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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 MARCH 31, 1996
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) and 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 May 8, 1996 the issuer had 7,218,854 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 May 8, 1996 the
aggregate market value of the common stock held by non-affiliates was
$8,602,478. This calculation is based upon the closing sale price of $1.31 per
share on May 8, 1996.
===============================================================================<PAGE>
TABLE OF CONTENTS
PAGE
NUMBER
PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3-4
March 31, 1996 (unaudited)
and December 31, 1995
Consolidated Statements of Operations (unaudited) 5-6
For the Three Months Ended
March 31, 1996 and 1995
Consolidated Statements of Cash Flows 7-8
(unaudited) For the Three Months Ended
March 31, 1996 and 1995
Notes to Consolidated Financial Statements 9-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-30
Part II - Other Information 30-31
Part III - Signatures 32
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31, December 31,
1996 1995
------------ -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 628,439 $ 677,275
Trade receivables 1,037,431 963,315
Income tax refund receivable 41,509 -
Inventory 504,108 532,289
Prepaid expenses and other 94,849 77,844
Common stock subscription
Receivable, 91,667 shares - 68,750
----------- -----------
Total current assets 2,306,336 2,319,473
----------- -----------
OIL AND GAS PROPERTIES, at cost
(successful efforts method):
Undeveloped properties 377,606 377,606
Developed properties 9,263,349 9,149,516
----------- -----------
Total oil and gas properties 9,640,955 9,527,122
Less accumulated depreciation,
depletion and impairment (3,764,514) (3,608,917)
----------- -----------
Net oil and gas properties 5,876,441 5,918,205
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Gas plant 4,099,284 4,095,227
Service equipment and rolling-stock 869,820 855,025
Land, buildings and office equipment 529,703 529,703
----------- -----------
Total property, plant and equipment 5,498,807 5,479,955
Less accumulated depreciation (1,139,479) (1,034,731)
----------- -----------
Net property, plant and equipment 4,359,328 4,445,224
----------- -----------
ASSETS HELD FOR SALE 92,432 92,432
----------- -----------
OTHER ASSETS:
Non-compete agreements, net 341,175 352,674
Other 295,592 311,718
Deferred debt issuance costs (Note 2) 200,000 -
----------- -----------
Total other assets 836,767 664,392
----------- -----------
TOTAL ASSETS $ 13,471,304 $ 13,439,726
=========== ===========
</TABLE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
March 31, December 31,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 959,764 $ 1,100,474
Accounts payable, trade:
Natural gas purchases 780,020 899,878
Other 301,304 272,689
Accrued production taxes 303,287 303,287
Other accrued expenses 184,651 243,325
----------- -----------
Total current liabilities 2,529,026 2,819,653
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt, less current
maturities:
Related parties 343,911 338,741
Other 757,315 884,418
Accrued production taxes and other 435,062 379,652
----------- -----------
Total long-term liabilities 1,536,288 1,602,811
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $ .01 per
share, 2,000,000 shares authorized,
202,688 shares of Series A Cumulative
Convertible Preferred Stock issued and
outstanding (liquidation preference of
$2,330,912 at March 31, 1996)
Common Stock, par value $.10 per share, 2,027 2,027
25,000,000 shares authorized, 7,218,854
and 7,180,804 shares issued and outstanding,
respectively 721,886 718,081
Additional paid-in capital 16,794,439 16,560,194
Accumulated deficit (8,112,362) (8,263,040)
----------- -----------
Total stockholders' equity 9,405,990 9,017,262
=========== ===========
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 13,471,304 $ 13,439,726
=========== ===========
</TABLE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
For The Three Months
Ended March 31,
------------ ---------------
1996 1995
------------ -----------
<S> <C> <C>
REVENUE:
Gas plant:
Marketing and trading $ 1,345,955 $ 1,310,800
Processing 187,843 244,878
----------- ----------
Total gas plant 1,533,798 1,555,678
Oil and gas sales 613,099 764,527
Oil field services 133,917 378,979
Oil field supply and equipment 67,685 162,062
Well administration and other income 32,157 30,500
----------- ----------
Total revenue 2,380,656 2,891,746
OPERATING COSTS AND EXPENSES:
Gas plant:
Marketing and trading 1,130,663 1,157,800
Processing 125,241 183,209
----------- ----------
Total gas plant 1,255,904 1,341,009
Oil and gas production 293,916 476,927
Oil field services 80,792 339,629
Oil field supply and equipment 66,483 139,216
General and administrative 240,586 289,159
Depreciation, depletion and
amortization 274,148 372,455
----------- ----------
Total operating costs and expenses 2,211,829 2,958,395
INCOME (LOSS) FROM OPERATIONS 168,827 (66,649)
OTHER INCOME (EXPENSES):
Interest expense (58,119) (77,640)
Restructuring charges - (19,254)
Gain (Loss) on sale of assets (1,539) 33,411
----------- -----------
Total other expenses, net (59,658) (63,483)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 109,169 (130,132)
INCOME TAXES:
Federal income tax refund 41,509 -
Deferred income tax benefit - 44,500
----------- -----------
NET INCOME (LOSS) $ 150,678 $ (85,632)
=========== ===========<PAGE>
</TABLE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(continued)
<TABLE>
For The Three Months
Ended March 31,
----------------------------
1996 1995
------------- ------------
<S> <C> <C>
NET INCOME (LOSS) $ 150,678 $ (85,632)
Preferred stock dividends:
In arrears (50,672) (50,820)
Converted in tender offer - (117,000)
Non-cash inducement charge incurred in
connection with the tender offer to
convert preferred stock to common stock (1,523,906)
----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS $ 100,006 $ (1,777,358)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS
Before non-cash inducement charge $ .01 (.07)
Non-cash inducement charge - (.41)
----------- -----------
$ .01 $ (0.48)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING 7,316,500 3,750,500
=========== ===========
</TABLE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
For The Three Months
Ended March 31,
-----------------------------
1996 1995
<S> <C> <C>
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 150,678 $ (85,632)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Provision for depreciation
and depletion 262,649 348,453
Amortization of intangible assets 14,624 30,143
Deferred income taxes - (44,500)
Loss (Gain) on sale of property and equipment 1,539 (33,411)
Other (13,334) (13,333)
Changes in operating assets
and liabilities:
(Increase) decrease in:
Trade receivables (115,625) 358,921
Inventory 28,181 (36,502)
Prepaid expenses and other assets (17,005) 2,272
Increase (decrease) in:
Accounts payable (53,193) (518,938)
Accrued expenses 1,906 (46,640)
----------- -----------
Net cash provided by (used in)
operating activities 260,420 (39,167)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property
and equipment (144,575) (116,910)
Proceeds from redemption of
certificate of deposit 13,001 9,000
Proceeds from sale of property
and equipment 8,047 21,466
----------- -----------
Net cash provided by (used in)
investing activities (123,527) (86,444)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (254,479) (229,665)
Proceeds from common stock subscription receivable 68,750 -
----------- ----------
Net cash provided by (used in)
financing activities (185,729) (229,665)
----------- ----------
</TABLE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
<TABLE>
For The Three Months
Ended March 31,
-----------------------------
1996 1995
------------- -------------
<S> <C> <S> <C> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS $ (48,836) $ (355,276)
CASH AND EQUIVALENTS, beginning
of period 677,275 532,916
----------- -----------
CASH AND EQUIVALENTS, end of period $ 628,439 $ 177,640
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 50,700 $ 65,674
=========== ===========
Cash paid for income taxes $ - $ -
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Long-term debt incurred
for purchase of vehicles $ - $ 24,992
=========== ===========
Fair value of warrants granted
for debt issuance costs $ 200,000 $ -
=========== ===========
</TABLE>
Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. They do not include all information and notes required
by generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there has been no material change in the
information disclosed in the notes to consolidated financial statements included
in the Annual Report on Form 10-KSB of Pease Oil and Gas Company and
Subsidiaries (the Company) for the year ended December 31, 1995. In the opinion
of Management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the periods presented are not necessarily indicative of the results
that may be expected 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,
1995. It is suggested that these financial statements be read in conjunction
with the financial statements and notes included in the Form 10-KSB.
Note 2 - Deferred Debt Issuance Costs:
In connection with the warrants issued to Beta Capital Group, Inc. in March 1996
to purchase one million shares of the Company's common stock at $.75 per share,
(which are more fully described in the Annual Report on Form 10-KSB), the
Company recorded the estimated fair value of the warrants of $200,000 as a debt
issuance cost. This amount will be amortized over the term of the convertible
debentures discussed in Note 5. The estimated fair value of the warrants was
determined under the valuation methodology prescribed in Statement of Financial
Accounting Standards No. 123 and the consensus reached in issue No. 91-3 of the
Emerging Issues Task Force.
Note 3 - Income Taxes:
The total income tax expense or benefit differs from the amount that would be
provided by applying the statutory U.S. Federal income tax rate to income or
loss before taxes primarily due to the utilization of net operating loss carry
forwards, tax credit carry forwards, and percentage depletion carry forwards.
The income tax refund of $41,509 recorded during the first quarter of 1996 is
related to a net operating loss carry back that was filed with the Internal
Revenue Service in March 1996.
Note 4 - Net Income (Loss) Per Common Share:
The net income per common share and common share equivalents for the first
quarter of 1996 was computed by dividing net income applicable to common
stockholders (which includes preferred stock dividends in arrears during the
period presented) by the weighted average number of shares of common stock and
common stock equivalents outstanding during the period. All the outstanding
options and warrants that had an exercise price below the market value at March
31, 1996 were considered common stock equivalents and were included in the
earnings per share computation using the treasury stock method.
The net loss per common share for the first quarter of 1996 was computed by
dividing the net loss applicable to common stockholders (which includes
preferred stock dividends in arrears during the period presented) by the
weighted average number of common shares outstanding during the period. All
common stock equivalents were excluded from the computations because their
effect would be anti-dilutive.
Note 5 - Private Placement:
In April 1995, the Company initiated a private placement to sell up to
$5,000,000 of collateralized convertible debentures in the form of "Units". The
private placement is more thoroughly discussed later in Managements Discussion
and Analysis under the caption Liquidity and Capital Resources.
Note 6 - Reclassifications:
Certain reclassifications have been made to the 1995 financial statements to
conform to the presentation in 1996. The reclassifications had no effect on the
1995 net loss.<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
Statement of Operations Data: For the Three Months
Ended March 31,
(In Thousands Except
the Per Share Data)
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Gas Marketing and Trading $ 1,346 $ 1,311
Oil and Gas Sales 613 765
Gas Plant Processing Revenue 188 245
Total Operating Revenues 2,381 2,892
Net Income (Loss) 151 (85)
Preferred Stock Dividends:
Declared - -
In Arrears (51) (51)
Converted in tender offer - (117)
Non-cash inducement charge to
convert preferred stock to common stock - (1,524)
------- -------
Net Income (Loss) Applicable
to Common Stockholders $ 100 $ (1,777)
======= =======
Per Share Data:
Before non-cash inducement charge .01 (.07)
Effect of non-cash inducement charge - (.41)
-------- --------
Net Income (Loss) per Common Share $ .01 $ (.48)
======== ========
Cash Dividends Declared Per Common Share None None
======== ========
Balance Sheet Data:
<CAPTION>
As of
---------------------
3/31/96 12/31/95
--------- -----------
<S> <C> <C>
Working capital (deficit) $ (223) $ (500)
Total assets $ 13,471 $ 13,440
Long-term liabilities $ 1,536 $ 1,603
Stockholders' equity $ 9,406 $ 9,017
</TABLE>
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL EXPENDITURES
Liquidity and Capital Resources
At March 31, 1996, the Company's cash balance was $628,439 with a working
capital deficit of $222,690 compared to a cash balance of $677,275 and a
working capital deficit of $500,180 at December 31, 1995. The change in the
Company's cash balance is summarized as follows:
Cash balance at December 31, 1995 $ 677,275
Cash provided by operating activities 260,420
Capital expenditures (144,575)
Proceeds from sale of property
and equipment 8,047
Redemption of certificates of deposit 13,001
Payments on long-term debt (254,479)
Proceeds from common stock
subscription receivable 68,750
-------
Cash balance at March 31, 1996 $ 628,439
=======
The decrease of $277,490 in the working capital deficit can be substantially
attributed to the positive cash flow generated from operating activities in the
first quarter of 1996, the other components affecting cash and the decrease in
the current maturities of long-term debt from $1,100,474 at December 31, 1995 to
$959,764 at March 31, 1996.
The success of the Company is largely dependent on its ability to raise
additional debt or equity capital to fund future drilling and development
activities. Since the acquisition of Skaer in August of 1993, the Company has
suffered from undercapitalization, lacking the necessary funds to properly
exploit the assets acquired from Skaer or explore other opportunities outside of
its existing asset base. Over the past 18 to 24 months, management has pursued
various avenues in search of a strategic partner to facilitate the Company's
growth.
As a result of these efforts, in March 1996, the Company entered into a
consulting agreement with Beta Capital Group, Inc. ("Beta"). Beta is located in
Newport Beach, California and specializes in emerging companies that have both
capital needs and market support requirements. Steve Antry, Beta's President,
is from a third generation oil and gas background, was an officer of Benton Oil
and Gas between 1989 and 1992 and marketed Swift Energy's Income Funds between
1987 and 1989. The Company has joined forces with Beta in an effort to raise
significant debt and/or equity capital in the very near future.
In April 1995, the Company initiated a private placement to sell up to
$5,000,000 of collateralized convertible debentures in the form of "Units".
Each Unit consists of one $50,000 five-year 10% collaterized convertible
debenture and warrants to purchase 25,000 shares of the Company's common stock
at $1.25 per share. The debentures will be subordinate to payment in full of
the existing debt with Colorado National Bank. The debentures will be
collaterized by a second priority interest in certain oil and gas properties
owned and operated by the Company as well as a second priority interest in the
Company's gas processing facility. The debentures will be convertible, at the
holders option, into the Company's common stock of $3.00 per share and may be
redeemed by the Company, in whole or in part, beginning at a premium of 110% of
the original principal amount and are subject to adjustment beginning on April
25, 1999. Interest on the debentures will be payable quarterly commencing on
September 30, 1996 and the entire principal balance will be due on April 15,
2001. The warrants will be exercisable commencing on August 1, 1996 and will
expire on July 31, 2001. The Company will be entitled to call the warrants at
any time commencing 90 days after issuance at a price of $0.10 per warrant. As
of May 8, 1995, the Company had sold 8 units generating gross proceeds of
$400,000. The Company has agreed to use its best efforts to register for
resale:(1) the shares of common stock into which the debentures may be
converted; (2) the warrants; and (3) the shares of common stock issuable upon
exercise of the warrants by including such securities on a registration
statement on an appropriate form filed with the United States Securities and
Exchange Commission within 60 days of terminating the private placement.
The proceeds from these efforts, if successful, will be used for working
capital, horizontal drilling in Loveland Field, Colorado, and possibly to
participate with other industry participants in select drilling ventures in
Louisiana, the Gulf of Mexico or elsewhere in the continental United States.
The capital raising discussed above is only the first of a series of financings
the Company is contemplating with Beta's assistance. Accordingly, Management
firmly believes that this union with Beta, will put the Company well on its way
to realizing its goal of growth and expansion.
Regardless of the outcome of the private placement initiated in April 1996,
Management believes the current cash flows will support continued operations for
at least 12 months. The Company has not yet determined what actions it will
take if the contemplated private placement should be unsuccessful or if the
current cash flows will not support continued operations. However, potential
actions may include (i) selling some of the existing 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 with partners other
than Beta.
Capital Expenditures
During the first quarter of 1996, the Company invested $144,575 in property and
equipment as follows:
Oil and Gas Properties $ 124,724
Service Equipment and
Rolling Stock 15,644
Gas Plant 4,207
-------
$ 144,575
=======
The costs incurred for Oil and Gas Properties were substantially attributed to
perforating and fracing 3 wells in Loveland Field in the Timpas formation - a
relatively undeveloped formation in Loveland Field. Based on the results of
this work as well as other geologic and engineering data, the Company believes
that the Timpas formation is an excellent candidate to be included in the
anticipated horizontal drilling program in Loveland Field. The Company is
scheduled to begin drilling the first horizontal well in Loveland Field in June
1996. Should the private placement that was initiated in April 1996 ultimately
prove successful, the Company anticipates investing up to $2.5 million in 1995
in drilling and development activities which will include horizontal drilling in
Loveland Field.
RESULTS OF OPERATIONS
Overview
The Company's largest source of operating income is from the sale of produced
oil, gas, and natural gas liquids. Therefore, the level of the Company's
revenues and earnings are affected by prices at which natural gas, oil and
natural gas liquids are sold. As a result, the Company's operating results for
any prior period are not necessarily indicative of future operating results
because of the fluctuations in natural gas, oil and natural gas liquid prices
and the lack of predictability of those fluctuations as well as changes in
production levels.
Early in 1995, the Company initiated a corporate restructuring that focused on:
eliminating areas of its business that were losing money; reducing operating
costs; increasing efficiencies; and generating funds for working capital. These
initiatives included:
1)The disposition of approximately 35 wells in 1995 that generated operating
losses of approximately $134,000 in 1994 and approximately $10,500 in the first
quarter of 1995. Because of the losses suffered by these properties prior to
their sale, Management does not expect any negative financial impact on the
Company's future operations from the disposition of the properties and believes
that the actions taken have increased the net margins generated from oil and gas
operations;
2)A substantial downsizing of the Company's oil field service and supply
operations. As is more fully discussed later in this section under their
respective captions, the Company's oil field service and oil field supply
operating margins have been historically low and even unprofitable. The burden
of these low margins or operating losses 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.
3)Closing the administrative office in Denver, Colorado which eliminated annual
payroll costs associated with its accounting and administrative staff of
approximately $140,000. The Company also expects savings of an additional
$60,000 annually from costs duplicated as a result of the Company maintaining
two administrative offices (such as rent, telephone, insurance and office
supplies).
Prior to the restructuring initiatives discussed above, the Company also
addressed one of the single largest cash demands burdening the Company - the
preferred stock dividend. In light of the Company's continuing operating
losses, deteriorating working capital position, and belief that the Company's
primary lender would not approve a payment thereon, the Company's Board of
Directors voted in December, 1994 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. 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, in January 1995, the Company
extended a tender offer to the Preferred Stockholders. 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 ended December 31, 1995 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, 21,600 shares of Preferred Stock
converted into 56,739 shares of Common Stock prior to the tender offer.
Accordingly, as of March 31, 1996 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.
These restructuring initiatives consolidated and focused the Company's
operations such that it is operating very efficiently today. The consideration
of the restructuring is an important component when comparing the results of
operations between the two periods presented.
Total Revenue
<TABLE>
Total Revenue from all operations was as follows:
<CAPTION>
For the Three Months Ended March 31,
-------------------------------------------------
1996 1995
---------------------- -----------------
Amount % Amount %
-------- ----- --------- ----
<S> <C> <C> <C> <C>
Gas Plant:
Marketing and trading $ 1,345,955 56% $ 1,310,800 46%
Processing 187,843 8% 244,878 8%
---------- ---- --------- ----
Total gas plant 1,533,798 64% 1,555,678 54%
Oil and gas sales 613,099 26% 764,527 26%
Oil field services 133,917 6% 378,979 13%
Oil field supply
and equipment 67,685 3% 162,062 6%
Well administration
and other income 32,157 1% 30,500 1%
---------- ---- --------- ----
Total revenue $ 2,380,656 100% $ 2,891,746 100%
========== ==== ========== ====
</TABLE>
The decrease in total revenue is primarily a result of a decrease in production
and a loss of revenue resulting from the Company's downsizing of its service and
supply operations. These circumstances, along with any known trends or changes
that effect revenue on a line-by-line basis are discussed 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 Company fills a portion of this contract with marketing
and trading activities which represent gas purchased from third parties and sold
to PSCo under the terms of the contract.
Operating statistics for the Company's Marketing and Trading Activities for the
periods presented are as follows:
<TABLE>
For the Three Months Ended
March 31,
------------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Total Volume Sold (Mcf) 725,479 839,957
Average Price $ 1.86 $ 1.56
----------- ------------
Total Revenue $ 1,345,955 $ 1,310,800
Costs (1,130,663) (1,157,800)
----------- ------------
Gross Margin $ 215,292 $ 153,000
=========== ============
</TABLE>
The contract with PSCo expires on June 30, 1996. Historically, the price paid
by PSCo under this contract has been at a premium above the market and therefore
has allowed for the marketing and trading activities. With the increasing
competition fostering within all phases of the natural gas industry, it is
unlikely that the contract will be renewed at an above market premium and the
Company's Marketing and Trading activities will probably disappear.
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 material and negative impact 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.
The revenues generated from these products are derived from the Company's own
production from the Loveland and Johnson's Corner Fields.
Operating statistics for the periods presented are as follows:
<TABLE>
For the Three Months
Ended March 31,
------------------------------
1996 1995
---------- ----------
<S> <C> <C> <C>
Production: Volumes Volumes
--------- ----------
Natural Gas Sold (Mcf) 58,722 96,759
B-G Mix (gallons) 235,694 312,800
Propane (gallons) 176,952 243,300
<CAPTION>
Gross Margin: Amount Amount
---------- ----------
<S> <C> <C>
Revenue $ 187,843 $ 244,878
Costs (125,241) (183,209)
--------- ---------
Gross Margin $ 62,602 $ 61,669
========= =========
Gross Margin Percent 33% 25%
</TABLE>
The decrease in processing volumes and revenue during the first quarter of 1996
as compared to same period in 1995, can be substantially attributed to the
Company purchased and processed third party gas between February 1995 and
September 1995. In October 1995 the Company stopped processing third party gas
to correct some operational problems. The operational problems have been
corrected and the plant is now running more efficiently and effectively than it
has in the past. However, with the increased competition to process natural gas
and the historically low gas prices prevalent in the Rocky Mountain Region, the
Company has not been able to purchase third party gas at an economical rate. In
light of the uncertainty of the PSCo gas contract discussed previously under the
caption Gas Plant Marketing and Trading, and the increasing competitive
environment in the natural gas market, it is uncertain at this time if the
Company will be able to compete with other gas plants and purchasers 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.
Costs associated with the Gas Plant operations consist of both semi-fixed and
variable costs. The semi-fixed costs consist of direct payroll, utilities,
operating supplies, general and administrative costs, and other items necessary
in the day-to-day operations. The semi-fixed costs average approximately
$435,000 annually and are not expected to change significantly regardless of the
volume processed by the Gas Plant. The variable costs consist primarily of
purchased gas, plant fuel and shrink, lubricants, repair and maintenance, and
costs of gas marketing and buying. These costs are generally a direct function
of the volume processed by the Gas Plant and are expected to either increase or
decrease proportionately with the corresponding plant production. The costs in
1995 increased both in amount and as a percentage of revenue, when compared to
1996, as a result of the Company purchasing and processing third party gas
between February 1995 and September 1995. Prior to that time, and currently,
most of the gas processed by the Gas Plant was from wells the Company owned.
Accordingly, the variable costs, as a percentage of revenue, decreased in 1996.
Oil and Gas
Operating statistics for oil and gas producing activities for the periods are as
follows:
For the Three Months
Ended March 31,
--------------------------------
1996 1995
------------ ------------
Production:
Oil (bbls) 26,608 37,244
Gas (Mcf) 111,925 125,761
BOE (6:1) 45,262 58,204
Average Collected Price:
Oil (per Bbl) $ 17.74 $ 16.13
Gas (per Mcf) $ 1.26 $ 1.30
Per BOE (6:1) $ 13.33 $ 13.14
Gross Margin:
Revenue $ 613,099 $ 764,527
Costs (293,916) (476,927)
----------- -----------
Gross Margin $ 319,183 $ 287,600
=========== ===========
Gross Margin Percent 52% 38%
Change in oil and gas revenue
attributed to:
Production $ (189,565)
Price 38,137
----------
$ (151,428)
==========
Average Production Cost per
BOE before DD&A $ 6.49 $ 8.19
========== ===========
The price of oil and natural gas had very little effect on the decrease in
revenue between the two periods presented. The price of oil did not start its
upward trend until March 1996. Accordingly, if this trend continues, the
Company expects even greater margins in the future. Most of the decrease in
revenue was attributable to a decrease in production. The Company has not
performed any significant drilling or development activities since the fourth
quarter of 1994. Accordingly, the 12,942 decrease in BOE production can be
attributed to the following: 1) approximately 3,700 BOE relates to the oil and
gas properties that were sold in 1995; 2) approximately 3,000 BOE relates to
operating reconfiguration on certain properties that essentially lowered the
production levels yet increased the gross margins from operations; and 3) the
remaining decrease is substantially attributed to the natural decline inherent
of oil and gas wells.
The decrease in production costs, both in total and per BOE, are substantially
attributed to: 1) the oil and gas properties sold in 1995 incurred production
costs of $62,271. With revenues of $51,766, the properties sold incurred losses
of $10,505 during the first quarter of 1995; and 2) operating reconfiguration on
certain properties designed to maximize the gross margins from operations.
These efforts are reflective of the Company's focus on managing production,
controlling costs and increasing the net margin from oil and gas producing
activities.
Oil Field Services and Oil Field Supply
Operating statistics for the Company's service and supply operations for the
periods presented are as follows:
Service Operations Supply Operations
For the Three Months For the Three Months
Ended March 31, Ended December 31,
--------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ---------- ---------
Revenue $ 133,917 $ 378,979 $ 67,685 $ 162,062
Costs (80,792) (339,629) (66,483) (139,216)
Depreciation (25,496) (50,598) (3,180) (3,513)
--------- ----------- ---------- ---------
Net Operating
Income (Loss) $ 27,629 $ (11,248) $ (1,978) $ 19,333
========= =========== ========== =========
The decrease in revenue from the operations is directly related to the
restructuring initiatives conducted in 1995. 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 was 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 for 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 reduced to approximately $350,000 to $450,000
annually, it is not expected to have a material negative effect on the Company's
overall results of operations in light of the historically low margins and/or
operating losses.
Supply Operations
Historically, the Company's supply business has also operated out of two
locations - Loveland and Sterling, Colorado. The restructuring was 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 to approximately $250,000 to
$300,000 annually, it is not expected to have a material negative effect on the
Company's overall results of operations in light of the historically low margins
and/or operating losses.
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 1996 and Management does not expect any
significant change in the future.
General and Administrative Expenses
General and Administrative Costs decreased 17% from $289,159 in the first
quarter of 1995 compared to $240,586 for the first quarter of 1996. The
decrease can be substantially attributed to the considerable effort put forth by
Management of the Company to decrease and control general and administrative
expenses. For example:
a)measures taken 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)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;
c)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. The consulting contract entered into with Beta, in March 1996 is
expected to increase annual expenses at least $320,000. As of March 31, 1996,
the Company had incurred $15,048 of fees and expenses associated with Beta and
this amount is included in general and administrative expenses.
Depreciation, Depletion and Amortization
Depreciation, Depletion and Amortization ("DD & A") consisted of the following:
For the Three Months Ended
March 31,
--------------------------
1996 1995
----------- ---------
Oil and Gas Properties $ 157,901 $ 218,218
Gas Plant and Other Buildings 62,072 60,863
Rolling Stock 23,048 43,781
Other Field Equipment 7,945 14,035
Furniture and Fixtures 11,682 11,558
Non-Compete Agreements 11,500 24,000
--------- ---------
Total $ 274,148 $ 372,455
========= =========
DD&A per BOE for oil and gas properties decreased to $3.49 per BOE in the first
quarter of 1996 compared to $3.75 per BOE in the first quarter of 1995 primarily
because of the properties sold in 1995 required a higher rate of DD&A. The
decrease in DD&A for the Rolling Stock and Other Field Equipment can be
attributed to the disposition of the corresponding assets during the
restructuring of the Service and Supply operations. The decrease in the
amortization of the Non-compete Agreements is because one agreement with an
original cost basis of $100,000, which was being amortized over a 24 month
period, became fully amortized in 1995.
Interest Expense
Total interest expense for the first quarter of 1996 was $ 58,119 compared to
$77,640 for the same period in 1995. This lower interest expense is reflective
of the decrease in long term debt from $3.1 million at March 31, 1995 to $2.1
million at March 31, 1996.
Gain on Sale of Assets
The gain on sale of assets of $33,411 in the first quarter of 1995 is primarily
related to the sale of various oil and gas properties. The Company did not
dispose of any significant assets in the first quarter of 1996.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract incidental to the operation of its business. The Company is
not currently involved in any such incidental litigation which it believes could
have a materially adverse effect on its financial condition or results of
operations.
Item 2. Changes in Securities
(a) There is no information reportable under this item for the period covered by
this report.
(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 March 31, 1996, dividends in arrears aggregate $304,032 or
$1.50 per share.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of Company's security holders during the
period covered by this report.
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) There were no reports on Form 8-K filed during the quarter ended March 31,
1996.<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: May 10, 1996 By: /s/ Willard H. Pease, Jr.
Willard H. Pease, Jr.
President and Chief Executive Officer
Date: May 10, 1996 By: /s/ Patrick J. Duncan
Patrick J. Duncan
Chief Financial Officer and
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 628,439
<SECURITIES> 0
<RECEIVABLES> 1,115,040
<ALLOWANCES> 36,100
<INVENTORY> 504,108
<CURRENT-ASSETS> 2,306,336
<PP&E> 15,232,194
<DEPRECIATION> 4,903,993
<TOTAL-ASSETS> 13,271,304
<CURRENT-LIABILITIES> 2,529,026
<BONDS> 0
0
2,027
<COMMON> 721,886
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,271,304
<SALES> 2,348,499
<TOTAL-REVENUES> 2,380,656
<CGS> 1,697,095
<TOTAL-COSTS> 1,697,095
<OTHER-EXPENSES> 514,734
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,119
<INCOME-PRETAX> 109,169
<INCOME-TAX> (41,509)
<INCOME-CONTINUING> 150,678
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150,678
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
