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
FOR THE QUARTER ENDED JUNE 30, 1997
or
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 81506
Grand Junction, Colorado (Zip code)
(Address of principal executive offices)
(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)
Common Stock Purchase Warrants (Expire August 13, 1998)
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 August 6,1997 the issuer had 15,437,717 shares of its ____
$0.10 par value Common Stock issued and outstanding. ____
----
Transitional Small Business Issuer Disclosure Format Yes ____ No X ____
<PAGE>
TABLE OF CONTENTS
PAGE
NUMBER
PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets. . . . . . . . . . . . . .. . .3-4.
June 30, 1997 (unaudited)
and December 31, 1996
Consolidated Statements of Operations . . . . . . . . . . . .5.
For the Three Months Ended June 30, 1997
(unaudited) and 1996 (unaudited)
Consolidated Statements of Operations . . . . . . . . . . . .6.
For the Six Months Ended June 30, 1997
(unaudited) and 1996 (unaudited)
Consolidated Statements of Cash Flows . . . . . . . . . . .7-8.
For the Six Months Ended June 30, 1997
(unaudited) and 1996 (unaudited)
Notes to Consolidated Financial Statements . . . . . . . .9-10
Item 2. Management's Discussion and Analysis . . . . . . . . .11
Disclosure Regarding Forward-Looking Statements . .11
Liquidity and Capital Resources . . . . . . . . . .11
Capital Expenditures . . . . . . . . . . . . . . .13.
Drilling Activity . . . . . . . . . . . . . . . . .15
Results of Operations . . . . . . . . . . . . . . 16
Overview . . . . . . . . . . . . . . . . . . . . . . . 16.
Total Revenue . . . . . . . . . . . . . . . . . . . . .16
Oil and Gas . . . . . . . . . . . . . . . . . . . . . .17
Natural Gas Marketing and Trading . . . . . . . . . . .18
Gas Plant Processing Revenues . . . . . . . . . . . . .19
Oil Field Services and Oil Field Supply . . . . . . . .20
Well Administration and Other Income . . . . . . . . . 20.
General and Administrative . . . . . . . . . . . . . . 20.
Consulting Agreement - Related Party . . . . . . . . . 21.
Depreciation, Depletion and Amortization . . . . . . . 21.
Interest Expense . . . . . . . . . . . . . . . . . . . 22.
Part II - Other Information . . . . . . . . . . . . . . . . . . . . . . . .23
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 23.
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . 23.
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . 26.
Item 4. Submission of Matters to a Vote of Security Holders . . . . 26.
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . 27.
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . .27
Part III - Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . .28
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
----------------------------
(unaudited)
CURRENT ASSETS:
Cash and equivalents $ 3,529,578 $ 1,995,860
Trade receivables 486,269 599,648
Inventory 434,702 408,787
Prepaid expenses and other 71,712 56,327
------------- --------------
Total current assets 4,522,261 3,060,622
------------- -------------
OIL AND GAS PROPERTIES, at cost (successful efforts method):
Exploratory wells in progress 433,402 181,312
Undeveloped properties 2,116,731 351,727
Developed properties 13,112,633 9,505,408
------------ -------------
Total oil and gas properties 15,662,766 10,038,447
Less accumulated depreciation, and depletion (4,241,417) (3,946,974)
-------------- --------------
Net oil and gas properties 11,421,349 6,091,473
------------ -------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Gas plant 4,099,285 4,099,285
Service equipment and vehicles 891,785 879,313
Land, buildings and office equipment 462,212 459,228
-------------- --------------
Total property, plant and equipment 5,453,282 5,437,826
Less accumulated depreciation (1,561,556) (1,376,154)
------------- --------------
Net property, plant and equipment 3,891,726 4,061,672
------------- -------------
OTHER ASSETS:
Deferred debt isuance costs 817,837 1,105,874
Non-compete agreements 283,680 306,678
Other 272,493 274,830
-------------- --------------
Total other assets 1,374,010 1,687,382
------------- -------------
TOTAL ASSETS $ 21,209,346 $ 14,901,149
============= ============
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
June 30, December 31,
1997 1996
--------------- ------------
(unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt:
Related parties $ - $ 285,895
Other 27,578 45,944
Accounts Payable, Exploratory Wells 418,820 -
Accounts payable, trade 205,412 267,540
Accrued production taxes 252,910 288,122
Other accrued expenses 246,581 265,427
------------ --------------
Total current liabilities 1,151,301 1,152,928
------------- -------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities:
Convertible Debentures 4,180,000 5,000,000
Other 29,967 19,945
Accrued production taxes 179,460 256,088
-------------- --------------
Total long-term liabilities 4,389,427 5,276,033
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.01 per share, 2,000,000 shares authorized, none
and 179,938 shares of Series A Cumulative Convertible Preferred Stock
issued and outstanding, respectively. - 1,799
Common Stock, par value $0.10 per share,40,000,000 shares authorized,
13,161,077 and 7,526,817 shares issued and outstanding, respectively.
1,316,108 752,682
Additional paid-in capital 25,176,553 17,392,329
Accumulated deficit (10,824,043) (9,674,622)
------------- --------------
Total stockholders' equity 15,668,618 8,472,188
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 21,209,346 $ 14,901,149
============= ============
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For The Three Months
Ended June 30,
1997 1996
--------------- -------------
REVENUE:
Oil and gas sales $ 670,373 $ 638,879
Natural gas marketing and trading - 702,610
Gas plant processing 162,346 167,837
Oil field services and supply 145,893 104,533
Well administration and other income 17,099 25,739
-------------- ---------------
Total revenue 995,711 1,639,598
-------------- -------------
OPERATING COSTS AND EXPENSES:
Oil and gas production 410,304 353,947
Exploration costs 58,436 -
Natural gas marketing and trading - 614,783
Gas plant processing 99,461 126,767
Oil field services and supply 139,475 93,402
General and administrative 380,730 262,504
Consulting agreement-related party 97,795 64,778
Depreciation, depletion and amortization 302,009 274,171
-------------- --------------
Total operating costs and expenses 1,488,210 1,790,352
------------- -------------
INCOME (LOSS) FROM OPERATIONS (492,499) (150,754)
OTHER INCOME (EXPENSES):
Interest income 45,054 7,676
Interest expense:
Amortization of debt issuance costs (63,801) (19,086)
Interest paid or accrued (115,555) (52,050)
Gain (Loss) on sale of assets (8,547) 18,188
----------------- ---------------
Total other expenses, net (142,849) (45,272)
--------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES (635,348) (196,026)
INCOME TAXES - -
----------------------------------
NET INCOME (LOSS) (635,348) (196,026)
PREFERRED STOCK DIVIDENDS:
In arrears - (50,672)
Converted into common stock (44,984) -
---------------- --------------
Total preferred stock dividends (44,984) (50,672)
--------------- ----------------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS $ (680,332) $ (246,698)
=============== ===============
NET INCOME (LOSS) PER COMMON SHARE $ (0.05 $ (0.03)
================ =================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 12,622,000 7,262,000
============= =============
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For The Six Months
Ended June 30,
1997 1996
-------------------- -------------
REVENUE:
Oil and gas sales $ 1,459,579 $ 1,251,978
Natural gas marketing and trading - 2,048,565
Gas plant processing 371,856 355,680
Oil field services and supply 344,212 306,135
Well administration and other income 38,904 56,488
--------------- ---------------
Total revenue 2,214,551 4,018,846
------------- -------------
OPERATING COSTS AND EXPENSES:
Oil and gas production 738,103 647,863
Exploration costs 365,716 -
Natural gas marketing and trading - 1,745,446
Gas plant processing 204,299 252,008
Oil field services and supply 293,133 240,677
General and administrative 706,179 487,942
Consulting agreement-related party 181,178 79,826
Depreciation, depletion and amortization 563,241 548,319
-------------- --------------
Total operating costs and expenses 3,051,849 4,002,081
------------- -------------
INCOME (LOSS) FROM OPERATIONS (837,298) 16,765
OTHER INCOME (EXPENSES):
Interest income 63,113 9,084
Interest expense:
Amortization of debt issuance costs (127,601) (19,086)
Interest paid or accrued (241,444) (110,169)
Gain (Loss) on sale of assets (6,191) 16,649
---------------- ---------------
Total other expenses, net (312,123) (103,522)
-------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES (1,149,421) (86,757)
INCOME TAXES:
Federal income tax refund - 41,409
------------------- ---------------
NET INCOME (LOSS) (1,149,421) (45,348)
PREFERRED STOCK DIVIDENDS:
In arrears - (101,344)
Converted into common stock (89,969) -
--------------- --------------
Total preferred stock dividends (89,969) (101,344)
--------------- ---------------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS $ (1,239,390) $ (146,692)
=============== ===============
NET INCOME (LOSS) PER COMMON SHARE $ (0.1) $ (0.02)
================ ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 10,781,000 7,226,000
================ ===========
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For The Six Months
Ended June 30,
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,149,421) $ (45,348)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for depreciation and depletion 540,243 525,320
Amortization of intangible assets 150,599 42,084
Exploration costs 365,716 -
Loss (Gain) on sale of property and equipment 6,191 (16,648)
Issuance of common stock for services 10,155 38,050
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade receivables 113,379 250,327
Inventory (6,639) 64,157
Prepaid expenses and other assets (30,548) (33,410)
Increase (decrease) in:
Accounts payable (62,128) (526,899)
Accrued expenses (130,686) (204,125)
-------------- ---------------
Net cash provided by (used in)
operating activities (193,139) 93,508
------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property
and equipment (4,817,767) (541,801)
Proceeds from sale of property and equipment 49,811 153,547
Proceeds from redemption of certificate of
deposit 17,500 26,500
---------------- ---------------
Net cash provided by (used in)
investing activities (4,750,456) (361,754)
----------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 1,015,000
Repayment of long-term debt (323,821) (537,498)
Proceeds from sale of Common Stock 3,880,000 68,750
Proceeds from exercise of Common Stock
warrants 3,608,525 -
Offering and other costs associated with long-
term debt, stock and warrants (687,391) (185,081)
-------------- ---------------
Net cash provided by (used in)
financing activities 6,477,313 361,171
---------- --------------
INCREASE IN CASH AND EQUIVALENTS 1,533,718 92,925
CASH & EQUIVALENTS, beginning of period 1,995,860 677,275
------------- --------------
CASH & EQUIVALENTS, end of period $ 3,529,578 $ 770,200
============= --------------
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
For The Six Months
Ended June 30,
1997 1996
-------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest:
Related parties $ 42,417 $ -
Other 243,019 98,216
-------------- ---------------
Total $ 285,436 $ 98,216
============== ===============
Cash paid for income taxes $ - $ -
----------------- - ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Long-term debt incurred for purchase
of vehicles $ 29,582 $ -
================= ============
Conversion of debentures into common stock$ 820,000 $ -
=============== ============
Acquisition of oil and gas properties
for common stock $ 875,000 $ -
================ ============
Estimated fair value of warrants granted
for debt issuance costs $ - $ 200,000
================= === ==============
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
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 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, 1996. 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,
1996. 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 - Private Placement:
In July 1997, the Company completed a private placement for the sale of
2,240,000 shares of the Company's $0.10 par value common stock generating gross
proceeds of $5,600,000. Pursuant to the terms of the private placement
memorandum, the Company agreed to use its best efforts to file a registration
statement on an appropriate Form to register the shares, for resale, with the
United States Securities and Exchange Commission on or before November 15, 1997.
Note 3 - Preferred Stock:
Pursuant to the terms of the Articles of Incorporation, on June 11, 1997 all of
the outstanding Preferred Stock automatically converted into the Company's
Common Stock and Common Stock Purchase Warrants. On June 11, 1997 there were
96,847 shares of Preferred Stock outstanding that converted into 308,692 shares
of Common Stock and 308,692 Common Stock Purchase Warrants. Accordingly, as of
June 30, 1997 there are no shares of Preferred Stock issued or outstanding.
Note 4 - 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.
-7-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(continued)
The income tax refund of $41,409 recorded in 1996 is related to a net operating
loss carry back.
Note 5 - Reclassifications:
Certain reclassifications have been made to the 1996 financial statements to
conform to the presentation in 1997. The reclassifications had no effect on the
1996 net loss.
-8-
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Disclosure Regarding Forward-Looking Statements
This report on Form 10-QSB includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
facts included in this report, including, without limitation, those regarding
the Company's financial position, reserve quantities and net present values,
business strategy, plans and objectives of management of the Company for future
operations and capital expenditures, and the future results from oil and gas
drilling operations, are forward-looking statements and the assumptions upon
which such forward-looking statements are based are believed to be reasonable.
The Company can give no assurance that such expectations and assumptions will
prove to have been correct. Reserve estimates of oil and gas properties are
generally different from the quantities of oil and natural gas that are
ultimately recovered or found. This is particularly true for estimates applied
to exploratory prospects. Additionally, any statements contained in this report
regarding forward-looking statements are subject to various known and unknown
risks, uncertainties and contingencies, many of which are beyond the control of
the Company. Such things may cause actual results, performance, achievements or
expectations to differ materially from the anticipated results, performance,
achievements or expectations. Factors that may affect such forward-looking
statements include, but are not limited to, the Company's ability to generate
additional capital, risks inherent in oil and gas acquisitions, exploration,
drilling, development and production, price volatility of oil and gas,
competition, shortages of equipment, services and supplies, government
regulation, environmental matters, financial condition of the other companies
participating in the exploration, development and production of oil and gas
programs and other matters. All written and oral forward-looking statements
attributable to the Company or persons acting on its behalf subsequent to the
date of this report are expressly qualified in their entirety by this
disclosure.
Liquidity and Capital Resources
At June 30, 1997, the Company's cash balance was $3,529,578 with a positive
working capital position of $3,370,960, compared to a cash balance of $1,995,860
and a positive working capital position of $1,907,694 at December 31, 1996. The
change in the Company's cash balance for the first half of 1997 is summarized as
follows:
Cash Balance at December 31, 1996 $1,995,860
Sources of Cash:
Proceeds from the sale of common stock 3,880,000
Proceeds from the exercise of common stock warrants 3,608,525
Proceeds from the sale of property and equipment 49,811
Proceeds from the redemption of a certificate of deposit 17,500
-----------
Total Sources of Cash 7,555,836
Uses of Cash:
Acquisition of oil and gas interest in
East Bayou Sorrel (3,375,000)
Exploratory Drilling (838,703)
Other Capital Expenditures (604,064)
Costs associated with the sale of common stock and
exercise of common stock warrants (687,391)
Payments on long term debt (323,821)
Cash used in operating activities (193,139)
Total uses of cash (6,022,118)
Cash balance at June 30, 1997 $3,529,578
==========
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<PAGE>
Although most of the Company's sources of cash during the first half of 1997
were derived from capital raising equity transactions (which are discussed more
thoroughly later in this report under Item 2(c) in Part II below), it is
important to note that a portion of the funds were used to acquire a significant
interest in the East Bayou Sorrel Field, located in Iberville Parish, Louisiana.
This field includes a discovery well, the Schwing #1 that accounted for 20% of
the Company's oil and gas production (on a BOE basis), 25% of the Company's oil
and gas revenue, and 45% of the Company's operating income from oil and gas
activities during the first half of 1997. The operating statistics for this
well, along with all the other oil and gas properties, are more fully
illustrated later in this report under the Results of Operations section under
the caption "Oil and Gas". The exploratory offset to the C.E. Schwing #1, known
as the C.E. Schwing #2, was drilled to a total depth of 13,600 feet during the
second quarter of this year and completed in two productive zones in late June.
As of the date of this report, the Schwing #2 was producing at rates similar to
the Schwing #1. Should this continue, the Company's future production and cash
flow could be enhanced considerably.
The Company's primary focus is to expand its operations by continuing to
implement an aggressive exploration program in the Gulf Coast region of
Louisiana, Alabama and Texas. As part of this plan, on February 4, 1997, the
Company signed a definitive agreement with National Energy Group, Inc. ("NEGX"),
a publicly held Company, headquartered in Dallas, Texas. The agreement provides
the Company the right and obligation to participate with NEGX in various Gulf
Coast oil and gas exploration projects over the course of next two years.
Essentially, the agreement consists of three main elements. First, the Company
has the right and obligation to participate as a 12.5% working interest owner in
NEGX's outlined program which consists of 10 identified projects in Alabama,
Southern Louisiana, and Texas. The working interest percentage may vary on a
prospect by prospect basis, as negotiated, and has ranged from 10% to 20% to
date. Second, subject to certain conditions defined in the agreement, the
Company has the right and obligation to participate in any future projects
generated under NEGX's exclusive arrangement with Sandefer Oil and Gas Company,
Inc. ("Sandefer"). Sandefer is a private corporation owned and operated by a
group of geologists and geophysicists who generate Gulf Coast, Southern
Louisiana and other wildcat prospects. Third, the Company is entitled to
participate in any other third party generated prospects that NEGX participates
in subject to certain conditions as defined in the agreement.
Pursuant to the terms of the agreement with NEGX, the Company's minimum
obligation is at least $5.0 million per year in dry hole, or drilling, costs.
Additional costs will be incurred for completion and development of successful
projects. Accordingly, the Company anticipates the actual obligation will be
higher assuming that a reasonable amount of success is achieved with the
underlying prospects. Through June 30, 1997, the Company had incurred total
costs of $1,164,879 in connection with this agreement.
In addition to the agreement with NEGX, the Company is pursuing other
exploration opportunities with various industry partners. For instance, in July
1997, the Company signed a letter of intent regarding a joint venture agreement
with Parallel Petroleum Corporation ("Parallel"), a publicly held entity
headquartered in Midland, Texas. The letter of intent contemplates the Company
will own a 12.5% working interest in three separate 3-D seismic exploratory
projects covering 130,000 acres in Jackson County, Texas within the
Yegua/Frio/Wilcox geological trend. The Company decided to pursue the joint
venture with Parallel based on their history of success in the Yegua/Frio/Wilcox
Trend. For example, between October 1994 and April 1997, utilizing 3-D seismic
imaging and other new technologies, Parallel participated in drilling 54
exploratory wells, of which 43 have been producers -- an 80% success rate. The
projects contemplated in the letter of intent with Parallel will span the course
of the next two to three years with seismic operations scheduled to begin in
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<PAGE>
September 1997. Contingent on the result of the seismic surveys, up to 75 wells
may be drilled over the course of the projects. Total cash commitments
associated with this joint venture are approximately $2.5 million in 1997 for
land and seismic costs and an additional $2.5 million to $7.5 million over the
term of the projects for drilling costs that are subject to the results of the
seismic surveys.
If even a modest percentage of the contemplated exploratory prospects with NEGX
and Parallel are successful and those properties are eventually fully developed,
the net reserves of recoverable oil and gas attributable to the Company's
interest would be several times the Company's present reserves. The Company's
current Rocky Mountain reserves are approximately 2 million barrels of oil (or
equivalent). With the addition of East Bayou Sorrel, the Company believes its
reserves have at least doubled. This combined with the agreements with NEGX and
Parallel provide the Company with an exploration program that has the potential
to significantly increase its existing reserves and future cash flow.
In July 1997 the Company completed a private placement of 2.24 million shares of
restricted common stock that generated gross proceeds of $5.6 million. The
Company expects to spend $8.0 to $12.0 million during the remainder of 1997 for
exploration and development activities. The Company's current cash position
should cover the Company's working capital needs, including the anticipated
exploration costs associated with the letter agreements with NEGX and Parallel,
at least through the third quarter of 1997. After that, the Company will need to
seek additional financing which may include additional debt or equity financings
or the sale of certain existing assets.
In March 1996 the Company retained Beta Capital Group, Inc. ("Beta") as a
consultant to the Company. Beta is located in Newport Beach, California and
specializes in emerging oil and gas companies that have capital resources needs
and market support requirements. Beta has worked closely with the Company to
structure its financings and meet the Company's expected cash and capital
resources requirements. Beta's President, Steve Antry, was an officer of Benton
Oil and Gas Company between 1989 and 1992. During that time, Mr. Antry was
instrumental in obtaining various sources of capital that Benton Oil and Gas
required during a very significant growth period. Based on Mr. Antry's
background, the Company believes that Beta adds a tremendous value to the
Company because of their network of financial resources. Therefore, the Company
will attempt to utilize Beta's syndication of financial resources to fund future
capital requirements.
Capital Expenditures
During the first half of 1997 the Company paid $4,817,767 for investment in
capital assets which is summarized as follows:
For the Six Months Ending
June 30, 1997
Acquisitions of oil and gas interest in East Bayou Sorrel $3,375,000
Drilling Costs -
Drilling and Development of East Bayou Sorrel 220,897
Exploratory Wells in Prog 252,090
Exploratory Dry Holes 365,716
-----------
Total Drilling Cost 838,703
Workovers or Recompletions of Rocky Mountain properties 569,980
-----------
Total Oil and Gas properti 4,783,683
Service and Other Field Equipment 30,639
Office Equipment 3,445
-------------
Total Capital Expenditures $ 4,817,767
==========
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<PAGE>
The acquisitions of the oil and gas interest in East Bayou Sorrel consisted of
purchasing a 10% working interest and an additional 7.8125% after prospect
payout working interest. This field includes two discovery wells that produced a
combined average of 2,681 BOPD and 4,970 MCFPD, (3,509 BOEPD) in July 1997. With
two more exploratory wells scheduled to be drilled on this property in 1997, it
is anticipated this field will ultimately be one of the Company's core
properties. NEGX, the operator of the property, has planned a 33-square mile 3-D
seismic program covering the East Bayou Sorrel field and surrounding areas later
this year that will complement an already extensive database of reprocessed 2-D
seismic and a number of existing well logs.
At June 30, 1997, the Exploratory Wells in Progress ("WIP") and corresponding
costs incurred through the first half of 1997 were as follows:
<TABLE>
<CAPTION>
WIP Transfer From WIP to: WIP
Balance Developed Balance
Property ............... 12/31/96 Additions Dry Hole Properties 6/30/97
<S> <C> <C> <C> <C>
E. Winn #1 (South Lake Arthur) ......... 181,312 175,590 -- -- 356,902
Brazos Block 480 ....................... -- 317,789 (317,789) -- --
C.E. Schwing #2 (East Bayou Sorrel) .... -- 365,761 -- (365,761) --
Shoccoe Prospect ....................... -- 47,927 (47,927) -- --
Tiger Bayou Prospect ................... -- 63,000 -- -- 63,000
Austin Bayou Prospect .................. -- 13,500 -- -- 13,500
---------- --------
181,312 983,567 (365,716) (365,761) 433,402
===================== ======== ======== ========== ========
</TABLE>
The E. Winn #1, an exploratory well in the South Lake Arthur Prospect, located
in Jefferson Davis Parish, Louisiana, was drilled to a total depth of 17,800
feet in April 1997. Although the deep objective of a Miogyp Sand test was dry, a
productive zone uphole was found and tested in June 1997 at a flow rate of 4200
MCFPD. The Company owns a 20.3% working interest in this well. The pipeline and
other production facilities are currently being built and the Company expects
this well to be put on production in August 1997. At that time, all the costs
capitalized through June 30, 1997 along with the future completion costs will be
transferred to Developed Properties.
Brazos Block 480, an offshore prospect in Texas, was drilled to a total depth of
13,500 feet in May 1997 and found to be dry. The Company's portion of the cost
of this exploratory dry hole was $317,789.
As previously discussed, the C.E. Schwing #2 is another discovery well in the
East Bayou Sorrel Field, located in Iberville Parish, Louisiana. This well was
completed in late June 1997 and all the corresponding costs were transferred to
Developed Properties. In July 1997, the Schwing #2 produced an average of 1,330
BOPD, 3,413 MCFPD (or 2,267 BOEPD) and 247 barrels of water per day.
The Shoccoe Prospect, located in Mississippi, was a shallow exploratory well in
which the Company owned an 8.33% working interest. The cost of this exploratory
dry hole was $47,927.
The costs incurred through June 30, 1997 for the Tiger Bayou and Austin Bayou
Prospects represent land costs. Both prospects are currently being drilled as of
the date of this report.
In the first half of 1997, the Company spent $569,980 for workovers,
recompletions and equipment acquisitions related to maintaining or enhancing the
current production of its producing oil and gas properties in the Rocky Mountain
region.
-12-
<PAGE>
DRILLING ACTIVITY:
As of the date of this report, the following exploratory prospects were in
process of drilling:
1. Trahan #1 (Maurice Prospect) - located in Lafayette and Vermillion Parishes,
Louisiana began drilling on June 23, 1997. This prospect is operated by Amerada
Hess and the target depth of 16,500' is expected to be reached in September
1997. The Company owns a 10.0% working interest in this prospect.
2. McDaniel 9-10 #1 (Robertsdale Prospect) - located in Baldwin County, Alabama
began drilling on July 15, 1997. This prospect is operated by NEGX and the
target depth 20,000' is expected to be reached in October 1997. The Company owns
a 10.0% working interest in this prospect.
3. Ramos #1 (West Grand Bayou Prospect) - located in Assumption Parish,
Louisiana began drilling on July 20, 1997. This prospect is operated by NEGX and
the target depth of 17,900' is expected to be reached in October 1997. The
Company owns a 10.0% working interest in this prospect.
4. Luther Moore #1 (Tiger Bayou Prospect) - located in Terrebonne Parish,
Louisiana began drilling on July 23, 1997. This prospect is operated by NEGX and
the target depth of 12,850' is expected to be reached in August 1997. The
Company owns a 20% working interest in this prospect.
5. Bennett #1 (Austin Bayou Prospect) - located in Brazoria County, Texas began
drilling on August 1, 1997. This prospect is operated by TransTexas and the
target depth of 13,000' is expected to be reached in October 1997. This prospect
is a farmout by the Company to TransTexas and the Company owns a carried 2.5%
working interest in this prospect.
-13-
<PAGE>
RESULTS OF OPERATIONS
Overview
The Company's largest source of operating revenue 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 prices at which natural gas, oil and
natural gas liquids are sold. As a result, the Company's operating results for
any prior period are not necessarily indicative of future operating results
because of the fluctuations in natural gas, oil and natural gas liquid prices
and the lack of predictability of those fluctuations as well as changes in
production levels.
Total Revenue
Total Revenue from all operations was as follows:
For the Three Months
Ended June 30,
1997 1996
--------------------------- ----------------
Oil and gas sales ............... $ 670,373 67% $ 638,879 39%
Natural gas marketing and trading -- -- 702,610 43%
Gas plant processing ............ 162,346 16% 167,837 10%
Oil field services and supply ... 145,893 15% 104,533 6%
Well administration and other ... 17,099 2% 25,739 2%
--------- --------- --------- -------
Total revenue .............. $ 995,711 100% $ 1,639,598 100%
========= ========= ========= ======
For the Six Months
Ended June 30,
1997 1996
------------------------- ----------------
Oil and gas sales ............... $1,459,579 65% $ 1,251,978 31%
Natural gas marketing and trading -- -- 2,048,565 51%
Gas plant processing ............ 371,856 17% 355,680 9%
Oil field services and supply ... 344,212 16% 306,135 8%
Well administration and other ... 38,904 2% 56,488 1%
---------- ---------- ---------- -----
Total revenue .............. $2,214,551 100% $ 4,018,846 100%
========== ========== ========== =====
The decrease in total revenue is primarily a result of the expiration of the
Company's natural gas marketing and trading contract with Public Service Company
of Colorado effective July 1, 1996. As illustrated, revenues generated from that
contract were $702,610, or 43% of the total revenue for the second quarter of
1997 and 2,048,565, or 51% of the total revenue for the first six months of
1997. This circumstance, 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.
-14-
<PAGE>
Oil and Gas - Operating statistics for oil and gas production for the periods
presented are as follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- -----------------------
1997 1996 1997 1996
------- ---------- ---------- -------
Production:
Oil (Bbls)
<S> <C> <C> <C> <C>
Rocky Mtns ........... 20,092 26,457 40,070 53,057
East Bayou Sorrel .... 8,308 -- 16,137 --
--------------- ----------- ----------- -------------
Combined Total .. 28,400 26,457 56,207 53,057
=============== =========== =========== =============
Gas (Mcf)
Rocky Mtns ........... 100,725 111,972 192,937 228,150
East Bayou Sorrel .... 11,375 -- 18,238 --
--------------- ----------- ----------- -------------
Combined Total . 112,100 111,972 211,175 228,150
=============== =========== =========== -------------
BOE (6:1)
Rocky Mtns ........... 36,880 45,119 72,226 91,082
East Bayou Sorrel .... 10,204 -- 19,177 --
--------------- ----------- ----------- -------------
Combined Total . 47,084 45,119 91,403 91,082
=============== =========== =========== =============
Average Collected Price:
Oil (per Bbl)
Rocky Mtns ........... $ 18.43 $ 19.71 $ 19.88 $ 18.72
East Bayou Sorrel .... $ 19.20 $ -- $ 20.01 $ --
--------------- ----------- ----------- -------------
Combined Average $ 18.66 $ 19.71 $ 19.92 $ 18.72
=============== =========== =========== =============
Gas (per Mcf)
Rocky Mtns .......... $ 1.12 $ 1.05 $ 1.51 $ 1.13
East Bayou Sorrel ... $ 2.44 $ - $ 2.71 $ --
--------------- ----------- ----------- -------------
Combined Average $ 1.25 $ 1.05 $ 1.61 $ 1.13
=============== =========== =========== =============
Per BOE (6:1)
Rocky Mtns .......... $ 13.10 $ 14.16 $ 15.05 $ 13.75
East Bayou Sorrel ... $ 18.35 $ -- $ 19.42 $ --
--------------- ----------- ----------- -------------
Combined Average $ 14.24 $ 14.16 $ 15.97 $ 13.75
=============== =========== =========== =============
Operating Margins:
Rocky Mtns:
Revenue ............... $ 483,171 $ 638,879 $ 1,087,227 $ 1,251,978
Costs ................. $ (385,384) $ (353,947) $ (688,284) $ (647,863)
--------------- ----------- ----------- -------------
Operating Margin .... $ 97,787 $ 284,932 $ 398,943 $ 604,115
=============== =========== =========== =============
Operating Margin Percent .. 20% 45% 37% 48%
East Bayou Sorrel:
Revenue .............. $ 187,202 $ -- $ 372,352 $ --
Costs ................ $ (24,920) $ -- $ (49,819) $ --
- --------------- ----------- ----------- -------------
Operating Margin ... $ 162,282 $ -- $ 322,533 $ --
=============== =========== =========== =============
Operating Margin Percent .. 87% -- 87% --
Combined Totals:
Revenue ............... $ 670,373 $ 638,879 $ 1,459,579 $ 1,251,978
Costs ................. $ (410,304) $(353,947) $ (738,103) $ (647,863)
--------------- ----------- ----------- -------------
Operating Margin .... $ 260,069 $ 284,932 $ 721,476 $ 604,115
=============== =========== =========== =============
Operating Margin Percent .. 39% 45% 49% 48%
Production Costs per
BOE before DD&A:
Rocky Mtn Region ... $ 10.64 $ 7.85 $ 9.57 $ 7.08
Gulf Coast Region .. $ 2.44 $ - $ 2.60 $ --
--------------- ----------- ----------- -------------
Combined Average $ 8.87 $ 7.85 $ 8.11 $ 7.08
=============== =========== =========== =============
Change in Revenue
Attributable to:
Production ............... $ 7,096 $ 9,729
Price .................... $ 24,398 $ 107,632
----------- -------------
Total Increase in Revenue .. $ 31,494 $ 117,361
=========== =============
</TABLE>
<PAGE>
Most of the decrease in oil and gas production for the Rocky Mountain region can
be attributed to the following: 1) the sale of several marginal, uneconomic, or
nonstrategic oil and gas properties in the second quarter 1996 that accounted
for 3,900 bbls. of oil and 4,500 Mcf of gas in the prior year; and 2) the
natural decline in production that is inherent in oil and gas wells. Both these
circumstances were largely offset by an increase in commodity prices (per BOE)
and new production from the East Bayou Sorrel Field in Louisiana.
The operating costs of the Rocky Mountain properties increased considerably in
1997 (both as a percentage of revenue and per BOE) when compared to the same
periods in 1996, primarily as a result of an extensive amount of maintenance and
stimulation procedures that were needed to maintain production. Most of the
wells in the Rocky Mountain region are between 10 and 30 years old and the
Company expects to incur higher costs from time to time since the equipment is
aging and the reservoirs are on the latter part of the decline curve. Although
the Company does not expect future costs of the Rocky Mountain properties to
increase, and anticipates that they may even be lower, it cannot be determined
when, if, or how much the costs of the Rocky Mountain properties will be in the
future based on the age of the wells and corresponding equipment.
Natural Gas Marketing and Trading
Operating statistics for the Company's Marketing and Trading Activities for the
periods presented are as follows:
For the Three Months
Ended June 30,
1997 1996
------------------- ------------
Total Volume Sold (Mcf) - 498,277
Average Price $ - $ 1.41
---------------------- ------------------
Total Revenue $ - $ 702,610
Costs - (614,784)
---------------------- ----------------
Gross Margin $ - $ 87,826
==================== ================
Gross Margin Percent 13%
For the Six Months
Ended June 30,
1997 1996
------------------- ------------
Total Volume Sold (Mcf) - 1,223,756
Average Price $ - $ 1.67
---------------------- ------------------
Total Revenue $ - $ 2,048,565
Costs - (1,745,446)
---------------------- -----------------
Gross Margin $ - $ 303,119
====================== =================
Gross Margin Percent 15%
The Company had a "take-or-pay" contract with Public Service Company of Colorado
("PSCo") which called 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 was based on the Colorado Interstate Gas Commission's "spot" price, plus
a fixed price bonus. The natural gas marketing and trading activities represent
natural gas that was purchased from third parties and sold to PSCo under the
terms of the contract.
The contract with PSCo expired on June 30, 1996. Historically, the price paid by
PSCo under that contract was at a premium above the market and therefore allowed
for the marketing and trading
-15-
<PAGE>
activities. With the increasing competition fostering within all phases of the
natural gas industry, it is unlikely that the Company will be able to negotiate
another contract that pays at an above market premium. Accordingly, the Company
is unlikely to resume marketing and trading activities. Since the gross margin
represents the net cash flow and income generated from this activity, the loss
of this premium contract price has and will have a material and negative impact
on the Company's current and future operations.
Gas Plant Processing Revenues
This category accounts for the natural gas processed and the natural gas liquids
extracted and sold by the Gas Plant facility. Operating statistics for the
periods presented are as follows:
For the Three Months
Ended June 30,
1997 1996
-------------- ------------
Volumes Volumes
Production:
Natural Gas Processed (Mcf .................. 85,312 91,590
Liquids Produced :
B-G Mix (gallons) ................... 204,100 226,300
Propane (gallons ................... 162,300 173,700
--------- ---------
Total ....................... 366,400 400,000
========= =========
Average Sales Price of Liquids (per gallon) $ 0.44 $ 0.47
Gross Margin: ............................. Amount Amount
--------- ---------
Revenue .......................... $ 162,346 $ 167,837
Costs ............................ (99,461) (126,767)
--------- ---------
Gross Margin ..................... $ 62,885 $ 41,070
========= =========
Gross Margin Percent...... 39% 24%
For the Six Months
Ended June 30,
1997 1996
--------- ---------
Volumes Volumes
Production:
Natural Gas Processed (Mcf) ............... 164,242 185,447
B-G Mix (gallons) ................. 396,200 461,400
Propane (gallons) ................. 321,400 349,000
--------- ---------
Total ....................... 717,600 810,400
========= =========
Average Sales Price of Liquids (per gallon) ... $ 0.52 $ 0.44
Gross Margin: ............................. Amount Amount
--------- ---------
Revenue .......................... $ 371,856 $ 355,680
Costs ........................... (204,299) (252,008)
--------- ---------
Gross Margin .................... $ 167,557 $ 103,672
========= =========
Gross Margin Percent..... 45% 29%
The decrease in natural gas processing volumes (per Mcf) during 1997 when
compared to the same periods in 1996, can be substantially attributed to the
normal decline in production from the two fields owned and operated by the
Company that supply the gas plant with the natural gas. The change in revenue in
1997 when compared to the same period in 1996 is a direct result of the volume
of natural gas processed and the corresponding changes in liquid prices.
-16-
<PAGE>
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 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 associated with the gas plant decreased in 1997 when
compared to the same periods in 1996 primarily because of reductions in plant
personnel and less gas was processed.
Oil Field Services and Oil Field Supply
Operating statistics for the Company's oil field service and supply operations
for the periods presented are as follows:
For the Three Months
Ended June 30,
1997 1996
------------- --------
Revenue $ 145,893 $ 104,533
Costs (139,475) ( 93,402)
----------- ------------
Net Operating Income $ 6,418 $ 11,131
============ ==========
Net Operating Margin Percent 4% 11%
For the Six Months
Ended June 30,
1997 1996
------------- --------
Revenue $ 344,212 $ 306,135
Costs (293,133) (240,677)
---------- -----------
Net Operating Income $ 51,079 $ 65,458
========== ===========
Net Operating Margin Percent 15% 21%
As expected, there has been no material change in the results of operations for
the periods presented and the Company does not expect any significant changes in
the future.
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 1997 and 1996 and the Company does not expect
any significant change in the future.
General and Administrative
General and administrative ("G&A") expenses increased approximately $118,000
during the second quarter of 1997 and approximately $218,000 during the first
half of 1997 when compared to the same periods in 1996. The increases for the
first half of 1997 are summarized below:
$ 56,000 - For consulting services (legal, accounting, land and other)
associated with the Company's expansion into the Gulf Coast.
37,000 - Travel and entertainment costs associated with the Company's
expansion into the Gulf Coast.
36,000 - Recovery of Bad Debt in 1996 (this reduced G&A expense in 1996 -
no such amounts were recovered in 1997)
-17-
<PAGE>
33,000- Payroll costs associated with an increase in base pay and insurance
benefits for virtually all the Company's officers and employees.
26,000- A Directors and Officers Liability Insurance Policy purchased on
July 1, 1996.
20,000 Directors compensation
10,000- All other, net.
$218,000
The Company expects future G&A costs to be at least at those levels incurred in
the second quarter of 1997, or approximately $130,000 per month.
Consulting Agreement - Related Party
In March 1996 the Company entered into a three-year consulting agreement with
Beta Capital Group, Inc. ("Beta"). Beta, located in Newport Beach, California,
specializes in emerging companies with both capital needs and market support
requirements. Beta's president, Steve Antry, has been a director of the Company
since August 1996. The consulting agreement with Beta provides for minimum
monthly cash payments of $17,500 plus reimbursement for out-of-pocket expenses.
Depreciation, Depletion and Amortization
Depreciation, Depletion and Amortization ("DD&A") for the periods presented,
excluding the amortization of debt issuance costs, consisted of the following:
For the Three Months
Ended June 30,
1997 1996
--------------------- ----------------
Oil and Gas Properties $ 183,732 $ 156,468
Gas Plant and Other Buildings 60,929 60,868
Rolling Stock 23,789 25,570
Other Field Equipment 9,676 7,936
Furniture and Fixtures 12,384 11,830
Non-Compete Agreement 11,499 11,499
-------- --------
Total 302,009 274,171
======= =======
For the Six Months
Ended June 30,
1997 1996
----------------------- ----------------
Oil and Gas Properties $ 323,604 $ 314,369
Gas Plant and Other Buildings 121,858 122,940
Rolling Stock 50,893 48,618
Other Field Equipment 19,134 15,882
Furniture and Fixtures 24,754 23,512
Non-Compete Agreement 22,998 22,998
-------- --------
Total 563,241 548,319
======= =======
The increase in DD&A for the periods presented is primarily related to the oil
and gas properties which is a result of increased production.
-18-
<PAGE>
Interest Expense
The higher interest expense incurred in 1996 is reflective of the increase in
the average long-term debt outstanding and amortization of the corresponding
debt issuance costs. Both of these circumstances are directly related to the
convertible debentures sold by the Company pursuant to a private placement of
convertible debentures completed in November 1996.
-19-
<PAGE>
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) Effective June 11, 1997, in accordance with provisions of the Company's
Articles of Incorporation, all outstanding $0.01 par value Series A Cumulative
Convertible Preferred Stock were automatically converted into Common Stock and
Common Stock Purchase Warrants. Other than the foregoing, there have been no
modifications to any instruments defining the rights of the holders of any class
of registered securities during 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.
(c) Recent sales of unregistered securities. The Company issued and sold the
following securities without registration under the Securities Act of 1933, as
amended ("Securities Act"), during the six months ended June 30, 1997 and
through the date of this Report.
1. Effective January 10, 1997 the Company issued 315,000 shares of its
common stock to three unrelated entities, Atocha Exploration, Inc., Potosky Oil
and Gas, Inc., and Browning Oil Company, Inc., in exchange for an undivided
interest in a producing oil and gas prospect designated as the East Bayou Sorrel
Prospect in Iberville Parish, Louisiana.
2. On January 31, 1997 the Company issued 250,000 shares of its common
stock upon exercise of outstanding purchase warrants of $1.25 per share for a
total proceeds of $312,500. The holders of the warrants received them as part of
a "unit" sold in a private placement in 1995 that consisted of common stock and
warrants. The Company relied upon Section 4(2) of the Securities Act and Rule
506 of Regulation D in claiming exemption from registration requirements of the
Securities Act for securities sold. The shares of common stock issued upon
exercise of the warrants were registered for resale by the holders in
Registration No. 33-94536.
3. Between February 1, 1997 and March 10, 1997, the Company issued
1,500,000 shares of its common stock for $3,750,000 to a group of private
investors each of whom qualified as an accredited investor as such term is
defined in Regulation D adopted by the Securities and Exchange Commission. The
Company paid a selling commission of $300,000. The Company relied upon Section
4(2) of the Securities Act and Rule 506 of Regulation D in claiming exemption
from the registration requirements of the Securities Act for the securities
sold.
-20-
<PAGE>
4. Between March 14, 1997 and April 15, 1997, the Company sold 52,000
shares of its common stock for $130,000 to a group of private investors each of
whom qualified as an accredited investor as such term is defined in Regulation D
adopted by the Securities and Exchange Commission. The Company paid a selling
commission of $10,400. The Company relied upon Section 4(2) of the Securities
Act and Rule 506 of Regulation D in claiming exemption from the registration
requirements of the Securities Act for the securities sold.
5. Through June 30, 1997 holders of $820,000 of the Company's outstanding
collateralized convertible 10% debentures ("Debentures") surrendered such
Debentures to the Company for conversion into 273,332 shares of the Company's
common stock in accordance with conversion provisions of the Debentures. The
Certificates representing the shares issued upon conversion bear a restrictive
legend prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer" instructions
have been issued to the transfer agent. The shares of common stock issued upon
conversion have been registered for resale by the holders on Registration No.
333-19589. The Company relied upon Section 3(a)9 of the Securities Act for
issuance of the securities.
6. On February 14, 1997, the Company issued 4,000 shares of its common
stock to two consultants of the Company in lieu of cash for consulting services
rendered to the Company valued at $8,000 for financial reporting purposes. The
Certificates representing the shares issued bear a restrictive legend
prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer" instructions
have been issued to the transfer agent.
7. Between March 1, 1997 and April 15, 1997 the Company issued 2,482,500
shares of its common stock upon exercise of a like number of warrants at $1.25
per warrant for a total proceeds of $3,103,125. Holders of such warrants
acquired the warrants in the Company's 1996 private placement of Debentures and
Warrants. The warrants would have expired if not previously exercised on April
15, 1997. The Certificates representing the shares issued upon exercise bear a
restrictive legend prohibiting transfer without registration under the
Securities Act or the availability of an exemption from registration and "stop
transfer" instructions have been issued to the transfer agent. The shares issued
upon exercise of warrants were registered by the Company for resale by the
holders in Registration No. 333-19589. The Company relied upon Rule 506 of
Regulation D in claiming exemption for the registration requirements of the
Securities Act for issuance of the securities upon exercise of the warrants.
8. Between March 1, 1997 and June 3, 1997, the Company issued 125,000
shares of its common stock upon exercise of outstanding stock purchase warrants
at $0.75 per share for total proceeds of $82,500 to the Company. The
Certificates representing the shares issued upon exercise bear a restrictive
legend prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer" instructions
have been issued to the transfer agent. The holder of the warrants is an
affiliate of Beta Capital Group, Inc. with whom the Company has a consulting
agreement and to whom the warrants were issued in February 1996. The shares of
common stock issued upon exercise of the warrants were registered for resale by
the holder in Registration No. 333-19589.
-21-
<PAGE>
9. Between June 23, 1997 and July 21, 1997 the Company issued 20,000 shares
of its common stock upon exercise of outstanding stock purchase warrants at
$0.75 per share for total proceeds of $15,000 to the Company (10,000 shares had
been issued as of June 30, 1997). The warrants were originally issued to Beta
Capital Group, Inc. with whom the Company has a consulting agreement and to whom
the warrants were issued in February 1996. Subsequent to their issuance, Beta
re-assigned the warrants to another holder. The Certificates representing the
shares issued upon exercise bear a restrictive legend prohibiting transfer
without registration under the Securities Act or the availability of an
exemption from registration and "stop transfer" instructions have been issued to
the transfer agent. The shares of common stock issued upon exercise of the
warrants were registered for resale by the holder in Registration No. 333-19589.
10. Between January 1997 and May 12, 1997, the Company issued 75,350 shares
of its common stock upon exercise of outstanding stock purchase warrants issued
by the Company between 1994 and 1996 to certain broker/dealers in connection
with private placements of Company securities during such time. The Company
received $134,900 of proceeds upon exercise of the warrants. The Certificates
representing the shares issued upon exercise bear a restrictive legend
prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer" instructions
have been issued to the transfer agent. The shares of common stock issued upon
exercise were registered by the Company for resale by the holders under
Registration Nos. 333-19589 and 33-94536.
11. On June 25, 1997 the Company issued 670 shares of its common stock to
one retiring director in lieu of cash for services to the Company valued at
$2,155 for financial reporting purposes. The Certificates representing the
shares issued bear a restrictive legend prohibiting transfer without
registration under the Securities Act or the availability of an exemption from
registration and "stop transfer" instructions have been issued to the transfer
agent.
12. On July 14, 1997 the Company issued 3,150 shares of its common stock to
one director in exchange for an overriding royalty interest in the producing oil
and gas prospect designated as the East Bayou Sorrel Prospect, Iberville Parish,
Louisiana. The shares were valued at $10,000 for financial reporting purposes.
The Certificates representing the shares issued bear a restrictive legend
prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer" instructions
have been issued to the transfer agent.
13. On July 18, 1997, the Company issued 2,240,000 shares of its common
stock for $5,600,000 to a group of private investors each of whom qualified as
an accredited investor as such term is defined in Regulation D adopted by the
Securities and Exchange Commission. The Company paid a selling commission of
$560,000. The Company relied upon Section 4(2) of the Securities Act and Rule
506 of Regulation D in claiming exemption from the registration requirements of
the Securities Act for the securities sold. The Certificates representing the
shares issued a restrictive legend prohibiting transfer without registration
under the Securities Act or the availability of an exemption from registration
and "stop transfer" instructions have been issued to the transfer agent.
-22-
<PAGE>
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 forgo 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. The
dividends continued to accrue on a monthly basis and were cumulative. Pursuant
to the terms of the Articles of Incorporation, on June 11, 1997 all the
outstanding Preferred Stock (96,847 shares on that date) plus all the dividends
in arrears, automatically converted into Common Stock and Common Stock Purchase
Warrants at a ratio of 3.1875 to 1. Accordingly, as of June 30, 1997, there were
no shares of Preferred Stock outstanding and no dividends in arrears.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held at the Newport Beach
Marriott Hotel and Tennis Club, 900 Newport Center Drive, Newport Beach,
California on Saturday, May 31, 1997, at 10:00 A.M. Pacific Daylight Time. The
matters submitted to a vote of the Company's security holders as well as the
results of the votes cast are as follows:
I. Matters Voted Upon by Holders of Common Stock
The election of three Class A directors to serve on the Company's
Board of Directors totaling eleven directors. A summary of the votes
cast are as follows:
<TABLE>
<CAPTION>
Votes Received
In Favor of Votes Withheld
% of % of
Number Shares Number Shares
<S> <C> <C> <C>
R. Thomas Fetters, Jr 9,801,218 77.7% 38,076 .3%
James N. Burkhalter .. 9,801,218 77.7% 38,076 .3%
Patrick J. Duncan .... 9,799,718 77.6% 39,576 .3%
</TABLE>
As a result of the voting, R. Thomas Fetters, James N. Burkhalter and
Patrick J. Duncan were elected as Class A Directors to serve in that
capacity until the Annual Meeting of Stockholders in 2000.
II. Matters Voted Upon by Holders of Preferred Stock
(1) The election of two directors to represent the holders of
Preferred Stock on the Company's Board of Directors totaling
eleven directors. A summary of the votes cast are as follows:
-23-
<PAGE>
Votes Received
In Favor of Votes Withheld
% of % of
Number Shares Number Shares
---------------------------------------------------
Steve Antry 103,238 92.67% 372 .3%
LeRoy Smith 103,238 92.67% 372 .3%
As a result of the votes, Steve Antry and Leroy Smith shall serve on
the Company's Board of Directors representing the Preferred
Stockholders until such time all past due dividends have been paid or
until re-elected or replaced at the next Annual Meeting of the
Company's stockholders in 1998.
II. Matters Voted Upon by Holders of Common Stock and Preferred Stock
The approval of an amendment to the Articles of Incorporation
increasing the number of authorized shares of common Stock from 25
million to 40 million. A summary of the votes cast are as follows:
Shares % of
Vote Voted Shares
-------------- ----------- ------
In Favor of 9,431,576 74.4%
Against 328,282 2.6%
Withheld 79,436 .6%
Not Voted 2,778,592 22.4%
As a result of the voting, the stockholders of the Company ratified,
approved and adopted the amendment to the Articles of Incorporation to
increase the authorized Common Stock to 40 million shares.
Item 5. Other Information
In connection with the automatic conversion of all of the Company's outstanding
Preferred Stock into Common Stock and Common Stock Purchase Warrants on June 11,
1997, the two directors that were elected to represent the Preferred
Stockholders, Mr. LeRoy Smith and Mr. Steve Antry, were automatically dropped
from the Board of Directors pursuant to the terms of the Articles of
Incorporation. In July 1997, Mr. Antry was reinstated as a Class B director to
serve in that capacity until the Annual Meeting of Stockholders in 1998.
Accordingly, the Company's current Board of Directors consists of ten (10)
directors.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
(1) Exhibit 27, "Financial Data Schedule".
-24-
<PAGE>
(b) The following reports on Form 8-K were filed during the quarter ended
June 30, 1997:
Item Reported Date Financial Statements
(1) Item 5 May 31, 1997 None
(2) Items 5 and 7 June 12, 1997 None
(3) Items 5 and 7 June 27,1997 None
There were no financial statements filed during the quarter ended June
30, 1997 other than the 10-QSB for the quarter ended March 31, 1997.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PEASE OIL AND GAS COMPANY
Date: August 11, 1997 By: /s/ Willard H. Pease, Jr.
Willard H. Pease, Jr.
President and Chief Executive Officer
Date: August 11, 1997 By: /s/ Patrick J. Duncan
Patrick J. Duncan
Chief Financial Officer and
Principal Accounting Officer
-25-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,529,578
<SECURITIES> 0
<RECEIVABLES> 510,664
<ALLOWANCES> 24,395
<INVENTORY> 434,702
<CURRENT-ASSETS> 4,522,261
<PP&E> 21,116,048
<DEPRECIATION> 5,802,973
<TOTAL-ASSETS> 21,209,346
<CURRENT-LIABILITIES> 1,151,301
<BONDS> 4,180,000
0
0
<COMMON> 1,316,108
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 21,209,346
<SALES> 2,175,647
<TOTAL-REVENUES> 2,214,551
<CGS> 1,235,535
<TOTAL-COSTS> 1,601,251
<OTHER-EXPENSES> 893,548
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 369,045
<INCOME-PRETAX> (1,149,421)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,149,421)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,239,390)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
