<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission file Number: 0-6580
PEASE OIL AND GAS COMPANY
(Exact Name of Registrant as Specified in its Charter)
Nevada 84-0285520
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
751 Horizon Court, Suite 203
Grand Junction, Colorado 81506
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (970) 245-5917
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $0.10 Per Share)
Series A Cumulative Convertible Preferred Stock (Par Value $0.01 Per Share)
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and, (2) has been subject to such filing requirements
for the past 90 days. [X] Yes [ ] No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of April 1, 1995, Registrant had 6,502,470 shares of its $0.10 par value
Common Stock and 203,288 shares of its $0.01 par value Series A Cumulative
Convertible Preferred Stock outstanding. As of April 1, 1995 the aggregate
market value of the common stock held by non-affiliates was $4,298,304. This
calculation is based upon the closing sale price of $0.75 per share on March 31,
1995.
1
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
OVERVIEW
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.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1993 1992
------- ------ ------
(In Thousands Except the Per Share Data)
<S> <C> <C> <C>
Oil and Gas Sales $3,221 $1,132 $373
Gas Plant Revenue 6,738 2,032 -
Total Operating Revenues 12,069 4,387 508
Net Loss Applicable to
Common Stockholders (2,865) (1,196) (468)
Per Share Data:
Net Loss Applicable to
Common Stockholders (2.32) (1.33) (0.14)
Cash Dividends Declared
Per Common Share None None None
Total Assets 15,839 16,580 2,062
Long-Term Debt, Net of
Current Maturities 2,254 2,167 560
</TABLE>
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL EXPENDITURES:
Liquidity
At December 31, 1994, the Company's cash balance was $532,916 with a
working capital deficit of $429,4173. Significant effort has been put forth
by Management in the fourth quarter of 1994 to increase the cash flow and
earnings of its existing asset base. For example, efforts to date have included
the following:
2
<PAGE>
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.
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; and
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 March 1995, the
Company was processing approximately 570 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.
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.
The Company has no immediate access to additional working capital. How-
ever, Management believes 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 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.
As previously discussed, 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 pay-
ment 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,
21,000 shares of Preferred Stock converted into 55,126 shares of Common Stock
3
<PAGE>
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 April
1, 1995 there remain 203,288 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.
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
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.
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.
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.
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; success-
fully 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).
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
first and second 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.
4
<PAGE>
RESULTS OF OPERATIONS:
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 Com-
pany'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.
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
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.
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.
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 March 1995, the Company was purchasing and processing an
additional 590 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
5
<PAGE>
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:
<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.
6
<PAGE>
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>
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. When these
operations are not supporting the Company s activities, efforts are made to
pursue new markets. However, competition in the areas the Company operates is
extremely competitive and there can be no assurance that these efforts will
either increase future revenue or maintain their current levels.
Management of the Company recognizes that the margins in oil and gas
service and supply operations are historically low. However, Management also
believes there is an inherent value that these operations add to the Company.
For instance, owning these operations enables the Company to operate, maintain
and develop substantially all of its owned oil and gas properties. In addition,
Management believes these operations put the Company in a better position to
control costs, safety, quality, timeliness of work as well as other factors
affecting the economics of its oil and gas production.
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,
7
<PAGE>
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.
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
8
<PAGE>
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.
9
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets - December 31, 1994 . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations - For the Years Ended December 31,
1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . F-5
Consolidated Statements of Stockholders' Equity - For the Years Ended
December 31, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows - For the Years Ended December
31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . ... . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-10
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 SHEET
DECEMBER 31, 1994
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and equivalents $ 532,916
Trade receivables, net of allowance of $94,000 1,623,777
Inventory 754,113
Prepaid expenses and other 91,845
---------
Total current assets 3,002,651
---------
OIL AND GAS PROPERTIES, at cost (successful efforts method):
Undeveloped properties 511,475
Developed properties 9,298,873
---------
Total oil and gas properties 9,810,348
Less accumulated depreciation and depletion (3,201,901)
---------
Net oil and gas properties 6,608,447
---------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Gas plant 3,920,965
Service equipment and vehicles 1,651,063
Buildings and office equipment 632,932
---------
Total property, plant and equipment 6,204,960
Less accumulated depreciation (878,874)
---------
Net property, plant and equipment 5,326,086
---------
ASSETS HELD FOR SALE -
---------
OTHER ASSETS:
Non-compete agreements, net of accumulated
amortization of $115,499 444,501
Other 456,891
---------
Total other assets 901,392
---------
TOTAL ASSETS $15,838,576
==========
F-3
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
(continued)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt:
Related parties $ 65,000
Other 962,000
Accounts payable, trade:
Natural gas purchases 1,010,400
Other 691,748
Accrued production taxes 313,838
Other accrued expenses 389,082
---------
Total current liabilities 3,432,068
---------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities:
Related parties 241,718
Other 2,011,808
Accrued production taxes 398,645
---------
Total long-term liabilities 2,652,171
---------
DEFERRED INCOME TAXES 400,000
---------
COMMITMENTS (NOTE 5)
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share,
2,000,000 shares authorized, 1,157,780
shares of Series A Cumulative Convertible
Preferred Stock issued and outstanding
(liquidation preference of $11,867,542) 11,578
Common Stock, par value $.10 per share,
25,000,000 shares authorized, 2,286,028
shares issued 228,603
Additional paid-in capital 16,744,348
Accumulated deficit (7,497,604)
Less 28,715 shares of treasury stock,
at cost (132,588)
----------
Total stockholders' equity 9,354,337
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $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 Years Ended
December 31,
--------------------------------
1994 1993
-------------- ------------
<S> <C> <C>
REVENUE:
Gas plant:
Marketing and trading $ 5,849,878 $ 1,658,901
Processing 888,743 373,242
---------- ----------
Total gas plant 6,738,621 2,032,143
Oil and gas sales 3,220,761 1,131,938
Oil field services 1,279,013 709,057
Oil field supply and equipment 720,928 448,600
Well administration and other income 109,376 65,549
--------- ---------
Total revenue 12,068,699 4,387,287
---------- ---------
OPERATING COSTS AND EXPENSES:
Gas plant:
Marketing and trading 5,315,241 1,453,248
Processing 573,206 255,108
---------- ---------
Total gas plant 5,888,447 1,708,356
Oil and gas production 2,189,780 765,757
Oil field services 1,183,501 665,300
Oil field supply and equipment 663,500 411,854
General and administrative 1,617,107 690,009
Depreciation, depletion and
amortization 1,614,590 502,270
Impairment of oil and gas properties 934,211 -
Dry holes, plugging and abandonments 315,809 335,715
---------- ---------
Total operating costs and
expenses 14,406,945 5,079,261
---------- ---------
LOSS FROM OPERATIONS (2,338,246) (691,974)
OTHER INCOME (EXPENSES):
Interest expense (324,251) (123,932)
Gain on sale of assets 55,372 29,995
---------- ---------
Net (268,879) (93,937)
---------- ----------
LOSS BEFORE INCOME TAXES 2,607,125) (785,911)
Deferred income tax benefit 900,000 -
--------- ----------
NET LOSS $ (1,707,125) $ (785,911)
========== ==========
F-5
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
<CAPTION>
<S> <C> <C>
NET LOSS $ (1,707,125) $ (785,911)
Preferred stock dividends:
Declared (868,335) (409,996)
In arrears (289,742) -
---------- ---------
Total preferred stock dividends (1,158,077) (409,996)
---------- ---------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (2,865,202) $(1,195,907)
========== ==========
NET LOSS PER COMMON SHARE $ (2.32) $ (1.33)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 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
========== ========= ========= ========== ===========
<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
========= ======== ========= ========= ==========
</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 Years Ended
December 31,
-----------------------
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,707,125) $ (785,911)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Provision for depreciation and depletion 1,518,590 482,770
Amortization of intangible assets 120,588 31,599
Abandonment and impairment of oil and gas
properties 1,250,020 335,715
Deferred income taxes (900,000) -
Gain on sale of property and equipment (55,372) -
Provision for bad debts 101,755 44,200
Other (64,604) (33,353)
Changes in operating assets and liabilities,
net of effects from acquisitions:
(Increase) decrease in:
Trade receivables (241,509) (556,000)
Inventory (57,170) 70,962
Prepaid expenses and other 12,683 80,596
Increase (decrease) in:
Accounts payable 1,015,685 395,645
Accrued expenses (220,196) (65,643)
---------- ---------
Net cash provided by operating activities 773,345 580
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of acquisitions, net of cash acquired - (8,391,209)
Capital expenditures for property and
equipment (2,466,757) (635,385)
Purchase of restricted investments (160,000) (50,000)
Proceeds from redemption of certificate of
deposit 31,000 -
Proceeds from sale of property and equipment 91,032 -
---------- ----------
Net cash used in investing activities (2,504,725) (9,076,594)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,522,877 2,662,940
Repayment of long-term debt (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 - 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 (1,158,018) (120,254)
---------- ----------
Net cash provided by financing activities 890,687 10,338,714
---------- ----------
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS (840,693) 1,262,700
CASH AND EQUIVALENTS, beginning of year 1,373,609 110,909
---------- ---------
CASH AND EQUIVALENTS, end of year $ 532,916 $ 1,373,609
========== =========
F-8
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<CAPTION>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 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 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 -
</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.
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.
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.
F-12
<PAGE>
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.
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 92,500
F-13
<PAGE>
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
---------
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.
F-14
<PAGE>
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:
<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.
F-15
<PAGE>
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.
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.
F-16
<PAGE>
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.
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
F-17
<PAGE>
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.
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.
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>
F-18
Page>
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.
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. 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:
F-19
<PAGE>
<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>
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)
F-20
<PAGE>
<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.
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.
F-21
<PAGE>
<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>
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.
F-22
<PAGE>
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.
<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-22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "1934 Act"), the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PEASE OIL AND GAS COMPANY
Date: October 19, 1995 by /s/ Willard H. Pease, Jr.
-------------------------------
Willard H. Pease, Jr., President
and Chief Executive Officer
Date: October 19, 1995 by /s/ Patrick J. Duncan
-------------------------------
Patrick J. Duncan,
Chief Financial Officer
10
