SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
{x} 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 SEPTEMBER 30, 1995
Commission File Number 0-6580
PEASE OIL AND GAS COMPANY
(Name of small business issuer as specified in its charter)
Nevada 87-0285520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 {x} No{ }
As of November 1, 1995 the issuer had 7,081,337 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 issued and
outstanding. As of November 1, 1995 the aggregate market value
of the common stock held by non-affiliates was $3,656,278. This
calculation is based upon the closing sale price of $0.562 per
share on November 1, 1995.
<TABLE>
TABLE OF CONTENTS
PAGE NUMBER
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PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets {3-4}
September 30, 1995 (unaudited)
and December 31, 1994
Consolidated Statements of Operations {5-6}
For the Three Months
Ended September 30, 1995
(unaudited) and 1994 (unaudited)
Consolidated Statements of Operations {7-8}
For the Nine Months Ended September 30, 1995
(unaudited) and 1994 (unaudited)
Consolidated Statements of Cash Flows {9}
For the Nine Months Ended September 30, 1995
(unaudited) and 1994 (unaudited)
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}
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
September 30, December 31,
1995 1994
---------- ----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 543,675 $ 532,916
Trade receivable 1,020,529 1,623,777
Inventory 611,241 754,113
Prepaid expenses and othe 89,812 91,845
---------- ----------
Total current assets 2,265,257 3,002,651
---------- ----------
OIL AND GAS PROPERTIES, at cost (successful efforts method):
Undeveloped propertie 476,213 511,475
Developed properties 9,036,206 9,298,873
---------- ----------
Total oil and gas properties 9,512,419 9,810,348
Less accumulated depreciation,
depletion and impairment (3,413,764) (3,201,901)
---------- ----------
Net oil and gas properties 6,098,655 6,608,447
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Gas plant 4,092,726 3,920,965
Service equipment and rolling-stock 852,151 1,651,063
Land, buildings and office equipmen 526,925 632,932
---------- ----------
Total property, plant and equip 5,471,802 6,204,960
Less accumulated depreciation (934,011) (878,874)
---------- ----------
Net property, plant and equipment 4,537,791 5,326,086
---------- ----------
ASSETS HELD FOR SALE 93,659 -
---------- ----------
OTHER ASSETS:
Non-compete agreements, net 372,501 444,501
Other 323,343 456,891
---------- ----------
Total other assets 695,844 901,392
---------- ----------
TOTAL ASSETS $ 13,691,206 $ 15,838,576
========== ==========
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
September 30, December 31,
1995 1994
----------- ----------
(unaudited)
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt:
Related parties $ 65,000 $ 65,000
Other 1,153,819 962,000
Accounts payable, trade:
Natural gas purchases 418,160 1,010,400
Other 658,808 691,748
Accrued production taxes 313,038 313,838
Other accrued expenses 215,063 389,082
---------- ----------
Total current liabilities 2,823,888 3,432,068
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities:
Related parties 241,717 241,717
Other 1,139,112 1,994,577
Accrued production taxes and othe 323,052 415,877
---------- ----------
Total long-term liabilities 1,703,881 2,652,171
---------- ----------
DEFERRED INCOME TAXES 77,000 400,000
---------- ----------
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 $2,229,568
at September 31, 1995)
Common Stock, par value $.10 per share, 2,027 11,578
25,000,000 shares authorized 7,081,337
and 2,286,028 shares issued,
respectively 708,134 228,603
Additional paid-in capital 16,508,132 16,744,348
Accumulated deficit (8,131,856) (7,497,604)
Less treasury stock, 0 and 28,715
shares, respectively, at cost - (132,588)
---------- ----------
Total stockholders' equity 9,086,437 9,354,337
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 13,691,206 $ 15,838,576
========== ==========
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For The Three Months
Ended September 30,
--------------------------
1995 1994
--------- ----------
<CAPTION>
<S> <C> <C>
REVENUE:
Gas plant:
Marketing and trading $ 464,954 $ 826,029
Processing 351,369 192,089
---------- ---------
Total gas plant 816,323 1,018,118
Oil and gas sales 514,043 906,537
Oil field services 85,099 241,278
Oil field supply and equipment 135,492 203,954
Well administration and other income 23,470 32,672
---------- ----------
Total revenue 1,574,427 2,402,559
OPERATING COSTS AND EXPENSES:
Gas plant:
Marketing and trading 394,918 742,032
Processing 334,569 110,986
---------- ----------
Total gas plant 729,487 853,018
Oil and gas production 341,767 605,536
Oil field services 100,705 248,782
Oil field supply and equipment 306,351 159,974
General and administrative 270,344 339,449
Depreciation, depletion and
amortization 276,674 245,619
Plugging and abandonment of oil and gas
properties - 8,158
---------- ----------
Total operating costs and expenses 2,025,328 2,460,536
---------- ----------
LOSS FROM OPERATIONS (450,901) (57,977)
OTHER INCOME (EXPENSES):
Interest expense (77,058) (93,808)
Restructuring charges (33,573) -
Gain on sale of assets 34,227 -
---------- ----------
Total other expenses, net (76,404) (93,808)
---------- ----------
LOSS BEFORE INCOME TAXES (527,305) (151,785)
INCOME TAXES
Federal income taxes (20,912) -
Deferred income tax benefit 181,900 148,000
---------- ----------
Total income taxes 160,988 148,000
---------- ----------
NET LOSS $ (366,317) $ (3,785)
========== ==========
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(continued)
For The Three Months
Ended September 30,
---------------------------
1995 1994
---------- ----------
<CAPTION>
<S> <C> <C>
NET LOSS $ (366,317) $ (3,785)
PREFERRED STOCK DIVIDENDS:
Declared - (289,445)
In arrears (50,672) -
---------- ----------
Total preferred stock dividends (50,672) (289,445)
---------- ----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (416,989) $ (293,230)
========== ==========
NET LOSS PER COMMON SHARE $ (0.06) $ (0.30)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 7,018,100 976,700
========== ==========
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For The Nine Months
Ended September 30,
--------------------------
1995 1994
---------- ---------
<CAPTION>
<S> <C> <C>
REVENUE:
Gas plant:
Marketing and trading $ 2,510,474 $ 4,282,328
Processing 918,571 597,258
---------- ----------
Total gas plant 3,429,045 4,879,586
Oil and gas sales 1,991,078 2,393,098
Oil field services 676,080 855,611
Oil field supply and equipment 468,075 563,454
Well administration and other income 71,196 80,705
---------- ----------
Total revenue 6,635,474 8,772,454
---------- ----------
OPERATING COSTS AND EXPENSES:
Gas plant:
Marketing and trading 2,196,488 3,904,941
Processing 793,064 423,485
---------- ----------
Total gas plant 2,989,552 4,328,426
Oil and gas production 1,242,359 1,640,402
Oil field services 665,670 829,911
Oil field supply and equipment 579,896 524,798
General and administrative 851,112 1,155,379
Depreciation, depletion and
amortization 971,880 919,734
Plugging and abandonment of oil and gas
properties 5,291 95,196
---------- ----------
Total operating costs and expenses 7,305,760 9,493,846
---------- ----------
LOSS FROM OPERATIONS (670,286) (721,392)
OTHER INCOME (EXPENSES):
Interest expense (238,443) (227,647)
Restructuring charges (113,292) -
Gain on sale of assets 85,681 8,700
---------- ----------
Total other expenses, net (266,054) (218,947)
---------- ----------
LOSS BEFORE INCOME TAXES (936,340) (940,339)
INCOME TAXES
Federal income taxes (20,912) -
Deferred income tax benefit 323,000 260,500
---------- ----------
Total income taxes 302,088 260,500
---------- ----------
NET LOSS $ (634,252) $ (679,839)
========== ==========
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(continued)
For The Nine Months
Ended September 30,
------------------------------
1995 1994
---------- ----------
<CAPTION>
<S> <C> <C>
NET LOSS $ (634,252) $ (679,839)
PREFERRED STOCK DIVIDENDS:
Declared - (868,390)
In arrears (152,016) -
---------- ----------
Total preferred stock dividends (152,016) (868,390)
---------- ----------
Loss before non-cash inducement (786,268) (1,548,229)
Non-cash inducement in tender offer
(Notes 3 and 4) (1,640,906) -
---------- ----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (2,427,174) $ (1,548,229)
========== ==========
NET LOSS PER COMMON SHARE
Before non-cash inducement $ (0.14) $ (1.60)
Non-cash inducement (Notes 3 and 4) (0.28) -
---------- ----------
$ (0.42) $ (1.60)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 5,819,700 969,200
========== ==========
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For The Nine Months
Ended September 30,
------------------------------
1995 1994
---------- ----------
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (634,252) $ (679,839)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Provision for depreciation
and depletion 899,880 829,289
Amortization of intangible assets 86,429 90,445
Provision for bad debts 15,078 55,353
Deferred income taxes (323,000) (260,500)
Gain on sale of property and equipment
before selling expenses (183,930) (8,700)
Issuance of stock for services 86,242 -
Other - 54,626
Changes in operating assets
and liabilities:
(Increase) decrease in:
Trade receivables 847,243 328,872
Inventory 217,872 31,201
Prepaid expenses and other assets 11,652 (41,406)
Increase (decrease) in:
Accounts payable (625,180) (356,633)
Accrued expenses (267,646) 351,683
---------- ----------
Net cash provided by
operating activities 130,388 394,391
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property
and equipment (313,374) (1,979,612)
Proceeds from sale of property
and equipment 627,693 56,600
Investments in Certificate of Deposit - (160,000)
Proceeds from redemption of certificate
of deposit 34,500 -
---------- ----------
Net cash provided by (used in)
investing activities 348,819 (2,083,012)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 1,400,000
Repayment of long-term debt (688,636) (726,035)
Net proceeds from issuance of
Common Stock 220,188 1,307,407
Preferred stock dividends paid - (868,390)
---------- ----------
Net cash (used in) provided by
financing activities (468,448) 1,112,982
---------- ----------
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS 10,759 (575,639)
CASH AND EQUIVALENTS, beginning of period 532,916 1,423,609
---------- ----------
CASH AND EQUIVALENTS, end of period $ 543,675 $ 847,970
========== ==========
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 211,936 $ 120,478
========== ==========
Cash paid for income taxes $ 20,912 $ -
========== ==========
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 $ 156,667
========== ==========
Issuance of stock for services $ 86,242 $ -
========== ==========
Cancellation of accounts receivable in
exchange for 2,474 shares of common
stock with a related party $ - $ 9,988
========== ==========
Offset of accounts receivable against
related parties notes and accrued
interest payable $ - $ 25,761
========== ==========
Offset of accrued expenses against stock
subscription receivable $ - $ 16,853
========== ==========
Conversion of related party notes payable
to 93,750 shares of common stock $ - $ 150,000
========== ==========
Cancellation of stock subscription
receivable for return of underlying
14,000 common shares with an officer of
the Company $ - $ 70,000
========== ==========
Purchase of the 5% outside interest in the
gas plant for future deliveries of natural
gas $ - $ 160,000
========== ==========
</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 September 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, as
amended, 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>
Unaffiliated Parties:
<CAPTION>
September 30, December 31,
1995 1994
----------- -----------
(unaudited)
<S> <C> <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 $ 2,008,517 $ 2,588,958
limits the total borrowing to a
borrowing base, as defined in
the agreement.
Convertible 12% debentures due May 1996.
The debentures are unsecured and are
convertible into the Company's shares 70,000 92,500
of common stock at $0.83 per share.
Other installment notes. Interest at
6.9% to 10.5%, monthly principal and
interest payments of approximately 103,932 118,066
$5,434 through June 1999. All the
notes are collateralized by rolling-stock.
Contract payable, $4,444 credited monthly
against gas purchases through July 1997, 80,000 120,000
collateralized by certificate of deposit.
Note payable to a bank. Interest at 10%,
monthly payments of $1,204 including
interest, due February 1998. This note
was paid in full in October 1995 when
the service equipment collateralizing
the note was sold. 30,482 37,053
---------- ----------
Total unaffiliated parties $ 2,292,931 $ 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 uncollateralized and
convertible into common stock at
$5.00 per share. $ 130,000 $ 130,000
Uncollateralized 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 2,599,648 3,263,294
Less current maturities (1,218,819) (1,027,000)
---------- ----------
Total long-term debt,
less current maturities $ 1,380,829 $ 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 as of December
31, 1994 are as follows:
Period Amount
----------------------------------- ----------
January 1995 through May 1995 $ 88,090
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.
As of September 30, 1995, the Company was not in compliance with
one of the amended financial covenants related to cash flow.
However, the entire balance has not been classified as a current
liability because the bank has not, and is not expected to, take
any formal action to declare a default under the loan agreement.
In addition, management believes the noncompliance with the cash
flow covenant will be cured in the normal course of business.
After giving effect to the restructuring of the debt agreement
described above, the aggregate maturities of long-term debt as
of December 31, 1994 are as follows:
<TABLE>
Year Ending Related
December Parties Others Total
- ---------- --------- --------- ---------
<CAPTION>
<C> <C> <C> <C>
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 0 15,419 15,419
1999 0 5,679 5,679
-------- --------- ---------
$ 306,717 $ 2,956,577 $ 3,263,294
</TABLE> ======== ========= =========
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 September 30,
1995, 202,688 shares of Preferred Stock remain outstanding,
resulting in preferred dividends in arrears of $1.00 per share
for an aggregate amount of $202,688 (of which $152,016, or $.75
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.
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
antidilutive.
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 $.28 for the Nine Months Ended September 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 $.28 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 put up for sale.
As of September 30, 1995 most of these assets had been sold at
approximately their net book value. As of September 30, 1995,
the Company has classified the remaining unsold amount of
$93,659 as "Assets Held For Sale" in its balance sheet and
consists primarily of land and buildings.
As of September 30, 1995, the Company has recognized $113,292 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 severance pay, relocation costs, and a loss on the
abondonment of the administrative 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.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity
At September 30, 1995, the Company's cash balance was $543,675
with a working capital deficit of $558,631, compared to a cash
balance of $532,916 and a working capital deficit of $429,417 at
December 31, 1994. The change in the Company's cash balances is
summarized as follows:
Cash balance at December 31, 1994 $ 532,916
Cash provided by operating activities 130,388
Capital expenditures (313,374)
Proceeds from the sale of property
and equipment 627,693
Payments on Long-term debt (688,636)
Net proceeds from issuance of common stock 220,188
Redemption of certificate of deposit 34,500
---------
Cash balance at September 30, 1995 $ 543,675
=========
In addition to the components effecting the change in the
Company's cash balances, the increase in the working capital
deficit can be substantially attributed to the increase in the
current maturities of long-term debt from $1,027,000 at December
31, 1994 to $1,218,819 at September 30, 1995.
In an attempt to increase the cash flow from its existing assets
and rebuild the working capital deficit, the Company initiated a
plan to restructure its operations in May 1995. The
restructuring included closing its administrative office in
Denver, Colorado and a substantial downsizing of its oil field
service and supply operations. The restructuring was initiated
to generate working capital, increase efficiences, eliminate
duplicate tasks and reduce costs. As is more fully discussed
and illustrated in the Results of Operations section, the
Company's Oil Field Service and Oil Field Supply operating
margins have been historically low. The burden of these low
margins have been 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. Downsizing these operations is not expected to have a
material negative effect on the Company's overall results of
operations. However, as a result of the downsizing, the Company
was able to generate approximately $420,000 from the sale of
service equipment and supply store inventory. On an aggregate
basis, these assets were sold at approximately their net book
value.
The closing of the Denver administrative office has eliminated
annual payroll costs associated with its accounting and
administrative staff of approximately $140,000. The Company
also expects to save an additional $60,000 annually from costs
that were duplicated as a result of the Company maintaining two
administrative offices (such as rent, telephone, insurance, and
office supplies).
On October 31, 1995, the Company received a formal notice that
the contract with Public Service Company of Colorado ("PSCo")
will be terminated December 1, 1995. The contract was
terminated pursuant to an "uneconomic clause" included in the
contract. Immediately after giving the termination notice,
representatives of PSCo asserted they had every intention to
renew the contract with its present volumes but the price paid
would be at what they termed a "closer to market price."
Historically, the price paid to the Company by PSCo has been at
premium above the market and has allowed the Company to conduct
the Marketing and Trading activities discussed later in the
Results of Operation section under the caption Gas Plant
Marketing and Trading. However, the loss of this market premium
will most likely dissolve any opportunity for the Marketing and
Trading Activities which have generated annual net revenues
between $500,000 and $600,000. Accordingly, the loss of this
market premium will have a very material and negative impact on
the Company's future operations. Management has subsequently
entered into negotiations with PSCo whereby PSCo has indicated
that they would be willing to continue, or renew, the Company's
contract at its present volume and price through at least
February 1996. However, at this time it cannot be determined at
what term, price, or volume, the contract will ultimately be
renegotiated at, or renewed for, or what impact this will
ultimately have on the Company's future operations.
Currently the Company has no immediate access to additional
working capital. Based on the uncertainty of the PSCo contract
discussed above, it is uncertain whether or not the current cash
flows of the Company will support future operations without
additional development of its oil and gas properties. The
Company has not yet determined what actions it will take if the
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 stock
offerings, joint ventures or debt financing.
Historical financial information and the potential effect on
future operations resulting from the Company's restructuring and
PSCo gas contract 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 September 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 nine months of 1995, the Company paid $668,636 in
principal plus $211,936 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 plus 1% to prime plus 3% beginning in
April 1995. As of September 30, 1995 the balance on this note
was $2,008,517 and is payable in monthly installments of
principal plus interest through August 1997.
As of September 30, 1995, the Company was not in compliance with
one of the amended financial covenants related to cash flow.
However, the entire balance has not been classified as a current
liability because the bank has not, and is not expected to take
any formal action to declare a default under the loan agreement.
In addition, management believes the noncompliance with the cash
flow covenant will be cured in the normal course of business.
Capital Expenditures
For the first nine months of 1995, the Company invested $313,374
in property and equipment and is summarized as follows:
Gas Plant $ 171,759
Oil and Gas Properties 98,719
Service Equipment
and Rolling Stock 36,925
Office Equipment 5,971
--------
$ 313,374
========
The costs in the Gas Plant category 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 in the Results of
Operations section under the caption Gas Plant Liquids and Gas.
The costs incurred in the Oil and Gas Properties category were
substantially attributed to workovers and equipment acquisitions
related to maintaining or enhancing the current production in
the oil and gas operations.
Currently, the Company's drilling, development and recompletion
activities have been curtailed significantly until funds are
available through cash flow from operations or other financing
vehicles.
RESULTS OF OPERATIONS:
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 for the periods presented are
as follows:
1995 1994
---------- ----------
For the three months
ended September 30, $ 1,574,427 $ 2,402,559
For the nine months
ended September 30, $ 6,635,474 $ 8,772,454
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, lower natural gas
prices and a decrease in revenue resulting from the downsizing
of the Company's service and supply operations. These
circumstances are discussed in more detail in the following
paragraphs under their respective captions.
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 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 Company's 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 has been a relatively constant price per MMBtu.
However, the volumes sold and the price paid by PSCo do vary on
a monthly basis. Operating statistics for the periods presented
are as follows:
<TABLE>
For the Three Months
Ended September 30,
----------------------------------
1995 1994
------------- --------------
<CAPTION>
<S> <C> <C>
Total Volume Sold (Mcf) 354,937 469,251
Average Price $ 1.3099 $ 1.7603
--------- ---------
Total Revenue $ 464,954 $ 826,029
Costs (394,918) (742,032)
--------- ---------
Gross Margin $ 70,036 $ 83,997
========= =========
For the Nine Months
Ended September 30,
----------------------------------
1995 1994
------------- --------------
<CAPTION>
<S> <C> <C>
Total Volume Sold (Mcf) 1,728,621 2,072,757
Average Price $ 1.4522 $ 2.0660
---------- ----------
Total Revenue $2,510,474 $ 4,282,328
Costs (2,196,488) (3,904,941)
---------- ----------
Gross Margin $ 313,986 $ 377,387
========== ==========
</TABLE>
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. The Company expects gas prices in the
Rocky Mountain region to continue to be depressed due to
significant tariff changes effecting the cost of transporting
natural gas, constrictions on moving and selling gas in eastern
markets and other factors beyond the Company's control.
The orginal contract with PSCo, as amended, was to expire on
June 30, 1996. However, on October 31, 1995, the Company
received a formal notice that the contract with PSCo will be
terminated December 1, 1995. The contract was terminated
pursuant to an "uneconomic clause" included in the contract.
Immediately after giving the cancellation notice,
representatives of PSCo asserted they have every intention to
renew the contract with its present volumes but the price paid
would be at what they termed a "closer to market price."
Historically, the price paid to the Company by PSCo has been at
premium above the market and has allowed the Company to conduct
the Marketing and Trading activities described above. However,
the loss of this market premium will most likely dissolve any
opportunity for the Marketing and Trading Activities.
Accordingly, since the gross margin represents the net cash flow
and income generated from this activity, the loss of this
premium contract price will have a very material and negative
impact on the Company's future operations. Management has
subsequently entered into negotiations with PSCo whereby PSCo
has indicated that they would be willing to continue, or renew,
the Company's contract at its present volume and price through
at least February 1996. However, at this time it cannot be
determined at what term, price or volume the contract will
ultimately be renegotiated at, or renewed for, or what impact
this will ultimately have on the Company's future operations.
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. 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 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.
Operating statistics for the periods presented are as follows:
<TABLE>
For the Three Months
Ended September 30,
------------------------------------
1995 1994
---------- ---------
<CAPTION>
<S> <C> <C> <C>
Natural Gas Processed (Mcf) 217,200 126,000
Natural Gas Liquids Extracted-
B-G Mix (gallons) 419,900 349,400
Propane (gallons) 300,400 293,900
For the Three Months
Ended September 30,
------------------------------------
1995 1994
---------- ----------
<CAPTION>
<S> <C> <C>
Gross Margin:
Revenue $ 351,369 $ 192,089
Costs (334,569) (110,986)
---------- ----------
Gross Margin $ 16,800 $ 81,103
========== ==========
Gross Margin Percent 5% 42%
========== ==========
For the Nine Months
Ended September 30,
------------------------------------
1995 1994
---------- ----------
<CAPTION>
<S> <C> <C> <C>
Natural Gas Processed (Mcf) 521,700 343,300
Natural Gas Liquids Extracted-
B-G Mix (gallons) 1,093,500 942,800
Propane (gallons) 852,300 694,000
For the Nine Months
Ended September 30,
------------------------------------
1995 1994
---------- ----------
<CAPTION>
<S> <C> <C>
Gross Margin:
Revenue $ 918,571 $ 597,258
Costs (793,064) (423,485)
---------- ----------
Gross Margin $ 125,507 $ 173,773
========== ==========
Gross Margin Percent 14% 29%
========== ==========
</TABLE>
The increase in processing revenue can be substantially
attributed to 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.
During the third quarter of 1995 the Company experienced some
operational problems caused by processing higher volumes of gas.
On several occasions, these operational problems forced the Gas
Plant to either shut down or take the incoming gas to flare.
Unfortunately, these circumstances caused the Company to lose
money on the gas purchased from third parities in the third
quarter of 1995. In order to identify and correct the
operational problems, the Company elected not to purchase and
process any significant amount of gas beginning October 1, 1995.
Management believes the operational problems encountered in the
third quarter of 1995 have been corrected but as of the date of
this report is not processing any third party gas. In light of
the uncertainty of the PSCo gas contract discussed previously
under the caption Gas Plant Marketing and Trading, it is
uncertain at this time if the Company will be able to compete
with other gas plants and purchasures of natural gas from the
Wattenburg Field. Accordingly, it cannot be determined at this
time when, or if, the Company will process any additional third
party gas.
Oil and Gas
Operating statistics for oil and gas production for the periods
presented are as follows:
<TABLE>
For the Three Months
Ended September 30,
------------------------------------
1995 1994
------------ -------------
<CAPTION>
<S> <C> <C>
Production:
Oil (bbLs) 24,900 43,000
Gas (Mcf) 111,100 148,600
BOE 43,400 67,800
Average Collected Price:
Oil (per bbl) $ 15.96 $ 16.97
Gas (per Mcf) $ 1.05 $ 1.19
Per BOE $ 11.84 $ 13.37
Gross Margin:
Revenue
Oil $ 397,239 $ 729,947
Gas 116,804 176,590
---------- ----------
Total 514,043 906,537
Costs (341,767) (605,536)
---------- ----------
Gross Margin $ 172,276 $ 301,001
========== ==========
Gross Margin Percent 43% 41%
========== ==========
Average Production Cost per
BOE before DD&A $ 7.87 $ 8.93
========== ==========
Change in oil and gas revenue
attributed to:
Production $ 372,964
Price 19,530
----------
Total $ 392,494
==========
For the Nine Months
Ended September 30,
---------------------------------
1995 1994
----------- -----------
<CAPTION>
<S> <C> <C>
Production:
Oil (bbls) 92,000 111,000
Gas (Mcf) 355,900 424,200
BOE 151,300 181,800
Average Collected Price:
Oil (per bbl) $ 16.20 $ 16.56
Gas (per Mcf) $ 1.23 $ 1.31
Per BOE $ 13.15 $ 13.16
Gross Margin:
Revenue
Oil $ 1,553,479 $ 1,838,813
Gas 437,599 554,285
----------- ------------
Total 1,991,078 2,393,098
Costs (1,242,359) (1,640,402)
----------- ------------
Gross Margin $ 748,719 $ 752,696
=========== ============
Gross Margin Percent 38% 31%
=========== ============
Average Production Cost per
BOE before DD&A $ 8.21 $ 9.03
=========== ============
Change in oil and gas revenue
attributed to:
Production $ 390,020
Price 12,000
----------
Total $ 402,020
==========
</TABLE>
The decrease in revenue can be substantially attributed to the
sale of 35 oil and gas properties in 1995, and the natural
decline in production. In addition, during the third quarter of
1995 the Company was unable to produce approximately 8,500 bbls
of oil and 24,000 Mcf of gas that would be considered normal and
expected production when several higher producing properties
where shut-in for workovers. The workovers were not completed
on a timely basis because of a shortage of funds and some
operational difficulties encountered during the restructuring of
the Company's operations. However, despite the lower than
anticipated production in the third quarter of 1995, it should
be noted that the Company has been able to decrease the costs of
production (per BOE) and increase its margins (as a percentage
of revenue) on an overall basis in 1995. This is a result of
management's ongoing efforts to balance the goal of maximizing
production while at the same time controling its costs.
In December 1994, the Company performed a detailed evaluation of
all its oil and gas properties. 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 before 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 periods presented are as follows:
<TABLE>
For the Three Months Ended September 30,
---------------------------------------------------------------
Service Operations Supply Operations
----------------------------- ----------------------------
1995 1994 1995 1994
----------- ------------ ----------- -----------
<CAPTION>
<S> <C> <C> <C> <C>
Revenue $ 85,099 $ 241,278 $ 135,492 $ 203,954
Costs (100,705) (248,782) (306,351) (159,974)
----------- ------------ ----------- -----------
Gross Margin $ (15,606) $ (7,504) $ (170,859) $ 43,980
=========== ============ =========== ===========
Gross Margin % (18%) 3% (126%) 22%
=========== ============ =========== ===========
For the Nine Months Ended September 30,
----------------------------------------------------------------
Service Operations Supply Operations
----------------------------- -----------------------------
1995 1994 1995 1994
----------- --------- ----------- -----------
<CAPTION>
<S> <C> <C> <C> <C>
Revenue $ 676,080 $ 855,611 $ 468,075 $ 563,454
Costs (665,670) (829,911) (579,896) (524,798)
----------- ------------ ----------- -----------
Gross Margin $ 10,410 $ 25,700 $ (111,821) $ 38,656
=========== ============ =========== ===========
Gross Margin % 2% 3% (24%) 7%
=========== ============ =========== ===========
</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 services provided included: servicing rigs,
vacuum trucks, roustabout services and hot oiling services. The
operations serviced both the Company's needs and those of third
parties. The restructuring is focused on reducing the service
rig, vacuum truck and roustabout 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. Any services of this type to third parties will be
limited to those circumstances when the equipment and man power
is not needed in the Company's operations. The Company did
retain its hot oiler fleet and intends to continue providing
this service to third parties on a full time basis. Although
management anticipates the future revenues generated from the
service operations will be significantly lower, 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.
The loss incurred by the supply operations in the third quarter
of 1995 is substantially attributed to a non-cash write-off of
approximately $175,000. This write-off was incurred in
connection with the restructuring when the Company was
liquidating a substantial portion of the inventory held in
Sterling, Colorado. No such write-offs are anticipated in the
future. However, because the value of oil field equipment and
supplies tend to act like commodities - either increasing or
decreasing in value based on supply and demand - there can be no
assurance that a future write-off, or writedown, will not be
incurred.
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 periods presented are
as follows:
1994 1995
----------- -----------
For the three months
ended September 30, $ 270,344 $ 339,449
For the nine months
ended September 30, $ 851,112 $ 1,155,379
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) in connection with the restructuring announced in the second
quarter of 1995, the Company closed its administrative office in
Denver, Colorado and 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
periods presented consisted of the following:
<TABLE>
For the Three Months
Ended September 30,
-----------------------------
1995 1994
------------ ------------
<CAPTION>
<S> <C> <C> <C> <C>
Oil and Gas Properties $ 150,132 $ 117,836
Gas Plant and Other Buildings 62,033 51,196
Rolling Stock 10,485 30,541
Other Field Equipment 18,109 11,628
Furniture and Fixtures 12,215 10,418
Non-Compete Agreements 24,000 24,000
----------- ------------
Total $ 276,974 $ 245,619
=========== ============
For the Nine Months
Ended September 30,
-----------------------------
1995 1994
------------ ------------
<CAPTION>
<S> <C> <C> <C> <C>
Oil and Gas Properties $ 544,804 $ 550,642
Gas Plant and Other Buildings 183,953 126,724
Rolling Stock 58,410 68,550
Other Field Equipment 78,465 81,745
Furniture and Fixtures 34,248 20,073
Non-Compete Agreements 72,000 72,000
------------ ------------
Total $ 971,880 $ 919,734
============ ============
</TABLE>
There has been no significant change, on an aggregate basis, in
the average monthly charge to DD&A. Any changes in the
respective categories between periods is attributed to the
change in the carring value of the respective assets.
Plugging and Abandonment of Oil and Gas Properties:
Plugging and abandonment costs incurred by the Company for the
periods presented are as follows:
1995 1994
---------- ----------
For the three months
ended September 30, $ - $ 8,158
For the nine months
ended September 30, $ 5,291 $ 95,196
All the charges incurred in 1994 and 1995 have been related to
plugging costs of abandoned oil and gas properties. 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 plugging
and abandonment.
Interest Expense:
Total interest expense for the periods presented are as follows:
1995 1994
---------- ----------
For the three months
ended September 30, $ 77,058 $ 93,808
For the nine months
ended September 30, $ 238,443 $ 227,647
Although the Company's total debt has decreased in 1995, the
interest rate paid on its largest outstanding note has increased
substanstially.
Restructuring Charges:
The Company has recognized restructuring charges for the periods
presented are as follows:
1995 1994
---------- ----------
For the three months
ended September 30, $ 33,373 $ -
For the nine months
ended September 30, $ 113,292 $ -
These costs were incurred in connection with the preferred stock
tender offer and the restructuring of the Company's operations
as previously discussed. The costs incurred with the
restructuring consist primarily of severance pay, relocation
costs and a loss on the abandonment of the administrative office
lease in Denver, Colorado.
Gain on Sale of Assets:
The Company recognized a gain on sale of assets for the periods
presented are as follows:
1995 1994
---------- ----------
For the three months
ended September 30, $ 34,227 $ -
For the nine months
ended September 30, $ 85,681 $ 8,700
The gain in 1995 is primarily related to the sale of various oil
and gas properties in June 1995 and the sale of oil field
service equipment in September 1995. The gain in 1994 is
substantially attributed to the sale of three vehicles and
various oil field service equipment.
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 September 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 September
30, 1995, dividends in arrears aggregate $152,016 or $.75 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 second quarter of 1995, the Registrant filed one
Form 8-K reporting the results of the tender offer previously
discussed in Item 2(a) 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: November 13, 1995 By: /s/ Willard H. Pease, Jr.
Willard H. Pease, Jr.
President and Chief Executive Officer
Date: November 13, 1995 By: /s/ Patrick J. Duncan
Patrick J. Duncan
Chief Financial Officer and
Principal Accounting Officer
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<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1995
<CASH> 543,675
<SECURITIES> 0
<RECEIVABLES> 1,096,004
<ALLOWANCES> 75,475
<INVENTORY> 611,241
<CURRENT-ASSETS> 2,265,257
<PP&E> 14,984,221
<DEPRECIATION> 4,347,775
<TOTAL-ASSETS> 13,691,206
<CURRENT-LIABILITIES> 2,823,888
<BONDS> 0
<COMMON> 708,134
0
2,027
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<TOTAL-LIABILITY-AND-EQUITY> 13,691,206
<SALES> 6,564,278
<TOTAL-REVENUES> 6,635,474
<CGS> 5,477,477
<TOTAL-COSTS> 5,477,477
<OTHER-EXPENSES> 1,828,283
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 238,443
<INCOME-PRETAX> (936,340)
<INCOME-TAX> 302,088
<INCOME-CONTINUING> (634,252)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (634,252)
<EPS-PRIMARY> (0.42)
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