SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
or
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1995
Commission File Number 0-6580
PEASE OIL AND GAS COMPANY
(Name of small business issuer as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization 87-0285520
(I.R.S. Employer
Identification Number)
751 Horizon Court, Suite 203, Grand Junction, Colorado 81506
(Address of principal executive offices) (Zip code)
(970) 245-5917
(Issuer's telephone number, including area code)
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 $.10 Per Share)
Series A Cumulative Convertible Preferred Stock (Par Value $0.01
Per Share)
Title of Class
Indicate by check mark whether the issuer (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days. Yes No
As of August 7, 1995 the issuer had 7,001,337 shares of its $0.10
par value Common Stock and 202,688 shares of its $0.01 par value
Series A Cumulative Convertible Preferred Stock outstanding. As
of August 7, 1995 the aggregate market value of the common stock
held by non-affiliates was $5,220,989. This calculation is based
upon the closing sale price of $0.8125 per share on August 7,
1995.
Table of Contents Page Number
PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1995 3-4
(unaudited) and December 31, 1994
Consolidated Statements of Operations
For the Three Months Ended June 30, 1995
(unaudited) and 1994 (unaudited)
5-6
Consolidated Statements of Operations
For the Six Months Ended June 30, 1995
(unaudited) and 1994 (unaudited)
7-8
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1995
(unaudited) and 1994 (unaudited)
9
Notes to Consolidated Financial Statements 10-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-31
Part II - Other Information 32-33
Part III - Signatures 34
<TABLE>
Consolidated Balance Sheet
<CAPTION>
June 30, December 31,
1995 1994
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 313,052$ 532,916
Trade receivables 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,
depletion and impairment -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 rolling-stock 921,395 1,651,063
Land, 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 396,501 444,501
Other 404,768 456,891
Total other assets 801,269 901,392
TOTAL ASSETS $ 14,426,275$ 15,838,576
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 241,717 241,717
Other 1,416,459 1,994,577
Accrued production taxes and other 269,626 415,877
Total long-term liabilities 1,927,802 2,652,171
DEFERRED INCOME TAXES 258,900 400,000
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, respectively
(liquidation preference of $2,178,896) 2,027 11,578
Common Stock, par value $ .10 per share,
25,000,000shares authorized 7,018,131 and
2,286,028 shares issued, respectively 701,813 228,603
Additional paid-in capital 16,606,392 16,744,348
Accumulated deficit -7,819,162 -7,497,604
Less 16,794 and 28,715 shares, respectively, -82,588 -132,588
of treasury stock, at cost
Total stockholders' equity 9,408,482 9,354,337
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,426,275$ 15,838,576
</TABLE>
<TABLE>
Consolidated Statements of Operations (unaudited)
<CAPTION>
For The Three Months
Ended June 30,
1995 1994
<S> <C> <C>
REVENUE:
Gas plant:
Marketing and trading $ 734,720$ 1,193,739
Processing 322,324 190,364
Total gas plant 1,057,044 1,384,103
Oil and gas sales 712,508 871,028
Oil field services 212,002 201,215
Oil field supply and equipment 170,521 164,027
Well administration and other income 17,226 21,227
Total revenue 2,169,301 2,641,600
OPERATING COSTS AND EXPENSES:
Gas plant:
Marketing and trading 643,770 1,080,109
Processing 275,286 114,790
Total gas plant 919,056 1,194,899
Oil and gas production 423,665 553,175
Oil field services 225,336 198,871
Oil field supply and equipment 134,329 181,902
General and administrative 291,609 403,708
Depreciation, depletion and amortization 322,751 267,524
Plugging and abandonment of oil and 5,291 7,682
gas properties
Total operating costs and expenses 2,322,037 2,807,761
LOSS FROM OPERATIONS -152,736 -166,161
OTHER INCOME (EXPENSES):
nterest expense -83,745 -74,366
Restructuring charges -60,465 -
Gain on sale of assets 18,043 8,700
Total other expenses, net -126,167 -65,666
LOSS BEFORE INCOME TAXES -278,903 -231,827
Deferred income tax benefit 96,600 112,500
NET LOSS $ -182,303$ 119,327
PREFERRED STOCK DIVIDENDS:
Declared - -289,445
In arrears -50,524 -
Total preferred stock dividends -50,524 -289,445
NET LOSS APPLICABLE TO COMMON $ -232,827$ -408,772
STOCKHOLDERS
NET LOSS PER COMMON SHARE $ (0.03) $ (0.42)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 6,671,800 971,100
</TABLE>
<TABLE>
For The Six Months
Ended June 30,
1995 1994
<S> <C> <C>
REVENUE:
Gas plant:
Marketing and trading $ 2,045,520$ 3,456,299
Processing 567,202 405,169
Total gas plant 2,612,722 3,861,468
Oil and gas sales 1,477,035 1,486,561
Oil field services 590,981 614,333
Oil field supply and equipment 332,583 359,500
Well administration and other income 47,726 39,333
Total revenue 5,061,047 6,361,195
OPERATING COSTS AND EXPENSES:
Gas plant:
Marketing and trading 1,081,570 3,162,909
Processing 458,495 234,359
Total gas plant 2,260,065 3,397,268
Oil and gas production 900,592 1,034,866
Oil field services 564,965 581,129
Oil field supply and equipment 273,545 364,824
General and administrative 580,768 885,370
Depreciation, depletion and amortization 695,206 661,815
Plugging and abandonment of oil and 5,291 87,038
gas properties
Total operating costs and expenses 5,280,432 7,012,310
LOSS FROM OPERATIONS -219,385 -651,115
OTHER INCOME (EXPENSES):
Interest expense -161,385 -146,139
Restructuring charges -79,719 -
Gain on sale of assets 51,454 8,700
Total other expenses, net -189,650 -137,439
LOSS BEFORE INCOME TAXES -409,035 -788,554
Deferred income tax benefit 141,100 112,500
NET LOSS $ -267,935$ -676,054
PREFERRED STOCK DIVIDENDS:
Declared - -578,945
In arrears -101,344 -
Total preferred stock dividends -101,344 -578,945
Loss before non-cash inducement -369,279 -1,254,999
Non-cash inducement in tender offer -1,640,906 -
(Notes 3 and 4)
NET LOSS APPLICABLE TO COMMON $ -2,010,185$ -1,254,999
STOCKHOLDERS
NET LOSS PER COMMON SHARE
Before non-cash inducement $ (0.07) $ (1.29)
Non-cash inducement (Notes 3 and 4) (0.32) -
$ (0.39) $ (1.29)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,219,100 976,400
</TABLE>
<TABLE>
>Consolidated Statements of Cash Flow
<CAPTION>
For The Six Months
Ended June 30,
1995 1994
<S> <C> <S><C> <S><C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ -267,935$ -676,054
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for depreciation and depletion 647,206 613,815
Amortization of intangible assets 59,301 60,300
Provision for bad debts 3,773 54,078
Deferred income taxes -141,100 -112,500
Gain on sale of property and equipment -51,454 -8,700
Issuance of stock for services 28,281 -
Other -26,667 45,001
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade receivables 610,265 245,175
Inventory -61,195 -11,596
Prepaid expenses and other assets -7,004 -6,045
Increase (decrease) in:
Accounts payable -707,766 260,024
Accrued expenses -166,761 -385,775
Net cash (used in) provided by
operating activities -81,056 77,723
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment -264,347 -1,391,831
Proceeds from sale of property and equipment 309,606 125,792
Proceeds from redemption of
certificate of deposit 31,200 -
Net cash (used in) provided by
investing activities 76,459 -1,266,039
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 1,400,000
Repayment of long-term debt -449,147 -376,196
Net proceeds from issuance of stock 233,880 -
Preferred stock dividends paid - -578,945
Net cash (used in) provided by
financing activities -215,267 444,859
INCREASE (DECREASE) IN CASH AND EQUIVALENTS -219,864 -743,457
CASH AND EQUIVALENTS, beginning of period 532,916 1,423,609
CASH AND EQUIVALENTS, end of period $ 313,052$ 680,152
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 142,251$ 96,948
Cash paid for income taxes $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of oil and gas properties for stock $ 59,922$ -
Long-term debt incurred for purchase of vehicles $ 24,992$ 84,028
Issuance of stock for services $ 28,281$ -
</TABLE>
1. Unaudited Consolidated Financial Statements:
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
necessary to present fairly the financial position of the Company
as of June 30, 1995 and the results of operations and cash flows
for the periods presented. All such adjustments are of a normal
recurring nature. The results of operations for the periods
presented are not necessarily indicative of the results for the
full year.
The accounting policies followed by the Company are set forth in
Note 1 to the Company's financial statements in Form 10-KSB for
the year ended December 31, 1994. It is suggested that these
financial statements be read in conjunction with the financial
statements and notes included in the Form 10-KSB.
2. Long-term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
Unaffiliated Parties: 1995 1994
<S> <C> <S><C>
Note payable to a bank, which was restructured in
March 1995 as described below. Prior to April 1995,
interest was computed at the bank's prime rate
plus 1% (9.5% at December 31, 1994). As a result
of the restructuring the interest rate was changed
to prime plus 3%. 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. $ 2,184,697 $ 2,588,958
Convertible 12% debentures due May 1996. The
debentures are unsecured and are convertible
into the Company's shares of common stock 70,000 92,500
at $0.83 per share.
Other installment notes. Interest at 6.9% to 10.5%,
monthly principal and interest payments of
approximately $5,434 through June 1999. All notes
are collateralized by rolling-stock. 124,339 118,066
Contract payable, $4,444 credited monthly against
gas purchases through July 1997, collateralized
by certificate of deposit. 93,333 120,000
Note payable to a bank. Interest at 10%, monthly
payments of $1,204 including interest, due
February 1998, collateralized by service equipment
and personally guaranteed by the Company's
president and CEO. 33,387 37,053
Total unaffiliated parties $ 2,505,756 $ 2,956,577
Related Parties:
Note payable to the Company's president for the
purchase of GJWS. Annual principal payments
of $65,000 plus interest at 6% through October 1996.
The note is convertible into common stock at $5.00
per share and is collateralized by service equipment. $ 130,000 $ 130,000
Unsecured notes payable to the Company's
president and various entities controlled by him.
Interest at 8% to 10% with principal and interest
due January 1, 1997. 176,717 176,717
Total related parties 306,717 306,717
Total long-term debt 2,812,473 3,263,294
Less current maturities -1,154,297 -1,027,000
Total long-term debt, less current maturities $ 1,658,176 $ 2,236,294
</TABLE>
In March 1995, the credit agreement with its primary lender was
restructured. Previously, the Company was making monthly
principal payments of $88,090 plus interest. Under the revised
agreement, the minimum monthly principal payments are as follows:
Period Amount
June 1995 through August 1995 $ 44,045
September 1995 $ 88,090
October 1995 through September 1996 $ 81,905
October 1996 to September 1997 $ 69,167
After September 1995 through maturity in September 1997 the
Company is required to pay the greater of: a) the amount
indicated above; or b) 40% of the net oil and gas revenues (net
of operating expenses) plus $60,000 per month.
The bank also agreed to waive any 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, the aggregate maturities of long-term debt are
as follows:
Year Ending Related
December 31, Parties Others Total
1995 $ 65,000 $ 962,000 $ 1,027,000
1996 65,000 1,056,778 1,121,778
1997 176,717 916,701 1,093,418
1998 - 15,419 15,419
1999 - 5,678 5,678
$ 306,717 $ 2,956,576 $ 3,263,293
3. Stockholders' Equity:
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 equal to $10 per
share plus any dividends in arrears. Currently each share is
convertible into 2.6875 shares of common stock and warrants to
purchase 2.6875 common shares. Each warrant currently entitles the
holders to purchase one share of common stock at $5.00 per share
through 1996, and $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 plus any dividends
in arrears 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 at December 31,
1994.
Tender Offer - 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 June 30, 1995, 202,688 shares
of Preferred Stock remain outstanding, resulting in preferred
dividends in arrears of $.75 per share for an aggregate of $152,016
(of which $101,344 or $.50 per share is attributable to 1995).
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 Placement - In April 1995, the Company initiated a private
placement to sell 250,000 "Units". Each unit consists of two shares
of common stock and one warrant to purchase one share of common
stock at $1.50 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 generating net proceeds of $233,880. The
Company agreed to use its best efforts to file a Registration
Statement with the United States Securities and Exchange Commission
("SEC") to register for resale the shares sold in this private
placement.
4. 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 either declared or in arrears during the period) by the
weighted average number of common shares outstanding during the
period. All common stock equivalents have been excluded from the
computations because their effect would be anti- dilutive.
As discussed in Note 3, the Company completed a tender offer to the
Company's preferred stockholders during the first quarter of 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 tendered. 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 from earnings available to common
stockholders. This non-cash charge resulted in the reduction of
earnings per share by $.32 for the six months ended June 30, 1995.
While this charge is intended to show the cost of the inducement to
the owner 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 per
share as a result of the tender offer. Therefore, management
believes that, even though the current accounting rules require
the $.32 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.
5. 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
Notes 3 and 4, and the restructuring discussed above. The costs
recognized in the restructuring consist primarily of severence pay
and a loss on the abondonment of the office lease in Denver,
Colorado.
6. Reclassifications:
Certain reclassifications have been made to the 1994 financial
statements to conform to the presentation in 1995. The
reclassifications had no effect on the 1994 net loss.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
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 decrease in cash and increase in the working capital
deficit can be primarily related to the loss from operations, debt
service, and investment in property and equipment. 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 and the proceeds of $309,606
generated from the sale of property and equipment. The private
placement is more fully discussed in Note 3 of the Consolidated
Financial Statements.
In order to fund the working capital deficit, the Company announced
a restructuring program in the second quarter of 1995 that
included, among other things, a plan to downsize the Company's
service operations and sell a portion of its oil field service
equipment. As of June 30, 1995, the Company has classified in its
balance sheet $465,466 as "Assets Held For Sale". 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.
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 the
foreseeable future. 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. However, 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 addition to putting the aforementioned assets up for sale, the
Company's plan of restructuring also included steps to reduce
operating costs, increase efficiences and reduce operating risks.
For example, as a result of the restructuring, 35 of the Company's
70 employees were terminated and the administrative office in
Denver, Colorado was closed. In addition, 35 oil and gas
properties that lost approximately $134,000 in 1994 were sold
during the first half of 1995. 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 been faced with many challenges. Therefore management
is continually exploring alternatives and opportunities to control
costs and improve the Company's cash flow.
Historical financial information and the potential effect on future
operations resulting from the Company's restructuring are more
fully illustrated and discussed later, by category, in the
"Results of Operations" section.
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
Series A Cumulative Convertible Preferred Stock ("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 opportunities that would enhance shareholder value through
improved cash flows and results of operations, the Company extended
a tender offer to the Preferred Stockholders in January 1995. On
February 28, 1995, the Company completed the tender offer to its
Preferred Stockholders 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 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 2,450,417 shares of Common Stock. In
addition, 21,000 shares of Preferred Stock converted into 55,126
shares of Common Stock prior to the tender offer. Accordingly, as
of June 30, 1995 there remains 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.
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.
Long-term Debt
For the first six months of 1995, the Company paid $449,147 in
principal plus $59,922 in interest on long-term debt. All payments
were made on or before their respective due dates. In March 1995,
the Company restructured its bank debt with its primary lender.
The Company had violated certain financial covenants under the
prior debt agreement. However, the bank agreed to waive any
covenant violations related to the previous agreement and modified
the financial covenants to provide for less restrictive provisions.
In addition, in order to assist the Company in rebuilding its
working capital, the bank agreed to reduce the monthly principal
payments 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 + 1% to prime plus 3%
beginning in April 1995. As of June 30, 1995 the balance on this
note was $2,184,697 and is payable in monthly installments of
principal plus interest through August 1997.
Capital Expenditures
For the first six months of 1995, the Company invested $263,000 in
property and equipment. Approximately $160,000 of these costs were
incurred in connection with the Gas Plant expansion activities
intended to accommodate and process additional third party gas. The
Gas Plant Expansion activities are discussed in more detail under
the caption "Gas Plant Liquids and Gas" in the Results of
Operations section beginning on page 19. An additional $66,000 was
spent on workovers and equipment acquisitions related to the
operations of the Company's oil and gas properties. The remaining
costs of $37,000 were 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 primarily
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.
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1995:
Overview
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
levels of production and prices at which oil, natural gas, 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 potential changes in
production levels and the fluctuations in the prices of oil,
natural gas, and natural gas liquids.
Total Revenue
Total Revenue from all operations was $2,169,301 for the three
months ended June 30, 1995, compared to $2,641,600 for the same
period in 1994. The decrease in total revenue is primarily a
result of lower volumes of natural gas delivered and accounted for
under the caption "Gas Plant Marketing and Trading" as well as
lower natural gas prices. Both these circumstances 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 first method
is through the tailgate production of its Gas Plant (this tailgate
delivery is accounted for and more thoroughly discussed later in
this section under the caption "Gas Plant Liquids and Gas") and the
second method is accounted for under this caption of "Gas Plant
Marketing and Trading".
The Marketing and Trading revenues and costs are derived from the
gas purchased from third parties and sold to PSCo under the terms
of the contract. This gas is only sold under the Company's
contract with PSCo and is not actually processed by the Gas Plant.
In both 1995 and 1994, the price between the amount paid the third
party producers and the amount received from PSCo 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:
For the Three Months
Ended June 30,
1995 1994
Total Volume Sold (Mcf) 505,785 639,586
Average Price $ 1.45 $ 1.87
Total Revenue $ 734,720 $ 1,193,739
Costs -643,770 -1,080,109
Gross Margin $ 90,950 $ 113,630
The lower volumes and prices received in 1995 as compared to 1994
are primarily related to a lower demand in the natural gas
markets. As with any commodity, prices are subject to the laws of
supply and demand of which the Company has no 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,
costs and the corresponding gross margin will most likely
disappear in July 1996. Since the gross margin represents the
net cash flow and net 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 informed the
Company (informally) 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 expansion activity is discussed in more detail in the
following paragraphs under the caption "Gas Plant Liquids and
Gas".
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 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 Plants
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 that is 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 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 Three Months Ended June 30,
1995 1994
Average Average
Volumes Price Volumes Price
<S> <C> <C> <C> <C> <C>
Production:
Natural Gas Sold (Mcf) 128,900$ 0.81 81,800$ 0.66
B-G Mix (gallons) 372,200$ 0.33 303,500$ 0.25
Propane (gallons) 299,000$ 0.32 217,500$ 0.27
</TABLE>
<TABLE>
<CAPTION>
Amount Amount
<S> <C> <C> <C> <C>
Operating Margin:
Revenue $ 322,324 $ 190,364
Costs -275,286 -114,790
Gross Margin $ 47,038 $ 75,574
Gross Margin Percent 15% 40%
</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.
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
consist 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
Operating statistics for oil and gas production for the three
months ended June 30, 1994 and 1995 are as follows:
For the Three Months
Ended June 30,
1995 1994
Production:
Oil (bbls) 33,100 36,200
Gas (Mcf) 144,800 141,600
BOE 57,200 59,800
Average Collected Price:
Oil (per Bbl) $ 16.77 $ 19.05
Gas (per Mcf) $ 1.08 $ 1.27
Per BOE $ 12.44 $ 14.55
Operating Margin:
Revenue $ 712,508 $ 871,028
Costs -423,665 -553,275
Gross Margin $ 288,843 $ 317,735
Gross Margin Percent 41% 36%
Average Production Cost per
BOE before DD&A $ 7.40 $ 9.24
The decrease in revenue can be substantially attributed to
certain well being shut-in for workovers, the sale of 35 oil and
gas properties in 1995, the natural decline in production and a
decrease in average prices for oil and natural gas. However, it
should be noted that the Company has been able to decrease the
costs of production and increase its margins, as a percentage of
revenue, despite the decrease in the average oil and gas prices.
This is a result of management's ongoing efforts to manage
production and control costs. For instance, 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 in February 1995 and sold within the next four
months (all these properties were sold as of 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 the costs of production
(per BOE) will actually 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 three months ended June 30, 1994 and 1995 are
as follows:
<TABLE>
<CAPTION>
Service Operations Supply Operations
1995 1994 1995 1994
<S> <C> <S><C> <S><C> <S><C>
Revenue $ 212,002$ 201,215$ 170,521$ 164,027
Costs -225,336 -198,871 -134,329 -181,902
Gross Margin $ -13,334$ 2,434$ 36,192$ -17,875
Gross Margin Percent (6%) 1% 21% (10%)
</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 are 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. A summary of the restructuring
for both operations is discussed in the following paragraphs.
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 man power is not needed in the Company's
operations. Therefore, management anticipates the revenues
generated in the future from the service operations will be
significantly lower. 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 or 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 to decrease
significantly in the future, it is not expected to have a
material effect on the Company's overall results of operations in
light of the historically low margins.
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.
General and Administrative Expenses:
General and administrative costs for the second quarter of 1995
were $291,609 compared to $403,708 for the same period in 1994.
The decrease can be substantially attributed to considerable
efforts put fourth by the management of the Company to decrease
and control general and administrative expenses for 1995. For
example:
a) measures taken in the fourth quarter of 1994 included
downsizing of personnel, using contract services for
temporary assignments, eliminating unnecessary services or
supplies, and evaluating certain types of costs for
efficiency and need;
b) two officers resigned in 1994 and were not replaced;
c) as a result of the administrative office in Denver, Colorado
being closed in connection with the restructuring announced
in the second quarter of 1995, the Company has eliminated
annual payroll costs associated with its accounting and
administrative staff of approximately $140,000;
d) the closing of the administrative office in Denver Colorado
is anticipated to save the Company 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). 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:
For the Three Months
Ended June 30,
1995 1994
Oil and Gas Properties $ 176,454 $ 128,441
Gas Plant and Other Buildings 61,057 56,894
Rolling Stock 37,551 34,158
Other Field Equipment 12,104 12,675
Furniture and Fixtures 11,586 11,356
Non-Compete Agreements 24,000 24,000
Total $ 322,752 $ 267,524
The increase can be substantially attributed to the DD&A for oil
and gas properties. The DD&A increased to $3.58 per BOE in 1995
as compared to $2.15 per BOE in 1994. DD&A for oil and gas
properties at June 30, 1995 was computed using the previous year-end reserves.
Since the prices used to compute the reserves were
approximately the same at December 31, 1994 and June 30, 1995,
however, between December 31, 1993 and June 30, 1994 there was a
substantial change in oil and gas prices. Accordingly, DD&A for
oil and gas properties at June 30, 1994 was computed using
revised reserve estimates based on oil and gas prices at June 30,
1994.
Plugging and Abandonment of Oil and Gas Properties:
Dry hole and abandonment costs incurred by the Company in the
second quarter of 1995 were $5,291 compared to $7,682 for the
same period in 1994. The Company does not anticipate 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 costs that will be
incurred in the future related to abandonments.
Interest Expense:
Total interest expense for the quarter ended June 30, 1995 was
$83,745, compared to $74,366 for the same quarter in 1994. The
increase can be substantially attributed to higher interest rates
in 1995. The balance of this loan 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.
Restructuring Charges:
The Company has recognized $60,465 as restructuring charges in
the second quarter of 1995. These costs were incurred in
connection with the restructuring previously discussed and
consist primarily of severance pay and a loss on the abandonment
of the office lease in Denver, Colorado.
Gain on Sale of Assets:
The Company recognized a gain on sale of assets in the second
quarter of 1995 of $18,043 and $8,700 for the same period in
1994. The gain in 1995 is primarily related to the sale of
various oil and gas properties in June 1995 and the gain in 1994
is substantially attributed to the sale of three vehicles and
various oil field service equipment.
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1995:
Overview
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
levels of production and prices at which oil, natural gas, 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 potential
changes in production levels and the fluctuations in the prices
of oil, natural gas, and natural gas liquids.
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
quarter ended June 30, 1994. The decrease in total revenue is
primarily a result of lower volumes of natural gas delivered and
accounted for under the caption "Gas Plant Marketing and Trading"
as well as lower natural gas prices. Both of these circumstances
are discussed in more detail 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 first method is through the tailgate production of its Gas
Plant (this tailgate delivery is accounted for and more
thoroughly discussed later in this section under the caption "Gas
Plant Liquids and Gas") and the second method is accounted for
under this caption of "Gas Plant Marketing and Trading".
The Marketing and Trading revenues and costs are derived from the
gas purchased from third parties and sold to PSCo under the terms
of the contract. This gas is only sold under the Company's
contract with PSCo and is not actually processed by the Gas
Plant. In both 1995 and 1994, the price between the amount paid
the third party producers and the amount received from PSCo 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:
For the Six Months
Ended June 30,
1995 1994
Total Volume Sold (Mcf) 1,345,742 1,603,506
Average Price $ 1.52 $ 2.16
Total Revenue $ 2,045,520 $ 3,456,299
Costs -1,801,570 -3,162,909
Gross Margin $ 243,950 $ 293,390
The lower volumes and prices received in 1995 as compared to 1994
are primarily related to a lower demand in the natural gas
markets. As with any commodity prices are subject to the laws of
supply and demand of which the Company has no 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,
costs and corresponding gross margin will most likely disappear
in July 1996. Since the gross margin represents the net cash
flow and net 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 informed the
Company (informally) 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 expansion activity is discussed in more detail in the
following paragraphs under the caption "Gas Plant Liquids and
Gas".
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 under capacity 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 the KN)
that is 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 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 Volumes Price
<S> <C> <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
</TABLE>
<TABLE>
<CAPTION>
Amount Amount
<S> <C> <S><C>
Operating Margin:
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. The increase in
these natural gas liquids is the 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.
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
consist primarily of purchased gas from third parties, plant fuel
and shrink, lubricants, 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.
Revenue between the two periods remained relatively constant
despite an overall decrease in production and an increase in the
average oil price. Operating statistics for the two periods are
as follows:
For the Six Months
Ended June 30,
1995 1994
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
It should be noted that the Company has been able to maintain its
production and decrease its costs. 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, 35 properties
that lost approximately $134,000 in 1994 were shut-in and sold in
the first six months of 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
the costs of production (per BOE) will actually 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 three months ended June 30, 1994 and 1995 are
as follows:
<TABLE>
<CAPTION>
Service Operations Supply Operations
1995 1994 1995 1994
<S> <C> <S><C> <S><C> <S><C>
Revenue $ 590,981$ 614,333$ 332,583$ 359,500
Costs -564,965 -581,129 -273,545 -364,824
Gross Margin $ 26,016$ 33,204$ 56,038$ -5,324
Gross Margin Percent 4% 5% 17% (1%)
</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 are 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 man power is not needed in the Company's
operations. Therefore, management anticipates the revenues
generated in the future from the service operations will be
significantly lower. 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 or 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 to decrease
significantly in the future, it is not expected to have a
material effect on the Company's overall results of operations in
light of the historically low margins.
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.
General and Administrative Expenses:
General and administrative costs for the six months ended June
30, 1995 were $580,768 compared to $972,997 for the same period
in for 1994. The decrease can be substantially attributed to
considerable efforts put fourth by the management of the Company
to decrease and control general and administrative expenses for
1995. For example:
a) measures taken in the fourth quarter of 1994 included
downsizing of personnel, using contract services for
temporary assignments, eliminating unnecessary services or
supplies, and evaluating certain types of costs for
efficiency and need;
b) two officers resigned in 1994 and were not replaced;
c) as a result of the administrative office in Denver, Colorado
being closed in connection with the restructuring announced
in the second quarter of 1995, the Company has eliminated
annual payroll costs associated with its accounting and
administrative staff of approximately $140,000;
d) the closing of the administrative office in Denver
Colorado is anticipated to save the Company and
additional $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:
For the Six Months
Ended June 30,
1995 1994
Oil and Gas Properties $ 394,672 $ 396,462
Gas Plant and Other Buildings 121,920 104,687
Rolling Stock 81,331 68,537
Other Field Equipment 26,139 23,696
Furniture and Fixtures 23,144 20,433
Non-Compete Agreements 48,000 48,000
Total $ 695,206 $ 661,815
The increase can be substantially attributed to the increase in
the depreciable basis of the Gas Plant as a result of the
expansion activities discussed previously 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.
Plugging and Abandonment of Oil and Gas Properties:
Plugging and abandonment costs incurred by the Company in the
first half of 1995 were $5,291 compared to $87,038 for the same
period in 1994. The Company does not anticipate any additional
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 costs that will be
incurred in the future related to abandonments.
Interest Expense:
Total interest expense for the six months ended June 30, 1995 was
$161,385, compared to $139,982 for the same period in 1994. The
increase can be substantially attributed to higher interest rates
in 1995. The balance of this loan 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.
Restructuring Charges:
The Company has recognized $79,719 as restructuring changes for
the first six months of 1995. $19,254 of these costs were
incurred in connection with the preferred stock tender offer
previously discussed. 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 sale of assets in the first half
of 1995 of $51,454 compared to $8,700 for the same period in
1994. This gain is primarily related to the sale of various oil
and gas properties in March 1995. The gain in 1995 is
substantially attributed to the sale of 35 oil and gas properties
and various pieces of oil field service equipment put up for sale
as a result of the Company's restructuring.<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings or material developments
that have become reportable events during the period covered by
this report.
Item 2. Changes in Securities
(a) 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 June 30, 1995,
202,688 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.
(b) No rights evidenced by any class of registered securities
have been materially limited or qualified by the issuance
or modification of any other class of securities.
Item 3. Defaults Upon Senior Securities
(a) There has been no material default in the payment of
principal, interest, or any other material default, with
respect to any indebtedness of the small business issuer
during the period covered by this report.
(b) In December 1994, the Board of Directors elected to forego
the declaration of the regular quarterly dividend for the
Company's Series A Cumulative Convertible Preferred Stock
for the fourth quarter of 1994. In March 1995, the Board of
Directors elected to suspend the Preferred Stock dividend
indefinitely. However, the dividends continue to accrue on
a monthly basis and are cumulative. Accordingly, as of June
30, 1995, dividends in arrears aggregate $101,644 or $.50
per share.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on June 16, 1995, the
Company's common stockholders elected Homer C. Osborne and James
C. Ruane as Class B Directors. They will serve in this capacity
until the Annual Meeting of Stockholders to be held in 1998.
Item 5. Other Information
There is no information reportable under this item for the period
covered by this report.
Item 6. Exhibits and Reports on Form 8-K
(a) There are no exhibits filed as part of this report.
(b) During the quarter ended June 30, 1995, the Registrant filed
one Form 8-K reporting the results of the tender offer
previously discussed in Item 2 of this section.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PEASE OIL AND GAS COMPANY
Date: August 18, 1995
By: /s/ Willard H. Pease, Jr
Willard H. Pease, Jr.
President and Chief Executive Officer
Date: August 18, 1995
By: /s/ Patrick J. Duncan
Patrick J. Duncan
Chief Financial Officer
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1995
<CASH> 313,052
<SECURITIES> 0
<RECEIVABLES> 1,077,696
<ALLOWANCES> 67,957
<INVENTORY> 815,308
<CURRENT-ASSETS> 2,246,568
<PP&E> 15,251,623
<DEPRECIATION> 4,338,651
<TOTAL-ASSETS> 14,426,275
<CURRENT-LIABILITIES> 2,831,091
<BONDS> 0
<COMMON> 701,813
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<TOTAL-LIABILITY-AND-EQUITY> 14,426,275
<SALES> 5,013,321
<TOTAL-REVENUES> 5,061,047
<CGS> 3,999,167
<TOTAL-COSTS> 3,999,167
<OTHER-EXPENSES> 1,281,265
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 161,385
<INCOME-PRETAX> (409,035)
<INCOME-TAX> 141,100
<INCOME-CONTINUING> (267,935)
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<NET-INCOME> (267,935)
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