60 per share resulting in gross proceeds of $462,600. See Note 9
regarding a private placement subsequent to March 31, 1995.
Conversion of Related Party Notes Payable - In September 1994, $150,000 of
uncollateralized 8% notes payable to related entities controlled by the
Company's President and CEO were converted into 93,750 shares of the
Company's common stock, with a fair value of $1.60 per share.
Stock Option and Stock Appreciation Right Plans - The Company is authorized
to grant options to purchase up to 550,000 shares of the Company's common
stock under its existing stock plans. The exercise price of each option
granted must equal or exceed the fair market value of the Company's common
stock on the date the options are granted. The options expire five years
from the date of grant and to date no options have been exercised.
<TABLE>
<CAPTION>
Exercise
Options Price
Expiration
<S> <C> <C> <C>
Balance, January 1, 1992 59,000 $5.31-$7.91 1995-96
Granted 39,000 $3.44-$3.78 1997
-------
Balance, December 31, 1992 98,000 $3.44-$7.94
Granted 244,000 $2.94-$3.23 1998
-------
Balance, December 31, 1993 342,000
Granted 40,000 $2.25-$3.25 1999
Expired (50,000) $2.94-$3.44
-------
Balance, December 31, 1994 332,000
=======
</TABLE>
Warrants - In connection with the 1994 private placements, the Company
issued warrants to purchase 83,188 shares of the Company's Common Stock at
an exercise price of $1.92 per share to brokers who sold the Notes and
shares in the private placements. Subject to certain conditions, the
warrants will be redeemable at the option of the Company for $.25 per
warrant at any time after August 13, 1995. The Company agreed to use its
best efforts to file a Registration Statement with the United States
Securities and Exchange Commission to register for resale the shares issued
in this offering.
F-19
<PAGE>
In connection with the Company's 1993 Preferred Stock offering, the Company
issued warrants to the underwriter to purchase 90,000 shares of preferred
stock at $12.00 per share. If not previously exercised, these warrants will
expire in August 1998.
Non-Qualified Stock Options - During June 1994, the Company granted non-
qualified stock options to a director to purchase 15,000 shares of the
Company's common stock at $2.25 per share. In November 1994, the Company
granted non-qualified stock options to a former director to purchase
50,000 shares of common stock at approximately $3.25 per share. If not
previously exercised, these options expire five years from the date of
grant. During 1994, the Company also granted options to two companies that
are providing management and financial public relations services to
purchase 200,000 shares of the Company's common stock at $2.44 per share.
If not previously exercised, these options will expire in August 1997.
7. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Substantially all of the Company's accounts receivable at December 31, 1994
result from crude oil and natural gas sales and/or joint interest billings
to companies in the oil and gas industry. This concentration of customers
and joint interest owners may impact the Company's overall credit risk,
either positively or negatively, since these entities may be similarly
affected by changes in economic or other conditions. In determining
whether or not to require collateral from a customer or joint interest
owner, the Company analyzes the entity's net worth, cash flows, earnings,
and credit ratings. Receivables are generally not collateralized.
Historical credit losses incurred on trade receivables by the Company have
been insignificant.
At December 31, 1994, the Company had a receivable from a major public
utility for $735,000, which was collected in January 1995. For the years
ended December 31, 1994 and 1993, the Company had natural gas sales to this
customer which accounted for 53% and 42% of total revenues, respectively.
8. FOURTH QUARTER ADJUSTMENTS:
Based on the Company's year-end reserve evaluation, the Company recognized
a provision for impairment and abandonment of producing oil and gas
properties of approximately $1,150,000 during the fourth quarter of 1994,
including $900,000 for the early adaption of SFAS No. 121 (see Note 1).
9. SUBSEQUENT EVENTS (UNAUDITED):
Acquisition - In April 1995, the Company purchased an 80% working interest
in producing oil and gas properties in exchange for 65,000 shares of the
Company's common stock with an estimated fair value of approximately
$60,000.
Common Stock - In April 1995, the Company initiated a private placement to
sell 250,000 "Units" at $1.50 each. Each unit consists of two shares of
common stock and one warrant to purchase one share of common stock at
$1.25 per share. The warrants are exercisable after July 31, 1995, expire
on April 30, 1997, and are redeemable by the Company at $0.25 per warrant.
As of June 30, 1995, the Company had sold 204,167 units. The Company has
agreed to use its best efforts to file a Registration Statement with the
United States Securities and Exchange Commission to register for resale the
shares sold in this private placement.
F-20
<PAGE>
In August 1995, the Company agreed to issue 80,000 shares of its common
stock in settlement of a trade payable for approximately $58,000.
Options and Warrants - In June 1995, the Board of Directors granted options
to purchase an aggregate of 152,000 shares of common stock to officers,
directors, and employees of the Company. The options are exercisable at
$.70 per share and expire in June 2000. The Board of Directors also
granted warrants to an individual to purchase 40,000 shares of common stock
for $.70 per share. If not previously exercised, these warrants expire in
June 2000.
Additionally, the Board of Directors granted warrants to purchase
200,000 shares to a consulting firm. Warrants for 50,000 shares are
exercisable for $.85 per share and the remaining 150,000 shares are
exercisable for $1.00 per share. These warrants become exercisable in
increments of 50,000 shares when the average trading price (for a period of
20 business days) of the Company's common stock amounts to $1.00, $1.50,
$1.75, and $2.00. If not previously exercised, these warrants expire on
December 31, 1995; however, at the Company's sole discretion, the exercise
period may be extended up to two additional years.
In August 1995, the Company granted warrants to consultants for a total of
100,000 shares of common stock. the warrants are exercisable for
approximately $.75 per share and, if not previously exercised, they will
expire in August 2000.
Convertible Debentures - In May 1995, the Company retired $22,500 of the
convertible debentures discussed in Note 3 and renegotiated the terms of
the remaining $70,000 of debentures to provide for an extended maturity
date of May 1996, and the debentures are now convertible into 82,353 shares
of common stock.
Restructuring - In light of declining natural gas prices, declining rig
counts, lackluster margins and the competitive environment inherent in the
oil and gas industry, the Company has taken steps to reduce operating
costs, increase efficiencies, reduce operating risks and generate
additional working capital. During the second quarter of 1995, the Company
announced a restructuring program that included substantially downsizing
its service and supply businesses and closing its administrative office in
Denver, Colorado. As a result of this restructuring 35 of the Company's
70 employees were terminated and service equipment and land with a net book
value of approximately $625,000 was or will be put up for sale. The
Company sold a portion of these assets held for sale in June 1995 at
approximately its net book value. As of June 30, 1995, the Company has
classified the remaining unsold amount of $465,466 as "Assets Held for
Sale" in its balance sheet. Most of these assets will be sold in an
auction in September 1995. Based on discussions with the auctioneer hired
for the sale, the Company expects the net proceeds from the sale of these
assets to be at or slightly above its net book value.
As of June 30, 1995, the Company has recognized $79,719 of costs incurred
in connection with both the tender offer discussed in Note 6, and the
restructuring discussed above. The costs recognized in the restructuring
consist primarily of severance pay and a loss on the abandonment of the
office lease in Denver, Colorado.
The revenues and net operating loss of the service and supply businesses
was as follows:
F-21
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
----------------------- ----------------------------
1995 1994 1994 1993
<S> <C> <C> <C> <C>
Revenues $923,564 $973,833 $1,999,941 $1,157,657
Operating costs (838,510) (945,953) (1,847,001) (1,077,154)
Depreciation (96,654) (102,142) (306,980) (102,270)
-------- -------- --------- ----------
Net operating loss $(14,600) $(74,262) $ (154,040) $ (21,767)
======== ======== ========== ==========
</TABLE>
10. SUPPLEMENTAL OIL AND GAS DISCLOSURES:
Costs Incurred in Oil and Gas Producing Activities - The following is a
summary of costs incurred in oil and gas producing activities for the years
ended December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Property acquisition costs $ 2,000 $5,740,000
Development costs 1,923,000 116,000
Exploration costs 213,000 -
--------- ---------
Total $2,138,000 $5,856,000
========= =========
</TABLE>
Results of Operations from Oil and Gas Producing Activities - Results of
operations from oil and gas producing activities (excluding natural gas
marketing and trading, well administration fees, general and administrative
expenses, and interest expense) for the years ended December 31, 1994 and
1993 are presented below.
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Oil and gas sales:
LGPCo $ 484,000 $ 169,000
Unaffiliated entities 2,737,000 963,000
--------- ---------
Total oil and gas sales 3,221,000 1,132,000
Exploration and abandonment expenses (316,000) -
Production costs (2,190,000) (766,000)
Depletion, depreciation and impairment(1,818,000) (300,000)
Imputed income tax benefit (provision) 408,000 (24,000)
---------- ----------
Results of operations from oil and gas
producing activities $ (695,000) $ 42,000
========== ==========
</TABLE>
F-22
<PAGE>
Oil and Gas Reserve Quantities (Unaudited) - Proved oil and gas reserves
are the estimated quantities of crude oil, natural gas, and natural gas
liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed oil and gas
reserves are those reserves expected to be recovered through existing wells
with existing equipment and operating methods. The reserve data is based
on studies prepared by the Company's independent petroleum engineers.
Reserve estimates require substantial judgment on the part of petroleum
engineers resulting in imprecise determinations, particularly with respect
to new discoveries. Accordingly, it is expected that the estimates of
reserves will change as future production and development information
becomes available. A portion of the Company's proved developed reserves
are currently non-producing as certain wells require workovers or
construction of a gathering system to an existing gas pipeline. All proved
reserves of oil and gas are located in the United States. The following
tables present estimates of the Company's net proved oil and gas reserves,
and changes therein for the years indicated.
Changes in Net Quantities of Proved Reserves (Unaudited)
<TABLE>
<CAPTION>
1994 1993
-------------------- ---------------
- -----------
Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf)
<S> <C> <C> <C> <C>
Proved reserves, beginning of year 1,045,000 5,854,000 825,000 2,652,000
Purchase of minerals in place - - 1,414,000 5,336,000
Extensions, discoveries, and
other additions 401,000 1,987,000 - -
Revisions of previous estimates 61,000 (1,574,000)(1,139,000)(1,944,000)
Production (155,000) (543,000) (55,000) (190,000)
-------- --------- --------- ---------
Proved reserves, end of year 1,352,000 5,724,000 1,045,000 5,854,000
========= ========= ========= ==========
Proved developed reserves,
end of year 1,021,000 3,658,000 794,000 4,206,000
========= ========= ========= =========
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows (Unaudited) -
Statement of Financial Accounting Standards No. 69 prescribes guidelines
for computing a standardized measure of future net cash flows and changes
therein relating to estimated proved reserves. The Company has followed
these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated
quantities of oil and gas to be produced. Estimated future income taxes
are computed using current statutory income tax rates including
consideration for estimated future statutory depletion and tax credits.
The resulting future net cash flows are reduced to present value amounts by
applying a 10% annual discount factor.
F-23
<PAGE>
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do not
necessarily reflect the Company's expectations for actual revenues to be
derived from those reserves nor their present worth. The limitations
inherent in the reserve quantity estimation process, as discussed
previously, are equally applicable to the standardized measure computations
since these estimates are the basis for the valuation process.
The following summary sets forth the Company's future net cash flows
relating to proved oil and gas reserves as of December 31, 1994 and 1993
based on the standardized measure prescribed in Statement of Financial
Accounting Standards No. 69.
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Future cash inflows $32,422,000 $24,836,000
Future production costs (14,085,000) (11,563,000)
Future development costs (4,321,000) (2,608,000)
Future income tax expense (3,363,000) (2,156,000)
---------- ----------
Future net cash flows 10,653,000 8,509,000
10% annual discount for estimated
timing of cash flow (4,153,000) (3,215,000)
---------- ----------
Standardized Measure of Discounted
Future Net cash flows $ 6,500,000 $ 5,294,000
========== ==========
</TABLE>
Changes in Standardized Measure (Unaudited) - The following are the
principal sources of change in the standardized measure of discounted
future net cash flows for the years ended December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Standardized measure, beginning of year $ 5,294,000 $ 4,658,000
Sale of oil and gas produced, net of
production costs (1,031,000) (422,000)
Acquisition of reserves in place - 5,257,000
Net changes in prices and production costs 1,871,000 (4,082,000)
Net changes in estimated development costs (1,257,000) (181,000)
Revisions of previous quantity estimates (171,000) (383,000)
Discoveries, extensions, and other additions 2,018,000 -
Accretion of discount 529,000 466,000
Changes in income taxes, net (753,000) (19,000)
---------- ---------
Standardized Measure, end of year $ 6,500,000 $ 5,294,000
========== ==========
</TABLE>
F-24
<PAGE>
Gas Plant (Unaudited) - The Company processes most of the natural gas from
its properties in a gas plant owned by the Company. Since the revenues
from the Company's properties are subject to agreements with royalty owners
and, in some cases, other working interest owners, gas processing
agreements have been entered into to set forth the contractual arrangements
for processing charges. Generally, the Company's processing fee consists
of ownership of the natural gas liquids and a portion of the residue gas
that result from processing. The Standardized Measure of Discounted Future
Net Cash Flows shown above excludes the Company's share of the natural gas
liquids and residue gas related to the Company's gas processing activities,
as well as marketing and trading activities.
The Company's independent engineer has prepared the following estimates for
the reserves related to these activities as of December 31, 1994. The
future net revenues are discounted at 10% but have not been reduced for any
income taxes.
F-25
<TABLE>
<CAPTION>
Net Quantities
-------------------------
Natural Gas Liquids Future Net
(Mcf) (Bbls) Revenues
<S> <C> <C> <C>
Gas plant processing 2,261,000 371,000 $1,073,000
Third party trading 3,841,000 - 654,000
--------- ------- ---------
Total 6,102,000 371,000 $1,727,000
========= ======= =========
</TABLE>
F-26
<PAGE>
SKAER ENTERPRISES, INC. AND RELATED ENTITIES
COMBINED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Eight
Months Ended
August 31, 1993
<S> <C>
NET REVENUES:
Oil and gas sales $ 2,942,000
Equipment sales, service and rental 1,417,000
Operating fees and other 132,000
----------
Total net revenues 4,491,000
----------
OPERATING EXPENSES:
Oil and gas production costs 1,552,000
Costs of equipment sales, service and rental 1,129,000
Depreciation, depletion and amortization 860,000
Selling, general and administrative 345,000
Compensation - Skaer interest 618,000
----------
4,504,000
----------
OPERATING INCOME (LOSS) (13,000)
INTEREST INCOME 76,000
----------
INCOME BEFORE MINORITY INTEREST AND
INCOME TAXES 63,000
MINORITY INTEREST (32,000)
----------
INCOME BEFORE INCOME TAXES 31,000
INCOME TAX (EXPENSE) BENEFIT:
Current -
Deferred (11,000)
----------
(11,000)
----------
NET INCOME $ 20,000
==========
</TABLE>
See accompanying notes to these combined financial statements.
F-27
<PAGE>
SKAER ENTERPRISES, INC. AND RELATED ENTITIES
COMBINED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Eight
Months Ended
August 31, 1993
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest 32,000
Depletion, depreciation and amortization 860,000
Deferred income taxes 11,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 533,000
Inventory (84,000)
Prepaid expenses and other (23,000)
Increase (decrease) in:
Accounts payable (799,000)
Accrued liabilities 182,000
--------
Net cash provided by operating activities 732,000
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (719,000)
Sale of marketable securities 241,000
---------
Net cash used in investing activities (478,000)
---------
INCREASE IN CASH AND EQUIVALENTS 254,000
CASH AND EQUIVALENTS, beginning of period 1,874,000
---------
CASH AND EQUIVALENTS, end of period $ 2,128,000
==========
</TABLE>
See accompanying notes to these combined financial statements.
F-28
<PAGE>
SKAER ENTERPRISES, INC. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization - Skaer Enterprises, Inc. (SEI) directly and through wholly-
owned subsidiary corporations and related entities is a fully-integrated
oil and gas company. SEI explores for, develops, produces, and sells oil
and natural gas. An operating division of SEI provides a wide range of oil
field services and supplies to SEI and third parties. ATSCO, Inc. (ATSCO)
is a wholly-owned subsidiary of SEI and operates all oil and gas wells in
which SEI owns an interest. Loveland Gas Processing Co. (LGPCo) is a
Colorado limited partnership owned 95% by SEI. LGPCo owns and operates a
natural gas refrigeration and compression facility. Colorado Vacuum Truck
Co. (CVT), an S Corporation owned by a SEI family members, provides oil
field services to SEI and to third parties. A. T. Skaer Company (A.T.
Skaer) is owned by the founder of SEI, and provides new and used oil field
equipment and supplies to SEI and third parties. There are also working
interests (Working Interests) in SEI's oil and gas wells which are owned by
SEI family members. Collectively, these entities are referred to herein as
Skaer.
Unaudited Financial Statements - In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring items) necessary to
present fairly Skaer's results of operations and cash flows for the eight
months ended August 31, 1993. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the Securities and Exchange Commission's rules and regulations.
The results of operations for the interim period presented is not
necessarily indicative of the results to be expected for the full year.
Principles of Combination - The accompanying combined financial statements
include the accounts of SEI, ATSCO, LGPCo, CVT, A.T. Skaer and the Working
Interests. SEI and ATSCO have a January 31 year-end, while LGPCo, CVT,
A.T. Skaer and the Working Interests have a December 31 year-end. For
financial presentation, balances have been combined based upon their
respective eight-month interim periods. All material intercompany
transactions and accounts have been eliminated.
Accounting Records - Skaer's books and records are maintained on an income
tax basis of accounting. The financial information presented herein has
been restated to generally accepted accounting principles under the
successful efforts method of accounting as discussed below.
Inventory - Inventory is carried at the lower of cost or market using
specific identification. Inventory consists of oil and gas equipment and
supplies, generally held for resale.
F-29
<PAGE>
Oil and Gas Properties - For financial reporting purposes, Skaer
capitalizes all exploration and development costs applicable to producing
oil and gas properties, including well equipment and intangible drilling
and development costs (successful efforts method). Undeveloped leased
properties are carried at the lower of acquisition cost or estimated market
value and charged to operations if the property is forfeited or abandoned.
Costs applicable to exploratory wells that do not result in the discovery
of proved reserves are charged to current operations.
Depletion of capitalized drilling costs is generally computed on the units-
of-production method, based on proved developed reserves. Amortization of
leasehold costs is computed on the units-of-production method, based on
proved developed and undeveloped reserves. Costs of maintenance and
repairs are charged to operating expenses as incurred. Costs of
significant additions, renewals and betterments of properties are
capitalized and depreciated based on estimated recoverable reserves. Gains
or losses are recognized upon the disposition of property and equipment.
Other Property and Equipment - Other property and equipment is stated at
cost. Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives (ranging from 3 to 30
years) of the respective assets. The cost of normal maintenance and
repairs is charged to operating expenses as incurred. Material
expenditures which increase the life of an asset are capitalized and
depreciated over the estimated remaining useful life of the asset. The
cost of properties sold, or otherwise disposed of, and the related
accumulated depreciation or amortization are removed from the accounts, and
any gains or losses are reflected in current operations.
Cash Flows - For purposes of the statement of cash flows, cash and
equivalents includes demand deposits and other cash deposits made at
financial institutions with maturities of three months or less.
Income Taxes - Deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at year-end.
F-30
<PAGE>
PEASE OIL AND GAS COMPANY
No person has been authorized to give any information or to make any represen-
tation in connection with the Offering being made hereby not contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized. This Prospectus does not constitute
an offer to sell or solicitation of an offer to buy any of the securities of-
fered hereby in any jurisdiction in which it is unlawful to make such offer or
solicitation in such jurisdiction. Neither the delivery of this Prospectus nor
any sale made hereunder shall under any circumstances create an implication that
information contained herein is correct as of any time subsequent to the date
hereof.
6,183,064 Shares of Common Stock and
241,875 Warrants to Purchase Shares of
Common Stock and 90,000 Shares of Series A Cumulative Convertible Preferred
Stock
_________________________
Page No.
AVAILABLE INFORMATION 2
PROSPECTUS SUMMARY 3
RISK FACTORS 7
USE OF PROCEEDS 10
MARKET PRICES OF COMMON EQUITY,
DIVIDEND POLICY AND
RELATED STOCKHOLDER MATTERS 10
MANAGEMENT S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF
THE COMPANY 12
BUSINESS OF THE COMPANY 24
MANAGEMENT 34
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 37
CERTAIN TRANSACTIONS 39
Selling Securityholders 40
DESCRIPTION OF SECURITIES 43
PLAN OF DISTRIBUTION 49
LEGAL MATTERS 50
EXPERTS 50
GLOSSARY 51
FINANCIAL STATEMENTS F-1
_____________
PROSPECTUS
_____________
_________, 1995
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
No changes from Registration Statement previously filed.
Item 25. Other Expenses of Issuance and Distribution.
No changes from Registration Statement previously filed.
Item 26. Recent Sales of Unregistered Securities
No changes from Registration Statement previously filed.
Item 27. Exhibits.
In addition to exhibits previously filed by Registrant, the following is a
list of all exhibits filed as part of this Registration Statement or, as noted,
incorporated by reference to this Registration Statement:
Exhibit No. Description and Method of Filing
(5) Opinion of Counsel regarding legality of the securities being
registered.
(23.1) Consent of HEIN + ASSOCIATES LLP Independent Certified Public
Accountants.
(23.2) Consent of Hopper and Kanouff, P.C.
Item 28. Undertakings
No changes from Registration Statement previously filed.
II-1
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2, and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Grand
Junction, State of Colorado on October 10, 1995.
PEASE OIL AND GAS COMPANY
By /s/Willard H. Pease, Jr.
_________________________
Willard H. Pease, Jr.,
President and Chief Executive Officer
By /s/ Patrick J. Duncan
________________________________
Patrick J. Duncan,
Principal Financial Officer and
Principal Accounting Officer
In accordance with the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
stated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Willard H. Pease, Jr. Director October 10, 1995
- ---------------------
Willard H. Pease, Jr.
/s/ Patrick J. Duncan Director October 10, 1995
- ---------------------
Patrick J. Duncan
/s/ James N. Burkhalter Director October 10, 1995
- -----------------------
James N. Burkhalter
/s/ James C. Ruane* Director October 10, 1995
- -----------------------
James C. Ruane
/s/ Robert V. Timlin* Director October 10, 1995
- -----------------------
Robert V. Timlin
/s/ William F. Warnick* Director October 10, 1995
- ------------------------
William F. Warnick
/s/ Homer C. Osborne* Director October 10, 1995
- -------------------------
Homer C. Osborne
*
/s/ Willard H. Pease, Jr. October 10, 1995
- --------------------------
By Willard H. Pease, Jr.
Power of Attorney
II-2
<PAGE>
As filed with the Securities and Exchange Commission on October 10, 1995
Registration No. 33-94536
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
FORM SB-2
Registration Statement
Under
The Securities Act of 1933
PEASE OIL AND GAS COMPANY
EXHIBITS
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
(5) Opinion of Counsel regarding legality of the securities
being registered.
(23.1) Consent of HEIN + ASSOCIATES LLP Independent Certified
Public Accountants.
(23.2) Consent of Hopper and Kanouff, P.C.
</TABLE>
<PAGE>
HOPPER AND KANOUFF, P.C.
1610 Wynkoop Street, Suite 200
Denver, Colorado 80202-1196
October 9, 1995
Pease Oil and Gas Company
751 Horizon Court, Suite 203
Grand Junction, Colorado 81506
Gentlemen:
You have requested our opinion as to the legality of
3,100,635 shares of
the $0.10 par value common stock of Pease Oil and Gas Company
("Company") 90,000
shares of the Series A Cumulative Convertible Preferred Stock
("Preferred
Stock"), and Warrants ("Warrants") to purchase 241,875 shares of
Common Stock
(the Common Stock, Preferred Stock and Warrants collectively
referred to herein
as the "Securities") to be registered pursuant to a Registration
Statement on
Form SB-2 (Registration No. 33-94536) that has been filed by the
Company with
the United States Securities and Exchange Commission.
We have reviewed the Articles of Incorporation, as amended,
of the Company,
the Bylaws of the Company, the minutes of the Board of Directors
and of the
shareholders of the Company, and such other documents that we
considered
necessary in order to render this opinion. As a result of our
review, we are of
the opinion that the Securities of the Company covered by the
Registration
Statement on From SB-2 have been legally authorized by the Board
of Directors of
the Company and that the Shares of Common Stock and Preferred
Stock and the
Warrants, when sold as described in the Registration Statement,
will be legally
issued, fully paid and nonassessable.<PAGE>
This opinion is based upon the assumption that the Regis-
tration Statement
on Form SB-2 becomes effective under the Securities Act of 1933,
as amended,
prior to any public sale of the Securities covered by such
Registration
Statement, and that there will be compliance with all applicable
securities laws
in those states where the Securities may be offered or sold.
Sincerely yours,
HOPPER AND KANOUFF, P.C.
By: /s/ Alan W. Peryam
--------------------------
------------
Alan W. Peryam, Director<PAGE>
<PAGE>
[TYPE] Exhibit 23.1
[DESCRIPTION] Independent Auditor's Consent
INDEPENDENT AUDITOR'S CONSENT
We consent to the inclusion in this Registration Statement on Form SB-2 of our
report dated March 31, 1995, on our audits of the consolidated financial
statements of Pease Oil and Gas Company. We also consent to the reference to
our firm under the caption "Experts."
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Denver, Colorado
October 4, 1995
<PAGE>
CONSENT OF ATTORNEYS
Reference is made to the Registration Statements on Form
SB-2 (Registration
No. 33-94536 and No. 33-64448) pursuant to which Pease Oil and
Gas Company
("Company") and certain Selling Securityholders propose to sell
a maximum of
6,183,064 shares of the $0.01 par value common stock ("Common
Stock") of the
Company, 241,875 Warrants to purchase shares of the Common
Stock, and 90,000
Shares of Series A Cumulative Convertible Preferred Stock of the
Company.
Reference is also made to our opinion dated October 9, 1995
included as Exhibit
(5.1) to the Registration Statement relating to the legality of
the securities
proposed to be issued and to be sold.
We hereby consent to the filing of our opinion dated
October 9, 1995, as an
exhibit to the Company's Registration Statements on Form SB-2.
HOPPER AND KANOUFF, P.C.
By: /s/ Alan W. Peryam
---------------------
---------------
Alan W. Peryam,
Director
Denver, Colorado
Dated: October 9, 1995<PAGE>
