SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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,
Grand Junction, Colorado 81506
-------------------------------------- --------
(Address of principal executive offices) (Zip code)
(970) 245-5917
----------------------------------------------
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b)
of the Act:
(None)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $.10 Per Share)
Series A Cumulative Convertible Preferred Stock (Par Value $0.01 Per Share)
Common Stock Purchase Warrants (Expire August 13, 1998)
Title of Class
Check whether the issuer (1) 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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B, is not contained in this form and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
the Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $6,165,664.
As of February 21, 1997, Registrant had 8,357,427 shares of its $0.10 par value
Common Stock and 141,822 shares of its $0.01 par value Series A Cumulative
Convertible Preferred Stock outstanding. As of February 21, 1997 the aggregate
market value of the common stock, the Registrant's only class of voting stock,
held by non-affiliates was $23,584,935. This calculation is based upon the
closing sales price of $3.25 per share on February 21, 1997.
<PAGE>
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
PART I
Item 1 Description of Business
Item 2 Description of Property
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for Common Equity and Related Stockholder Matters
Item 6 Management's Discussion and Analysis
Item 7 Financial Statements
Item 8 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Item 10 Executive Compensation.
Item 11 Security Ownership of Certain Beneficial Owners and Management.
Item 12 Certain Relationships and Related Transactions.
Item 13 Exhibits and Reports on Form 8-K
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PART I
ITEM 1 - BUSINESS
GENERAL
Pease Oil and Gas Company ("Company"), was incorporated under the laws of the
state of Nevada on September 11, 1968. The Company's address is 751 Horizon
Court, Suite 203, Grand Junction, Colorado 81506 and its telephone number is
(970) 245-5917. The Company is engaged in the oil and gas acquisition,
exploration, development and production business. Historically, the Company's
operations were in the western United States, primarily in Colorado, Nebraska,
Utah, and Wyoming. During 1996 and early in 1997, the Company has taken
initiatives to expand its operations in to the Gulf Coast region of Alabama,
Southern Louisiana and Texas.
On August 23, 1993, the Company acquired Skaer Enterprises, Inc. a Colorado
corporation, its related businesses and related oil and gas properties
(collectively "Skaer"). Skaer was privately owned and operated, and was
considered one of the largest private independent oil and gas companies in
Colorado, operating exclusively in the Denver-Julesburg Basin ("DJ Basin") of
northeastern Colorado. This acquisition substantially expanded the Company's
operations into providing oil field services, oil field supplies, natural gas
processing and natural gas marketing. Skaer was acquired for $12,200,000,
including $300,000 of various costs associated with the acquisition. This
acquisition was financed through: i) the issuance of 900,000 shares of preferred
stock in a public offering which generated net proceeds of $7,965,000; ii) the
issuance of restricted common and preferred stock with an agreed value of
$1,900,000 to the sellers; and iii) a $2,400,000 loan from a bank.
RECENT ACQUISITIONS AND DEVELOPMENTS
As discussed in the following paragraphs, the Company, through a series of
acquisitions and the development of strategic alliances with several private and
public exploration companies, has positioned itself to expand its asset base
into the Gulf Coast Region of Alabama, Southern Louisiana and Texas.
On January 10, 1997, the Company acquired a 7.8125% After Prospect Payout
Working Interest in the East Bayou Sorrel Prospect from third parties for a
total purchase price of $1.75 million. The purchase price consisted of the
issuance of 315,000 shares of the Company's common stock and $875,000 cash. On
March 3, 1997 the Company acquired an additional 10% working interest in this
prospect from unrelated third parties for $2.5 million cash. The prospect
contains a discovery well, the C.E. Schwing #1, which in February 1997 was
producing in excess of 1,400 barrels of oil per day and 1,300 MCF of natural gas
per day with a flowing tubing pressure of 6,300 PSI on a 12/64" choke from a
perforated interval of 13,208 feet to 13,226 feet. The C.E. Schwing #1 went on
production in December 1996. These acquisitions were funded with the Company's
existing working capital and the proceeds generated from a private placement of
common stock during February and March 1997. In that placement, the Company sold
1,500,000 shares of the Company's restricted common stock to accredited
investors for $2.50 per share. The private placement was completed on March 10,
1997 generating net proceeds of approximately $3.3 million.
On February 4, 1997 the Company entered into a definitive agreement with
National Energy Group, Inc. ("NEGX"), a publicly held company headquartered in
Dallas, Texas. NEGX is the operator of the East Bayou Sorrel Prospect. The
Agreement provides the Company the right and obligation to participate with NEGX
in various oil and gas exploration projects over the course of the next two
years. Essentially, the agreement consists of three main elements. First, Pease
has the right and obligation to participate as a 12.5% working interest owner in
NEGX's outlined exploration program. Specifically, there are 10 identified
projects including: Mustang Island located in Nueces County, Texas; Bayou Sorrel
located in Iberville Parish, Louisiana; and Robertsdale located in Baldwin
County, Alabama. Second, subject to certain conditions defined in the agreement,
Pease has the right and obligation to participate in any future prospects
generated under NEGX's exclusive arrangement with Sandefer Oil and Gas, 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. The East Bayou Sorrel prospect discussed in the
previous paragraph was generated by Sandefer. Third, Pease is entitled to
participate in any third party generated prospects that NEGX participates in
subject to certain conditions as defined in the Agreement.
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BUSINESS STRATEGY
The recent acquisitions and developments are the first steps in transforming the
Company. Its future business strategy is to expand its reserve base and cash
flow by utilizing its existing asset base in the Rocky Mountain Region and
cultivating the recent acquisitions, strategic alliances and opportunities in
the Gulf Coast Region of Alabama, Southern Louisiana and Texas. The Company will
attempt to execute this strategy through:
o Raising significant capital to take advantage of leading edge technologies
such as horizontal drilling and 3-D seismic exploration projects;
o Positioning itself with strategic sources of capital and partners that can
react to opportunities in the oil and gas business when they present
themselves;
o Developing alliances with major oil and gas finders that have been trained
by major oil companies; o Participating in exploration projects that have
opportunities involving relatively small amounts of capital that could
potentially generate significant rates of return. These projects include
areas with large field potentials in Alabama, Southern Louisiana, Texas and
the Gulf of Mexico. Generally, the exploration projects will target fields
with potential reserves of 10 million barrels of oil or 100 Bcf of gas;
o Implementing the Company's investment strategy to carefully consider,
analyze, and exploit the potential value of the Company's existing assets
to increase the rate of return to its shareholders;
o Reinvesting operating cash flows into development drilling and recompletion
activities; o Continuing the expansion of the Company's operations outside
the D-J Basin; o Continuing the implementation of asset rationalization and
operating efficiencies designed to improve operating margins and lower per
unit operating cost;
o Acquiring properties that build upon and enhance the Company's existing
asset base;
o Developing a long term track record regarding stock price performance and a
reasonable rate of return to shareholders.
The Company recognizes that the ability to implement its business strategies is
largely dependent on the ability to raise additional debt or equity capital to
fund future acquisition, exploration, drilling and development activities. The
Company's Capital resources are discussed more thoroughly in Part II, Item 6, in
Management's Discussion and Analysis.
OPERATIONS
As of December 31, 1996, the Company had varying ownership interests in 189
gross productive wells (174 net) located in five states. The Company operates
179 of the 189 wells, the other wells are operated by independent operators
under contracts that are standard in the industry.
The following table presents information on the Company's major operating areas
as of December 31, 1996:
Net Proved Reserves
-------------------
STATE REGION Bbls Mcf
----- ------ ---- ---
CO, WY, NE .......................... DJ Basin 996,000 3,950,000
Utah ................................ Greater Cisco
and Four Corners 143,000 750,000
Wyoming ............................. Big Horn Basin 35,000 --
CO & AR ............................. Various 1,000 133,000
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Total .......................... 1,175,000 4,833,000
========= =========
It is a primary objective of the Company to operate most of the oil and gas
properties located in the Rocky Mountain Region in which it has an economic
interest. The Company believes, with the responsibility and authority as
operator, it is in a better position to control costs, safety, and timeliness of
work as well as other critical factors affecting the economics of a well.
At the present time, oil and natural gas prospects pursued in the Gulf Coast
region will be pursued by the Company as a non-operator.
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COMPETITION
The oil and gas industry is highly competitive in all phases. The Company
encounters strong competition from other independent oil and gas companies in
acquiring economically desirable prospects as well as in marketing production
therefrom and obtaining external financing. Many of the Company's competitors
may have financial resources, personnel resources, and facilities substantially
greater than those of the Company.
Because there has been a decrease in exploration for and development of oil and
gas properties in the United States, there is increased competition for lower
risk development opportunities and for available sources of financing. In
addition, the marketing and sale of natural gas and processed gas are extremely
competitive. Accordingly, the competitive environment in which the Company
operates is unsettled.
MARKETS
Overview - The three principal products currently produced and marketed by the
Company are crude oil, natural gas and natural gas liquids ("NGL's"). The
Company does not currently use commodity futures contracts and price swaps in
the sales or marketing of its natural gas and crude oil.
Crude Oil - Oil produced from the Company's properties is generally transported
by truck to unaffiliated third-party purchasers at the prevailing field price
("the posted price"). Currently, the three primary purchasers of the Company's
crude oil are Total Petroleum, Inc., Texaco Trading and Transportation, Inc. and
Scurlock-Permian Corporation. Together these three purchasers buy more than 80%
of the Company's annual crude oil production. The contracts are month-to-month
and subject to change. The market for the Company's crude oil is competitive and
therefore the Company does not believe that the loss of one of its primary
purchasers would have a material adverse effect on the Company's business
because other arrangements could be made to market the Company's crude oil
products. The Company does not anticipate problems in selling future oil
production since purchases are made based on current market conditions and
pricing. Oil prices are subject to volatility due to several factors beyond the
Company's control including: political turmoil; domestic and foreign production
levels; OPEC's ability to adhere to production quotas; and possible governmental
control or regulation.
Natural Gas - The Company sells its natural gas production in two principal
ways: a.) at the wellhead to various pipeline purchasers or natural gas
marketing companies; and b.) at the tailgate of its Gas Plant to either Public
Service Company of Colorado ("PSCo") or Hewlett-Packard Company ("HP"). The
wellhead contracts have various terms and conditions, including contract
duration. Under each wellhead contract the purchaser is generally responsible
for gathering, transporting, processing and selling the natural gas and natural
gas liquids and the Company receives a net price at the wellhead.
The residue gas sold at the tailgate of the Company's Gas Plant to PSCo is
subject to a month-to-month contract and the Gas sold to HP is subject to a
17-year contract. The gas to both parties is priced on an MMBtu basis at an
index spot price.
Natural Gas Liquids - The Company produces two natural gas liquid products at
its Gas Plant, butane-gasoline mix and propane. The butane gasoline mix is sold
to an unaffiliated party at prevailing market prices on a month-to-month basis.
The propane is sold under a month-to-month arrangement with one or more local
propane wholesalers for resale to the local propane market. The Company does not
believe that the loss of the current purchasers of these products would have a
material adverse effect on the Company's business because it believes other,
similar arrangements could be made to market the Company's natural gas liquids.
REGULATIONS
General - All aspects of the oil and gas industry are extensively regulated by
federal, state, and local governments in all areas in which the Company has
operations.
The following discussion of regulation of the oil and gas industry is
necessarily brief and is not intended to constitute a complete discussion of the
various statutes, rules, regulations or governmental orders to which the
Company's operations may be subject.
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Price Controls on Liquid Hydrocarbons - There are currently no federal price
controls on liquid hydrocarbons (including oil, natural gas and natural gas
liquids). As a result, the Company sells oil produced from its properties at
unregulated market prices which historically have been volatile.
Federal Regulation of Sales and Transportation of Natural Gas - Historically,
the transportation and sale of natural gas in interstate commerce have been
regulated pursuant to the Natural Gas Act ("NGA"), the Natural Gas Policy Act of
1978 ("NGPA") and regulations promulgated thereunder. The Natural Gas Wellhead
Decontrol Act of 1989 eliminated all regulation of wellhead gas sales effective
January 1, 1993. As a result, the Company's gas sales are no longer regulated.
The transportation and resale in interstate commerce of natural gas produced and
sold by the Company continues to be subject to regulation by the Federal Energy
Regulatory Commission ("FERC") under the NGA. The transportation and resale of
natural gas transported and resold within the state of its production is usually
regulated by the state involved. In Colorado such regulation is by the Colorado
Public Utility Commission. Although federal and state regulation of the
transportation and resale of natural gas produced by the Company currently does
not have any material direct impact on the Company, such regulation does have a
material impact on the market for the Company's natural gas production and the
price the Company receives for its natural gas production. Adverse changes in
the regulation affecting the Company's gas markets could have a material impact
on the Company.
Commencing in the mid-1980's and continuing until the present, the FERC
promulgated several orders designed to correct market distortions and to make
gas markets more flexible and competitive. These orders have had a profound
influence on natural gas markets in the United States and have, among other
things, increased the importance of interstate gas transportation and encouraged
development of a large spot market for gas.
On April 8, 1992, the FERC issued Order No. 636 requiring material restructuring
of the sales and transportation service provided by interstate pipeline
companies. The primary element of Order No. 636 was the mandatory unbundling of
interstate gas transportation services and storage separately from their gas
sales. The unbundled transportation and storage was required to be offered
without favoring gas bought from the pipeline. Order No. 636 did not require
pipelines to stop buying and reselling gas; to the contrary, it contained
specific provisions to allow pipelines to continue unbundled sales of natural
gas. However, after Order No. 636 there was little reason for a pipeline to
continue selling natural gas and most pipelines moved all or almost all of their
gas purchases and sales to affiliated marketing companies.
Order No. 636 does not regulate gas producers such as the Company. However,
Order No. 636 does appear to have achieved FERC's stated goal of fostering
increased competition within all phases of the natural gas industry. Generally
speaking, this increased competition has driven the price down for natural gas
produced by the Company and other producers in the DJ Basin. It is unclear what
further impact the increased competition will have on the Company as a gas
producer and seller in the future. Increased flexibility and competition
provides greater assurance of access to markets, but has consequently reduced or
restrained prices.
In addition to FERC regulation of interstate pipelines under the NGA, various
state commissions also regulate the rates and services of pipelines whose
operations are purely intrastate in nature. To the extent intrastate pipelines
elect to transport gas in interstate commerce under certain provisions of the
NGPA, those transactions are subject to limited FERC regulation under the NGPA
and may ultimately effect the price of natural gas sold by the Company.
There are many legislative proposals pending in Congress and in the legislatures
of various states that, if enacted, might significantly affect the oil and gas
industry. The Company is not able to predict what will be enacted and thus what
effect, if any, such proposals would ultimately have on the Company.
State and Local Regulation of Drilling and Production - State regulatory
authorities have established rules and regulations requiring permits for
drilling, bonds for drilling, reclamation and plugging operations, limitations
on spacing and pooling of wells, and reports concerning operations, among other
matters. The states in which the Company operates also have statutes and
regulations governing a number of environmental and conservation matters,
including the unitization and pooling of oil and gas properties and
establishment of maximum rates of production from oil and gas wells. A few
states also prorate production to the market demand for oil and gas. These
statutes and
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regulations limit the rate at which oil and gas could otherwise be produced or
the prices obtained from the Company's properties.
During the 1993 session of the Colorado legislature, a coalition of surface
owner organizations attempted to persuade the legislators to enact a bill
requiring the payment of damages to surface owners. Such legislation could
increase the cost of the Company's operations and erode the traditional rights
of the oil and gas industry in Colorado to make reasonable use of the surface to
conduct drilling and development activities. Although the bill was withdrawn by
the surface owners after it was significantly amended, and no such legislation
has been presented since 1993 (to the Company's knowledge), surface owner groups
have indicated they may seek a statewide constitutional ballot initiative to
mandate compensation to surface owners and will attempt to increase regulation
of the oil and gas industry at the local government level. The involvement of
such local governments could not prohibit the conduct of drilling activities
within their boundaries which were the subject of permits issued by the Colorado
Oil and Gas Conservation Commission ("COGCC") but that they could regulate such
activities under their land use authority. Accordingly, under these decisions,
local municipalities and counties may take the position that they have the
authority to impose restrictions or conditions on the conduct of such operations
which could materially increase the cost of such operations or even render them
entirely uneconomic. In 1993 and 1991 the Cities of Thornton, Broomfield, and
Greeley, the Town of Frederick and Boulder County, enacted such ordinances. The
Company does not have any properties within these boundaries. The Company is not
able to predict which jurisdictions may adopt such regulations, what form they
will take or the ultimate effects of such enactments on its operations. However,
in general these ordinances are aimed at increasing the involvement of local
governments in the permitting of oil and gas operations, requiring additional
restrictions or conditions on the conduct of operations to reduce the impact on
the surrounding community and increasing financial assurance requirements.
Accordingly, the ordinances have the potential to delay and increase the cost,
or even in some cases to prohibit entirely, the conduct of the Company's
drilling activities.
In response to the concerns of surface owner groups, the COGCC has adopted
regulations for the D-J Basin governing notices to and consultation with surface
owners prior to the conduct of drilling operations, imposing specific
reclamation requirements on operators upon the conclusion of operations, and
containing bonding provisions to enforce these new requirements. The COGCC in
1994 modified its rules to require the mandatory installation of surface casing
to depths below known fresh water aquifers in the D-J Basin and is continuing to
consider additional measures for protection of surface owners, enhanced
financial assurance requirements, and modifications to its rules concerning
safety and plugging and abandonment. The rules adopted or modified by the COGCC
to date have not had a material impact on the Company but it is not possible to
predict what additional changes will be made or what their financial or
operational impact will be on the Company.
Under the sponsorship of the Colorado Department of Natural Resources,
legislation was approved in the 1994 session of the Colorado legislature to
enhance the authority of the COGCC to regulate oil and gas operations.
Representatives of the oil and gas industry were involved in the drafting of
this legislation, along with representatives of the agricultural industry, local
governments and environmental groups, and are working closely with the COGCC on
the consideration and drafting of new rules to address the concerns that have
been raised about the effects of oil and gas operations. Although the Company
believes that it generally conducts its operation in accordance with the
procedures contemplated in the pending regulatory initiatives, management is not
able to predict the final form of the initiatives or their impact on the
Company.
Recently, Wyoming increased its bonding and financial requirements for operators
acquiring existing properties. These new requirements are not expected to have a
significant impact on the Company or its operations.
Environmental Regulations - The production, handling, transportation and
disposal of oil and gas and by-products are subject to regulation under federal,
state and local environmental laws. In most instances, the applicable regulatory
requirements relate to water and air pollution control and solid waste
management measures or to restrictions of operations in environmentally
sensitive areas. In connection with its acquisitions, the Company attempts to
perform environmental assessments. However, environmental assessments have not
been performed on all of the Company's properties. To date, expenditures for
environmental control facilities and for remediation have not been significant
in relation to the Company's results of operations. However, it is reasonably
likely that the trend in environmental legislation and regulations will continue
towards stricter standards and may result in significant
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future costs to the Company. For instance, efforts have been made in Congress to
amend the Resource Conservation and Recovery Act to reclassify oil and gas
production wastes as "Hazardous Waste," the effect of which would be to further
regulate the handling, transportation and disposal of such waste. If such
legislation were to pass, it could have a significant adverse impact on the
operating costs of the Company, as well as the oil and gas industry in general.
New initiatives regulating the disposal of oil and gas waste are also pending in
certain states, including states in which the Company conducts operations, and
these various initiatives could have a similar impact on the Company. The COGCC
has enacted rules regarding the regulation of disposal of oil field waste,
including waste currently exempt from federal regulation. These rules may
require the termination of production from some of the Company's marginal wells
for which the cost of compliance would exceed the value of remaining production.
In addition, as indicated above, the COGCC has enacted regulations imposing
specific reclamation requirements on operators upon the conclusion of the
operations, and is currently chairing a group including representatives of the
oil and gas industry, environmental groups, surface owners, and local
governments to consider adopting statewide reclamation requirements. The COGCC
is also in the process of preparing new rules governing production pits which
are intended to require closure of unlined pits and certain steel, fiberglass,
cement and other vessels in designated sensitive areas (which will probably
include most of the areas in Colorado that the Company operates) or adequate
proof that such pits or vessels are not leaking. As currently drafted, such
rules would permit operators to comply over a period of at least two years. The
COGCC proposals will be subject to review and comment of water quality agencies
and other interested parties and thus may change from the approach described
above. Management believes that compliance with current applicable laws and
regulations or with proposals in their present form could possibly have a
material adverse impact on the Company, but management is unable to predict the
final form of the pending regulations or their potential impact on the Company.
Wyoming has recently established more stringent environmental regulations to
ensure compliance with federal regulations. These new regulations are not
expected to have a significant impact on the Company or its operations.
The Company believes that its operations comply with all applicable legislation
and regulations in all material respects, and that the existence of such
regulations has had no more restrictive effect on the Company's method of
operations than other similar companies in the industry. Although the Company
does not believe its business operations presently impair environmental quality,
compliance with federal, state and local regulations which have been enacted or
adopted regulating the discharge of materials into the environment could have an
adverse effect upon the capital expenditures, earnings and competitive position
of the Company, the extent of which the Company now is unable to assess.
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to the usual hazards incident to the
drilling and production of oil and gas, such as blowouts, cratering, explosions,
uncontrollable flows of oil, gas or well fluids, fires, pollution, releases of
toxic gas and other environmental hazards and risks. These hazards can cause
personal injury and loss of life, severe damage to and destruction of property
and equipment, pollution or environmental damage and suspension of operations.
The Company maintains insurance of various types to cover its operations. The
Company's insurance does not cover every potential risk associated with the
drilling and production of oil and gas. In particular, coverage is not
obtainable for certain types of environmental hazards. The occurrence of a
significant adverse event, the risks of which are not fully covered by
insurance, could have a material adverse effect on the Company's financial
condition and results of operations. Moreover, no assurance can be given that
the Company will be able to maintain adequate insurance in the future at rates
it considers reasonable.
ADMINISTRATION
Office Facilities - The Company currently rents approximately 4,000 square feet
in an office facility in Grand Junction, Colorado owned by an unrelated party.
The rental rate is $31,440 per year through June 30, 2000.
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Employees - As of February 21, 1997, the Company had 35 full time employees,
none of whom is covered by a collective bargaining agreement. The Company
considers its relations with its employees satisfactory.
ITEM 2 - PROPERTIES
PRINCIPAL OIL AND GAS INTERESTS
Developed Acreage - The Company's producing properties as of December 31, 1996
are located in the following areas shown in the table below:
<TABLE>
<CAPTION>
OIL GAS Developed Acreage
--------------- --------------- -----------------
Gross Net(2) Gross Net(2) Gross Net(2)
Fields State Wells(1) Wells Wells(1) Wells Acreage Acreage
- ------------------------ ------------ ----- ----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Loveland Field Colorado 88 87 5,083 5,047
Lower Horse Draw Field Colorado 2 1 400 204
North Minto Field Colorado 3 3 440 432
Pod Field Colorado 6 6 600 600
Yenter Field Colorado 6 6 1,655 1,655
Johnson's Corner Colorado 5 4 1,122 1,122
West Peetz Field Colorado 5 4 785 785
Cisco Dome Utah 1 1 38 31 8,877 8,267
Cowboy Utah 4 4 1,200 1,199
Enos Creek Wyoming 2 1 280 215
Other Fields CO/NB/UT 25 23 4 3 6,443 4,543
------ ------ ----- ----- ------ ------
Totals 147 140 42 34 26,885 24,069
====== ====== ===== ===== ====== ======
</TABLE>
- ------------------
Footnotes
(1) Wells which produce both gas and oil in commercial quantities are
classified as "oil" wells for disclosure purposes.
(2) "Net" wells and "net" acres refer to the Company's fractional working
interests multiplied by the number of wells or number of acres.
The majority of the Company's producing oil and gas properties are located on
leases held by the Company for as long as production is maintained.
Undeveloped Acreage - The Company's gross and net working interests in leased
undeveloped acreage in the Rocky Mountain Region as of December 31, 1996 is 406
and 366 acres, respectively. All these properties are located in Colorado and
will expire at various times in 1997 unless production has been obtained. The
Company's gross and net working interests in leased and developed acreage in
Louisiana as of December 31, 1996 is 1600 and 100 acres respectively. This
consists of one property and will expire in 1998 unless production has been
obtained.
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GULF COAST PROSPECTS
Overview - In 1997 and 1998, the Company will be directing a significant portion
of its resources to the Gulf Coast region, which is currently one of the most
actively explored areas in the United States. The Company's strategy for
entering the Gulf Coast area is to team up with the best oil and gas finders in
any specific area. The Company is focusing in South Louisiana, shallow Texas
State waters and specific areas where the Company believes it has strategic
advantage including Alabama and certain Texas areas., The parameters in general
are that the target reserves are 100 BCFG and/or 10 million bbls. oil. With this
strategy in mind, the Company is typically drilling to deeper horizons which
significant reserves have been found at shallower depths.
Currently, three prospects are in the process of drilling or are expected to
commence drilling in the first quarter of 1997. These include East Bayou Sorrel,
South Lake Arthur and Brazos Block 480. A brief description of these prospects
follows.
East Bayou Sorrel and Bayou Sorrel Area: This exploration prospect was generated
by Sandefer Oil and Gas. The initial exploratory location was selected with the
use of reprocessed 2D seismic data. The well, Schwing #1, was drilled in the
East Bayou Sorrel field, Iberville Parish, LA, to a total depth of 13,200 ft.
Upon test it flowed at a sustained rate of 1,026 barrels of oil and 980 Mcf of
gas per day with a flowing tubing pressure of 6,670 psi on an 8/64" choke. In
February 1997, the well was producing at or near the maximum allowable rate of
1,400 barrels of oil per day on a restricted choke.
In January 1997, the Company purchased a 7.8125% after prospect payout working
interest in the area of mutual interest (AMI) which includes the East Bayou
Sorrel Prospect. The Company acquired an additional 10% working interest in this
prospect in February 1997. The operator has identified seven productive zones in
the Schwing #1 well of which only one was tested and is on production.
Additional pay sands may be discovered in the second well, which is expected to
commence drilling operations in March 1997.
National Energy has planned a 33-square mile 3D seismic exploration program over
the Bayou Sorrel AMI area. The seismic program will commence in 1997. The 3D
data will compliment an already extensive database of reprocessed 2D seismic
data and a number of existing well logs. The Company's participation in the
Bayou Sorrel drilling and 3D seismic exploration program are expected to provide
significant exposure to potential productive drilling opportunities. The 3D
interpretation should help define the potential of the upper Marg vag pay zone
sandstone. It is believed that a productive section of a proven producing
formation will be found in Bayou Sorrel based on the existing 2D and well log
data. Because the formation is a profile producer in the region, Bayou Sorrel is
a potential large reserve prospect. Sandefer Oil and Gas and NEGX have also
identified two other fault blocks suitable for drilling from existing data and
will focus on this area with the 3D seismic exploration program which will give
the Company additional opportunities to participate in high potential reserve
projects.
South Lake Arthur - South Lake Arthur is located in Jefferson Davis Parish,
Louisiana. It is a four-way dip closure. Sandefer Oil and Gas has previously
drilled this prospect to 17,375 feet but the well was subsequently abandoned. In
reviewing the well data of this and other nearby wells, it was determined that
the well was most likely not tested sufficiently and inadequately completed.
Sandefer geologists believe this well would have been found to be a producer if
it had been properly tested. NEGX acquired this lease from Sandefer and planned
a well near the original Sandefer well. The well is currently being drilled. The
Company is participating at 1/16 of the working interest under its agreement
with NEGX. A very large gas field is in close proximity. A productive sandstone
formation underlies the prospect at a depth of between 18,000 feet and 20,000
feet. A large multi-national natural resources firm has announced plans to drill
to the same formation in the area, which may reveal the potential of this deep
play and influence future participation in this prospect.
Brazos Block 480 Prospect - Brazos Block 480 is the only offshore prospect in
which the Company is presently participating. This prospect, located within a
prolific gas producing geologic trend of offshore Texas, is believed to be
analogous to Amoco's Matagorda Block 519 Field which produced over 120 BCFG from
November 1985 through September 1995. A well is scheduled to commence drilling
operations in April 1997, at a site located adjacent to Cove Field about eight
miles offshore in approximately 60 feet of water. The prospect is tightly
controlled by numerous 2D seismic lines. A nine-square mile 3D seismic survey
has also been shot and interpreted.
8
<PAGE>
COLORADO PROPERTIES
Overview - The Denver-Julesburg ("DJ") Basin encompasses most of northeast
Colorado and parts of southeast Wyoming, southwest Nebraska and western Kansas.
Oil and gas are produced mainly from Cretaceous sandstones and limestones, with
the "D" and the "J" sandstones being the most prolific producers in the Basin at
depths ranging in general from approximately 5,000 feet to approximately 7,500
feet. The Company's activities have focused on the historically better producing
zones, the "D" and the "J" sandstones and the Niobrara formation. At December
31, 1996, 84% of the Company's reserves were in the DJ Basin. A summary of the
notable fields in the DJ Basin are as follows:
Loveland Field, Larimer and Weld Counties - Loveland Field is located near the
City of Loveland, Colorado, 40 miles north of Denver. The area is producing both
oil and gas at an average rate in 1996 of approximately 248 barrels of oil
equivalent ("BOE") per day (205 BOE net to the Company). Loveland Gas Plant and
associated Pease facilities are located near the center of the field. Johnson's
Corner Field is located just 4 miles east of Loveland Field. Together, the
Loveland Field, Johnson's Corner Field and Loveland Gas Plant constitute more
than half of Pease's total Rocky Mountain assets.
All of the Company's gas production from the Loveland and Johnson's Corner
fields is processed in the Company's Loveland Gas Plant, which has a rated
capacity of approximately 6,000 Mcf per day. Pipeline systems are in place to
gather gas from the Loveland and Johnson's Corner fields. There is also an
interconnect into the Wattenberg pipeline system of K N Energy, which gives the
gas plant access to third-party gas from the extensive Wattenberg field complex.
Approximately 1,000 Mcf of gas per day from the Loveland and Johnson's Corner
fields is currently processed through the Loveland gas plant. The natural gas
produced from the Loveland area is extremely rich in liquid composition with an
average heat content of 1,430 BTU per cubic foot. The ability of the gas plant
to recover natural gas liquids, such as propane and natural gasolines (B-G Mix),
from the gas enhances the value of gas production and significantly increases
the economic viability of additional development in the Loveland and Johnson's
Corner fields.
Among the existing wells, numerous opportunities exist to recomplete in certain
behind-pipe zones using newer stimulation technologies. In many wells, Codell
sandstone and Timpas limestone reserves remain behind-pipe which is available
for production upon recompletion of existing well bores. Among the wells that
have been completed in these zones, the Company believes that original
completions were often inadequate because of limited stimulation. Of the three
benches (separate sedimentary levels) of the Niobrara Formation, the upper bench
has been completed in most wells whereas the middle and lower benches are
available for production upon recompletion in many wells.
Currently, a program is being implemented to recomplete several selected wells.
Johnson's Corner Field, Larimer County, Colorado - Johnson's Corner Field is an
extension of the Wattenberg Field with Muddy "J" Sandstone gas production. The
wells produce approximately 40 BOE per day from the "J" sand. One well has also
been completed in the Codell and Niobrara formations and oil production from all
three zones is commingled. Recently two wells were recompleted in Codell
sandstone and the initial results are promising. In addition, the Company
believes there are several additional in-fill development locations.
West Peetz Field, Logan County, Colorado - The Company operates 5 wells in two
leases in the West Peetz field. The wells currently produce about 20 BOPD from
the J sand. A detailed geological and engineering evaluation of the field in
early 1995 suggested that West Peetz field can be produced profitably for many
years to come and the field has an excellent potential for secondary recovery. A
low-cost simple water injection plan has been recommended and is currently under
consideration.
Pod Field, Washington County, Colorado - In Pod Field, the Company has a 100%
working interest and operates five wells which produce from the "J" sand. A
geological and engineering evaluation of the field conducted in 1995 indicates
the potential presence of undeveloped gas reserves in the Niobrara Formation.
However, further study will be necessary before any action will be taken.
9
<PAGE>
Yenter Field, Logan County, Colorado - Yenter Field is a structural trap which
has produced more than 10 MMBO and 24 BCFG since the 1950s from the "J" sand.
Approximately 80% of wells in the field have been plugged and abandoned. The
Company owns and operates five wells with production of about 35 barrels of oil
per day ("BOPD"). Water produced with oil from these five wells is injected back
into the reservoir to help maintain reservoir pressures for continued
production. The Company has conducted a complete geological and engineering
study of Yenter Field, which has identified undeveloped potential in additional
sandstone reservoirs and recommended reworking "J" sandstone wells which have
been shut in since the mid 1970s, and upgrading the pressure maintenance
program. The Company desires to acquire additional acreage in the field to
implement a secondary recovery program possibly with horizontal wells.
North Minto Field, Logan County, Colorado - North Minto is a "J" Sandstone field
and was unitized for secondary recovery in 1989. One well was producing
approximately 8 BOPD during 1993. The injection well had been shut-in during
October 1992. The Company completed geologic and engineering reviews of the
field after the acquisition and consequently re-established the injection
program which increased production to 32 BOPD. In 1996, the Company restored one
well back into production to benefit from the waterflood. Additional leases have
been acquired as a result of this study and two additional drill sites have
reserve potential in the North Minto Unit.
Lower Horse Draw Field, Rio Blanco County, Colorado - The Company has interests
in two wells that produce gas from the Mancos B fractured silty shale in the
Lower Horse Draw Field. Proved developed reserves include 162,000 Mcf of gas net
to the Company.
UTAH PROPERTIES
Cisco Dome Area, Grand County, Utah - In April 1995, the Company purchased an
80% working interest in approximately 8,877 acres in the Cisco Dome Field. The
Cisco Dome Field is located adjacent to the Calf Canyon Field. The property in
the Cisco Dome Field contains 39 wells of which 21 are currently producing gas
from intervals ranging from 2,000 to 3,200 feet. The average aggregate
production from these properties is approximately 400 Mcf and 7 bbls of oil per
day. The Company is presently working to recomplete several wells in behind-pipe
zones to take advantage of current gas prices in the market. Among the
recompleted wells, one is producing 250 Mcf per day. The company expects that
after finishing the recompletion program, daily gas production can be
significantly increased. Management of the Company has extensive knowledge and
experience with operations in and near this field. Cisco Dome field is large and
geologically complex. There are numerous locations on the Company's acreage
available for additional drilling. A geological and engineering study is
currently being conducted to seek further development opportunities in the
existing wells as well as to delineate optimal drilling locations.
Cowboy Field, San Juan County, Utah - The Company has a 100% interest in four
oil wells in Cowboy Field in southeast Utah. The field is within the Paradox
Basin and production is from the Pennsylvanian Ismay Formation.
The Company has behind pipe potential and at least one development drillsite.
WYOMING PROPERTIES
Enos Creek Field, Hot Springs County, Wyoming - Enos Creek Field is located in
the southwestern Big Horn Basin of central Wyoming. In early 1992, the Company
entered into a farmout agreement with an industry partner to co-develop Enos
Creek Prospect. During the summer of 1992, the Company and its partners drilled
a side track well from an existing wellbore targeted at a separate fault block
in the geologic structure. The well penetrated three oil zones while drilling,
one in the Curtis Formation and two in the Phosphoria Formation.
The well is currently producing from the Phosphoria Formation. The Company
intends to recomplete a well adjacent to existing well in the Tensleep Formation
sometime in the future.
10
<PAGE>
TITLE TO PROPERTIES
As is customary in the oil and gas industry, only a perfunctory title
examination is conducted at the time oil and gas leases are acquired by the
Company. Prior to the commencement of drilling operations, a thorough title
examination is conducted. The Company believes that title to its properties is
good and defensible in accordance with standards generally accepted in the oil
and gas industry, subject to such exceptions, which in the opinion of counsel,
are not so material as to detract substantially from the property economics. In
addition, some prospects may be burdened by customary royalty interests, liens
incident to oil and gas operations and liens for taxes and other governmental
charges as well as encumbrances, easements and restrictions. The Company does
not believe that any of these burdens will materially interfere with the use of
the property.
ESTIMATED PROVED RESERVES
The oil and gas reserve and reserve value information is included in Part II,
Item 7 at footnote 12 of the consolidated financial statements, titled
Supplemental Oil and Gas Disclosures. This information is prepared pursuant to
Statement of Financial Accounting Standards No. 69, which includes the estimated
net quantities of the Company's "proved" oil and gas reserves and the
standardized measure of discounted future net cash flows. The reserve
information is based upon an engineering evaluation by McCartney Engineering,
Inc. The estimated proved reserves represent forward-looking statements and
should be read in connection with the disclosure on forward-looking statements
included herein under Item 6 in Managements' Discussion and Analysis.
The Company has not filed any reports containing oil and gas reserve estimates
with any federal authority or agency other than the Securities and Exchange
Commission and the Department of Energy. There were no differences in the
reserve estimates reported to these two agencies.
All of the Company's oil and gas reserves are located in the Continental United
States. The Table below sets forth the Company's estimated quantities of proved
reserves, and the present value of estimated future net revenues discounted by
10 percent per year using prices being received by the Company at the end of
each of the last three fiscal years on a non-escalated basis. The prices used at
December 31, 1996 were $24.43 per barrel of oil and $3.73 per MCF of natural
gas:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Estimated Proved Oil Reserves (Bbls) ...... 1,175,000 1,294,000 1,352,000
Estimated Proved Gas Reserves (Mcf) ....... 4,833,000 5,851,000 5,724,000
Estimated Future Net Revenues (before the
estimated future income taxes) ....... $26,506,000 $15,480,000 $14,016,000
Present Value of Estimated Future
Net Revenues (before the estimated
future income tax expenses) ........... $15,641,000 $ 9,616,000 $ 8,519,000
</TABLE>
The table above does not include the reserve values associated with the Gas
Plant. The Gas Plant reserves are disclosed in Part II, Item 7 of footnote 12.
No reserves have been estimated for the Company's interest in the East Bayou
Sorrel Prospect which was acquired subsequent to the Company's last fiscal year
end and will not be estimated until at least a developmental well is drilled on
the property in 1997. Other than that, there has been no major discovery or
other favorable or adverse event that is believed to have caused a significant
change in the estimated quantities of proved reserves subsequent to December 31,
1996. However, the prices for oil and gas have decreased as of the date of this
report below those used for the reserve estimates. The Company's reserves for
its oil and gas properties at December 31, 1996, discounted at 10%, using the
average sales prices in 1996 ($20.35 per bbl. of oil and $1.26 per Mcf of gas)
are approximately 47% lower, or $7.3 million dollars.
11
<PAGE>
NET QUANTITIES OF OIL AND GAS PRODUCED
The Company's net oil and gas production for each of the last three years (all
of which was from properties located in the United States) was as follows:
Year Ended December 31,
-----------------------------------------
1996 1995 1994
------- ------- -------
Oil (Bbls) .................. 100,000 121,000 155,000
Gas (Mcf) ................... 412,000 497,000 543,000
The average sales price per barrel of oil and Mcf of gas, and average production
costs per barrel of oil equivalent ("BOE") excluding depreciation, depletion and
amortization were as follows:
Average Sales Prices Average
Year Ended --------------------------------------- Production
December 31 Oil (Bbls) Gas (Mcf) Per BOE Cost Per BOE
----------- ----------- ----------- -------- ------------
1996 $ 20.35 $ 1.26 $ 15.10 $ 8.46
1995 $ 16.77 $ 1.18 12.85 $ 7.92
1994 $ 15.94 $ 1.36 13.09 $ 8.90
The above table represents activities related only to oil and gas production. It
does not include any value from the natural gas liquids extracted by the Gas
Plant.
DRILLING ACTIVITY
The following table summarizes the Company's oil and gas drilling activities,
all of which were located in the continental United States, during the last
three fiscal years:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1996 1995 1994
------------------ ----------------- ------------------
Wells Drilled Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Exploratory
<S> <C> <C> <C> <C> <C> <C>
Oil .................................... -- -- -- -- -- --
Gas .................................... -- -- -- -- -- --
Non-productive ......................... 1 .19 -- -- 1 .25
-- ---- --- --- ---- ----
Total .............................. 1 .19 -- -- 1 .25
==== === === ==== ====
Development
Oil .................................... 1 1 -- -- 4 3.92
Gas .................................... -- -- -- -- -- --
Non-productive ......................... -- -- -- -- -- --
-- ---- --- --- ---- ----
Total .............................. 1 1 -- -- 4 3.92
== ==== === === ==== ====
</TABLE>
The Company was not participating in any drilling activity at December 31, 1996.
However, the Company is participating to the extent of a 6.25% working interest
in the E. Winn #1 well, a 17,375 foot Miogyp Sand test, in the South Lake Arthur
Prospect, located in Jefferson Davis Parish, Louisiana, that commenced drilling
operations on January 9, 1997. Total depth is expected to be reached sometime in
April 1997. This prospect consists of approximately 1,600 gross acres.
ITEM 3 - 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. At December 31,
1996 and as of the date of this report, the Company was not involved in any
litigation which it believes could have a materially adverse effect on its
financial condition or results of operations.
12
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's Security holders during the
fourth quarter ending December 31, 1996.
Part II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information - The Company's Common Stock has been quoted on the
NASDAQ Small-cap Market, under the symbol WPOG, since July 1980. The Company's
Preferred Stock, has traded on the NASDAQ Small-cap Market under the symbol
WPOGP since August 1993.
Bid Quotations - The following table shows the range of high and low bid
quotations for each quarterly period since January 1, 1995, as reported by the
National Association of Securities Dealers, Inc. (such quotations represent
prices between dealers and do not include retail markups, markdowns, or
commissions and do not necessarily represent actual transactions.):
Bid Prices
-----------------------------------------
Common Stock Preferred Stock
----------------- ----------------
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
December 31, 1996 ........... 3 5/16 2 1/16 10 3/4 6
September 30, 1996 .......... 2 1/8 1 7/32 6 3/4 5 1/4
June 30, 1996 ............... 1 11/16 1 5/64 7 4 1/4
March 31, 1996 .............. 1 3/8 19/32 5 3 1/2
December 31, 1995 ........... 9/16 13/32 4 5/8 3 7/8
September 30, 1995 .......... 7/8 1/2 4 5/8 4 5/8
June 30, 1995 ............... 31/32 5/8 5 7/8 4 3/4
March 31, 1995 .............. 2 3/32 1 3/4 5 7/8 3 5/8
(b) Stockholders - As of February 21, 1997 the Company had 978 holders of record
of the Company's Common Stock and 17 holders of record of the Company's
Preferred Stock. This does not include the holders whose shares are held in a
depository trust in "street" name. As of February 21, 1997 at least 5,306,000
shares (or 62%) of the issued and outstanding common stock and at least 134,000
shares (or 95%) of the issued and outstanding preferred stock was held in a
depository trust in "street" name.
(C) Dividends - The Company has not paid cash dividends on its Common Stock in
the past and does not anticipate doing so in the foreseeable future. The Company
is precluded from paying dividends on its Common Stock so long as any dividends
on the Preferred Stock are in arrears.
Holders of shares of Preferred Stock are entitled to receive, when, as and if
declared by the Board of Directors out of funds at the time legally available
therefor, cash dividends at an annual rate of 10% (equal to $1.00 per share
annually), payable quarterly in arrears. Cumulative dividends accrue and are
payable to holders of record as they appear on the stock books of the Company on
such record dates as are fixed by the Board of Directors.
The Preferred Stock was issued in August 1993 and the Company declared and paid
five consecutive dividends for the quarters ended September 30, 1993 through
September 30, 1994. In December 1994, the Board of Directors voted not to
declare the quarterly cash dividend to holders of the Company's Preferred Stock
for the fourth quarter of 1994. The decision to not pay the quarterly dividend
was a result of the Company's continuing operating losses, the cash and working
capital position, and the Company's belief that its primary lender would not
approve the payment thereof. In March 1995, the Board of Directors voted to
suspend payment on any future Preferred Stock dividends indefinitely. However,
pursuant to the terms of the Preferred Stock, dividends will continue to accrue
13
<PAGE>
on a quarterly 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.
The Preferred Stock will have priority as to dividends over the Common Stock and
any series or class of the Company's stock hereafter issued, and no dividend
(other than dividends payable solely in Common Stock or any
other series or class of the Company's stock hereafter issued that ranks junior
as to dividends to the Preferred Stock) may be declared, paid or set apart for
payment on, and no purchase, redemption or other acquisition may be made by the
Company of, any Common Stock or other stock unless all accrued and unpaid
dividends on the Preferred Stock have been paid or declared and set apart for
payment.
(d) Recent Sales of Unregistered Securities - During the fiscal year ended
December 31, 1996, the Company issued and sold the following securities without
registration under the Securities Act of 1933, as amended.
1. Between June 1996 and November 15, 1996, the Company issued
$5,000,000 in collateralized convertible 10% debentures and warrants to
purchase up to 2,500,000 shares of the Company's common stock at $1.25 per
share. The securities were offered and sold as units, with each unit
consisting of $50,000 in debentures and warrants to purchase 25,000 shares.
The securities were sold by the Company and by 12 broker\dealers registered
as such with the Securities and Exchange Commission and who are members of
the National Association of Securities Dealers, Inc. The securities were
sold to 105 private investors each of whom qualified as an accredited
investors as such term is defined in Regulation D adopted by the Securities
and Exchange Commission under the Securities Act. The Company received $5.0
million for the securities and paid total underwriting discounts and
commissions of $547,000. The debentures sold by the Company are convertible
into common stock of the Company at the election of the holder at the rate
of one share of common stock for each $3.00 in principal amount of
debenture, or a total of 1,666,666 shares upon conversion of all debentures
issued. The warrants included in the units are exercisable at any time by
the holder and may be called for redemption by the Company at $0.10 per
share upon 45 days notice if the reported market price for common stock of
the Company is at least $3.00 per share for a period of 10 consecutive
trading days or more. 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 issued.
2. On March 9, 1996, the Company issued 38,050 shares of its common
stock to 22 persons who were employees or directors of the Company in lieu
of cash for services to the Company valued at $35,050 for financial
reporting purposes.
3. Effective February 12, 1996, the Company issued warrants
entitling the holders to purchase up to 1,000,000 shares of the Company's
common stock at $0.75 per share to 14 persons in connection with a
consulting agreement between the Company and Beta Capital Corp., with whom
the Company has a consulting agreement. Issuance of the warrants was
required by the consulting agreement and the exercise price of the warrants
was equal to the reported market price for the Company's common stock at the
time the Company became obligated to issue the warrants. For financial
reporting purposes, these warrants were valued at $192,300. The warrants are
exercisable for five years from the date of issuance.
4. On May 13, 1996, the Company issued 82,353 shares of its common
stock to three holders who elected to convert $70,000 in principal amount of
outstanding convertible debentures originally issued in a private placement
in 1991.
5. On August 13, 1996, the Company issued 15,000 shares of its
common stock to a consultant of the Company in lieu of cash for consulting
services to the Company valued at $22,977 for financial reporting purposes.
6. On December 16, 1996, the Company issued 60,000 shares of its
common stock to Willard H. Pease, Jr., the President of the Company, upon
conversion of a promissory note of the Company in the principal amount of
$60,000 issued to Mr. Pease in 1994 in payment of certain obligations.
14
<PAGE>
7. Between November 22, 1996 and December 13, 1996, the Company
issued 50,000 shares of its common stock upon exercise of three warrants
held by two persons. The warrants were exercised at $0.85 per share for
total proceeds to the Company of $42,500. The warrants had been issued in a
private transaction in 1995 as compensation to a consultant.
8. On December 16 and 17, 1996, the Company issued 17,500 shares of
its common stock upon exercise of two warrants held by two persons. The
warrants had been issued in the private placement of securities described in
subparagraph 1 above. The Company received proceeds of $21,875 upon exercise
of the warrant.
9. On December 16, 1996, 13,440 shares of common stock were issued
to eight nonemployee-directors of the Company in lieu of cash for services
to the Company valued at $24,261 by the Company for financial reporting
purposes.
10. Effective November 15, 1996, the Company issued warrants to
purchase up to 223,500 shares of common stock at $2.00 per share to 12
broker\dealers as partial compensation to such persons for sale of the
securities in the private offering described in subparagraph 1 above. The
warrants are exercisable upon issuance and expire if not exercised three
years after issuance.
11. On March 9, 1996, the Company issued warrants to purchase
40,000 shares of common stock at $0.75 per share to one person in lieu of
cash for consulting services provided to the Company valued at $7,700 for
financial reporting purposes. The warrants may be exercised at any time
before March 9, 2001.
As to each issuance of securities identified above, the Company relied upon
Section 4(2) of the Securities Act in claiming exemption from the registration
requirements of the Securities Act. All the persons to whom the securities were
issued had full information concerning the business and affairs of the Company
and acquired the shares for investment purposes. Certificates representing the
securities issued bear a restrictive legend and stop transfer instructions have
been entered prohibiting transfer of the securities except in compliance with
applicable securities laws.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Statement of Operations Data: Year Ended December 31,
1996 1995
---- ----
<S> <C> <C>
Oil and gas sales ...................................... $ 2,546,676 $ 2,623,782
Natural gas marketing and trading ...................... 2,067,379 3,872,565
Gas plant processing revenue ........................... 818,356 1,135,050
Total revenue .......................................... 6,165,664 9,031,816
Net loss ............................................ (1,411,582) (765,436)
Preferred Stock Dividends:
Declared ............................................ -- --
Converted ........................................... (22,750) (117,000)
In arrears .......................................... (179,938) (202,688)
Non-cash inducement .................................... -- (1,523,906)
----------- -----------
Net loss applicable
to common stockholders .............................. $(1,614,270) $(2,609,030)
=========== ===========
<CAPTION>
Per Share Data: ........................................ 1996 1995
---- ----
<S> <C> <C>
Before non-cash inducement charge ...................... $ (0.22) $ (0.18)
Effect of non-cash inducement charge ................... -- (0.24)
----------- -----------
Net loss per
common share ....................................... $ (0.22) $ (0.42)
=========== ===========
Cash dividends declared per common share ............... $ -- $ --
=========== ===========
15
<PAGE>
<CAPTION>
Balance Sheet Data: As of December 31,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Working capital (deficit) .............................. $ 1,907,694 $ (500,180)
Total assets ........................................... $ 14,901,149 $ 13,439,726
Long-term liabilities .................................. $ 5,276,033 $ 1,602,811
Stockholder's equity ................................... $ 8,472,188 $ 9,017,262
</TABLE>
Disclosure Regarding Forward-Looking Statements
This report on Form 10-KSB 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, statements under
"Business and Properties" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" 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, 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 December 31, 1996, the Company's cash balance was $1,995,860 with a positive
working capital position of $1,907,694, 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 used in operating activities ............................ (143,615)
Capital expenditures ......................................... (1,403,413)
Proceeds from the sale of property
and equipment .............................................. 163,821
Redemption of certificate of deposit ......................... 53,500
Payments on long-term debt ................................... (1,795,670)
Net proceeds from issuance of
convertible debt ........................................... 4,323,992
Proceeds from common stock
subscription receivable and warrant exercises, net ......... 119,970
-----------
Cash balance at December 31, 1996 ............................ $ 1,995,860
===========
The significant improvement in the Company's cash balance and working capital
position is directly related to: a) the proceeds received from the private
placement of convertible debentures; and b) the repayment of the entire balance
of outstanding debt with Colorado National Bank ("CNB"). In November 1996, the
Company completed a private placement of $5,000,000 of collateralized
convertible debentures and warrants to purchase up to 2,500,000 shares of stock,
sold in "Units", which generated net cash proceeds of $4,300,000. Each Unit sold
for $50,000 and consisted of one $50,000 five-year 10% collateralized
convertible debenture and warrants to purchase 25,000 shares of the Company's
common stock at $1.25 per share. The debentures are collateralized by a first
priority interest in certain
16
<PAGE>
oil and gas properties owned and operated by the Company. The debentures are
convertible, at the holders option, into the Company's common stock for $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 is payable quarterly and
the entire principal balance will be due on April 15, 2001. The warrants are
currently exercisable and will expire on July 31, 2001. The Company is entitled
to call the warrants at any time after February 15, 1997 at a price of $0.10 per
warrant. (As discussed later in this section, the Company initiated a call on
these warrants on February 28, 1997.) In a registration statement effective
February 10, 1997, the Company registered for resale: (1) the shares of common
stock into which the debentures may be converted; and (2) the shares of common
stock issuable upon exercise of the warrants.
The completion of that private placement and repayment of the entire balance of
outstanding debt with CNB with a portion of the proceeds thereof, significantly
improved the Company's working capital position and provided the funds necessary
to pursue additional acquisition, drilling and development activities on a
limited basis. Recently, the Company has charted a course of action to maintain
its existing asset base in the Rocky Mountain region and expand into the Gulf
Coast region of Alabama, Southern Louisiana and Texas through a series of
acquisitions and strategic alliances which is discussed more thoroughly in the
following paragraphs. However, this new course of action will require the
Company to seek a significant amount of additional capital to fully fund and
implement that 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 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. 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. If all the prospects prove to be productive (which the
Company believes is unlikely as the drilling program is a wildcat exploration
program), the total obligation to the Company for 1997 could be in excess of
$20.0 million.
If all the contemplated exploratory prospects are successful and the properties
are eventually fully developed, the net reserves attributable to the Company's
interest would be several times the Company's present reserves. The Company's
current reserves are approximately 2 million barrels of oil (or equivalent).
Accordingly, the agreement with NEGX provides the Company with an exploration
program that has the potential to significantly increase its existing reserves
and future cash flow.
In order to fund the obligation with NEGX the Company intends to seek additional
financing. The Company intends to pursue additional equity through exercise of
outstanding warrants, private equity placements, and/or other potential
financing vehicles. Specifically, in December 1996, the Company initiated a
warrant call underlying warrants to purchase 250,000 shares of the Company's
common stock held by 11 persons that were exercisable at $1.25 per share. These
warrants were issued as part of a "Unit" of common stock and warrants issued in
a private placement during 1995. All the holders of the warrants elected to
exercise their warrants prior to redemption by the Company. Exercise of the
warrants generated net cash proceeds of $290,000 in January 1997.
Also, during February and early March, 1997, the Company completed a private
placement of 1,500,000 shares of common stock for proceeds of $3.75 million as
described below. On February 28, 1997, the Company initiated a call of the
warrants that were attached to the convertible debentures issued in the private
placement which was
17
<PAGE>
completed in 1996. The warrants were held by approximately 105 persons and are
exercisable for $1.25 per share. Pursuant to the terms of the warrant, the
holders have forty-five days after the call notice (or until April 15, 1997) to
exercise their warrants or they will be redeemed by the Company for $.10 per
warrant. If all the warrants are exercised (which the Company believes is likely
based on the market price of the Company's common stock as of the date of this
report), it will generate net proceeds to the Company of approximately $2.9
million. The proceeds generated from these warrant calls should cover the
Company's working capital needs, including the anticipated exploration costs
associated with the letter agreement with NEGX, at least through the second
quarter of 1997. After that, the Company will need to seek additional financing.
Anticipating the need for additional financing, in February 1997 the Company
signed a non-binding letter of intent with a brokerage firm setting forth the
terms and conditions under which the broker will attempt to assist the Company
with a future private placement. The letter agreement with the brokerage firm
contemplates a future placement of at least $6.0 million dollars in common stock
in the second or third quarter of 1997. The agreement is subject to several
contingencies including, but not limited to, due diligence and the execution of
formal agreement.
If the Company is unsuccessful in completing the private placement, or if
additional funds are necessary either before or after such a transaction, it is
uncertain at this time what actions the Company will take. Possibilities include
other debt or equity financings or the sale of 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.
In addition to the identified exploration program with NEGX, the Company has
pursued the acquisition of an oil and gas property in Southern Louisiana. On
January 10, 1996, the Company acquired a 7.8125% After Prospect Payout Working
Interest ("APPO WI") in the East Bayou Sorrel Prospect from third parties for a
total purchase price of $1.75 million. The purchase price consisted of the
issuance of 315,000 shares of the Company's common stock and $875,000 in cash.
On March 3, 1997 the Company acquired an additional 10% working interest in the
same prospect for $2.5 million cash from third parties. The prospect includes a
discovery well, the C.E. Schwing #1, which in February 1997 produced at a rate
in excess of 1,400 barrels of oil per day and 1,300 Mcf of natural gas per day
with a flowing tubing pressure of 6,300 PSI on a 12/64" choke from a perforated
interval of 13,208 feet to 13,226 feet. If that production rate is sustained,
this acquisition will increase the Company's net production (per BOE) by 25%
(based on 1996's average net daily production. An offset developmental well to
the C.E. Schwing #1 is expected to commence drilling operations in the second
quarter of 1997.
These acquisitions were funded with the Company's existing working capital and
the proceeds generated from a private placement of common stock during February
and March 1997. In that placement, the Company sold 1,500,000 shares of the
Company's restricted common stock to accredited investors for $2.50 per share.
The private placement was completed on March 10, 1997 generating net proceeds of
approximately $3.3 million. The Company has agreed to use its best efforts to
register the shares sold in this private placement for resale on or before July
10, 1997.
18
<PAGE>
Capital Expenditures
During 1996, the Company capitalized or invested $1,403,413 in property and
equipment as follows:
Oil and Gas Properties:
Drilling Costs -
Exploratory Dry Holes ..................................... $ 525,000
Developmental well ........................................ 435,647
----------
Total Drilling Costs .................................. 960,647
Workovers or Recompletions of existing properties ......... 206,627
Deposit on future exploratory well ........................ 181,312
----------
Total Oil and Gas properties .......................... 1,348,586
Service Equipment and Rolling Stock ............................ 27,777
Office Equipment ............................................... 19,930
Gas Plant facility ............................................. 7,120
----------
$1,403,413
==========
During 1996 the Company drilled two new wells. The first well was a
"double-stacked" horizontal - the first of its kind in Colorado. The well was
drilled in Loveland Field, located in Larimer County, Colorado. A
"double-stacked" horizontal well consists of drilling two separate horizontal
wells, or legs, in two different geologic formations from a single well bore.
This technology has been used extensively in the Austin Chalk Formation in Texas
and Pease Oil and Gas was the first company to attempt this technology in
Colorado. The geologic formations targeted during this well were the Niobrara, a
proved zone, and the Timpas, an unproved zone. Unfortunately, the Timpas zone
was found to be unproductive and the Company wrote-off $450,000 to dry hole
costs (this represents the estimated costs attributable to drilling the Timpas
leg). The remaining costs associated with this well for the Niobrara leg were
capitalized as developmental costs.
The second well was a deep wildcat prospect in Southern Louisiana that was
generated by NEGX. The well was drilled in excess of 14,000 feet and although
the logs indicated some excellent shows, it appears the targeted formation
either did not receive a hydrocarbon charge or it had passed through the
formation and the well was plugged and abandoned. The Company's cost for this
dry hole was $75,000.
In 1996, the Company spent $206,627 for workovers, recompletions and equipment
acquisitions related to maintaining or enhancing the current production of its
producing oil and gas properties.
In November 1996, the Company also paid $181,312 for a deposit on an exploratory
well which commenced drilling operations on January 9, 1997. This well, the E.
Winn #1, is a 17,375 foot Miogyp Sand test, in the South Lake Arthur prospect,
located in Jefferson Davis Parish, Louisiana. Total depth is expected to be
reached sometime in April 1997. The deposit has been capitalized as of December
31, 1996 and will remain that way, along with the future drilling costs
incurred, until the outcome of the exploratory well is known.
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.
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 but were not limited to downsizing of the Company's oil
field service and supply operations and closing the administrative office in
Denver, Colorado. As is more fully discussed later in this section under their
19
<PAGE>
respective captions, the Company's oil field service 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 and the capital investment required to maintain and operate.
Accordingly, the decision was made to downsize these operations in May 1995. The
administrative office was closed because the Company could not afford the luxury
and expense of two administrative offices.
In December 1994 the Company's Board of Directors did 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. These decisions were based on the Company's
working capital position at that time, and the belief that the Company's primary
lender would not approve a dividend payment. However, pursuant to the terms
underlying the Preferred Stock, dividends continue to accrue on a quarterly
basis and will increase the number of common shares that will be issued upon
conversion of the preferred stock pursuant to the terms of the Company's
Articles of Incorporation. Whether dividends are paid in the future 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.
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. In 1996, an additional 22,750 shares of the Preferred Stock
converted into 69,670 shares of common pursuant to terms of such conversion set
forth in the Company's Articles of Incorporation. Accordingly, as of December
31, 1996 there remained 179,938 shares of Preferred Stock outstanding. These
conversions substantially changed the capital structure of the Company.
Consideration of the restructuring initiatives is an important component when
comparing the results of operations between the two periods presented.
Total Revenue
Total Revenue from all operations was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1995
----------------------- ----------------------
Amount % Amount %
------ -- ------ --
<S> <C> <C> <C> <C>
Oil and gas sales ................ $2,546,676 41% $2,623,782 29%
Natural gas marketing
and trading .................... 2,067,379 34% 3,872,565 43%
Gas plant processing ............. 818,356 13% 1,135,050 13%
Oil field services
and supply ..................... 618,225 10% 1,302,741 14%
Well administration
and other income ............... 115,028 2% 97,678 1%
---------- ----- ---------- ----
Total revenue .............. $6,165,664 100% $9,031,816 100%
========== ===== ========== ====
</TABLE>
The decrease in total revenue is a result of: a) the expiration of the Company's
natural gas marketing and trading contract with Public Service Company of
Colorado effective July 1, 1996; b) no third party gas was processed by the
Company's gas plant facility in 1996; c) a decrease in oil and gas production;
and d) downsizing of the Company's 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.
20
<PAGE>
Oil and Gas
Operating statistics for oil and gas production for the periods presented are as
follows:
For the Year Ended December 31,
------------------------------
1996 1995
----------- -----------
Production:
Oil (bbls) ........................... 100,000 121,500
Gas (Mcf) ............................ 412,000 496,500
BOE (6:1) ............................ 168,700 204,000
Average Collected Price:
Oil (per bbl) ........................ $ 20.35 $ 16.77
Gas (per Mcf) ........................ $ 1.26 $ 1.18
Per BOE (6:1) ........................ $ 15.10 $ 12.85
Gross Margin:
Revenue .............................. $ 2,546,676 $ 2,623,782
Operating costs ...................... (1,426,549) (1,617,318)
----------- -----------
Gross Margin ....................... $ 1,120,127 $ 1,006,464
=========== ===========
Gross Margin Percent ............... 44% 38%
=========== ===========
Average Production Costs per
BOE before DD&A ........................ $ 8.46 $ 7.92
DD&A per BOE ............................. 3.50 3.63
----------- -----------
Total Costs of Production
per BOE ............................ $ 11.96 $ 11.55
=========== ===========
Change in oil and gas revenue
attributed to:
Production ........................... $ (465,388)
Price ................................ 388,282
-----------
Net change between 1995 and 1996 .... $ (77,106)
===========
Most of the decrease in oil and gas production can be attributed to the
following: 1) the sale of several marginal, uneconomic, or nonstrategic oil and
gas properties in 1996 (see divested production table below); and 2) to a much
lesser extent the natural decline in production that is inherent in oil and gas
wells. Both these circumstances were largely offset by an increase in price.
The production included in the above tables and associated with the wells sold
during 1996 is as follows:
For the Year Ended December 31,
-------------------------------
Divested Production 1996 1995
- ------------------- ---- ----
Oil (bbls) ............................. 3,900 16,700
Gas (Mcf) .............................. 4,500 23,000
BOE (6:1) .............................. 4,650 20,500
Natural Gas Marketing and Trading
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.
21
<PAGE>
Operating statistics for the Company's Marketing and Trading Activities for the
periods presented are as follows:
For the Year Ended December 31,
---------------------------------
1996 1995
---- ----
Total Volume Sold (Mcf) .............. 1,223,855 2,586,205
Average Price ........................ $ 1.69 $ 1.50
----------- -----------
Total Revenue ............... $ 2,067,379 $ 3,872,565
Costs ................................ (1,745,446) (3,404,169)
----------- -----------
Gross Margin ................ $ 321,933 $ 468,396
=========== ===========
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 activities. Although the Company has been
negotiating with PSCo to renew the contract, no formal agreement has been
reached as of the date of this report. Consequently, no marketing and trading
revenues have been generated subsequent to June 30, 1996. 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, if at
all, and 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 Year Ended December 31,
-------------------------------
1996 1995
---- ----
Production:
Natural Gas Processed (Mcf) -
From Company owned wells ......... 363,000 424,600
Third party gas .................. -- 228,000
----------- -----------
Total gas processed ....... 363,000 653,400
Liquids Produced -
B-G Mix (gallons) ................ 907,600 1,314,900
Propane (gallons) ................ 694,000 1,053,900
Average Sales Price of Liquids (per gallon) $ 0.45 $ 0.34
=========== ===========
Gross Margin: ............................... Amount Amount
----------- -----------
Revenue .......................... $ 818,356 $ 1,135,050
Costs ............................ (464,512) (942,867)
----------- -----------
Gross Margin .............. $ 353,844 $ 192,183
=========== ===========
Gross Margin Percent ...... 43% 17%
The decrease in processing volumes and revenue during 1996 as compared to the
same periods 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. These
factors along with 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 in its market area. Accordingly,
it cannot be determined at this time when, or if, the Company will process any
additional third party gas.
22
<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 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. When compared
to 1996, the costs in 1995 were higher in amount and as a percentage of revenue
as a result of the Company purchasing and processing third party gas between
February 1995 and September 1995. Currently, the gas processed by the Gas Plant
facility is from wells the Company owned. Accordingly, the costs, as a
percentage of revenue, have decreased in 1996.
As stated above, the Company currently processes natural gas exclusively from
wells owned or operated by the Company. Given the extremely competitive
environment in the DJ Basin where the gas plant facility is located, management
is exploring the possibility of increasing the Company's net cash flow by
entering into a gas processing agreement with a third party. Under this
scenario, the current operations at the gas plant facility would be shut down
and the gas currently processed by the plant would be sold to a third party.
Although no formal decision has been made, this possibility is being disclosed
since such a decision may ultimately impact the carrying value of the gas plant
facility under Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets." As of December 31, 1996 the net
carrying value of the gas plant facility was approximately $3.34 million. It is
not certain at this time if a decision of this nature will ultimately be made,
and if so, if that decision would ultimate impact the carrying value of the gas
plant facility. However, should a determination be made in the future that the
carrying value of the gas plant facility will not be realized, a non-cash
impairment charge may need to be recognized as prescribed under SFAS No. 121,
which could have a material negative impact on the Company's future results of
operations and balance sheet.
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:
Service and Supply Operations
For the Year Ended December 31,
-------------------------------
1996 1995
---- ----
Revenue .................................. $ 618,225 $ 1,302,741
Costs .................................... 553,343 (1,391,588)
----------- -----------
Net Operating Income (Loss) .............. $ 64,882 $ (88,847)
=========== ===========
The decrease in revenue from the service and supply 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 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 oil and natural gas operations
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 (consisting
of three trucks) and intends to continue providing this service to third parties
on a full time basis.
Supply Operations
Historically, the Company's supply business has 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.
23
<PAGE>
Although total revenues from the service and supply operations decreased
approximately 53% from 1995 to 1996 as a result of the restructuring, the
margins improved since the operations ran more efficiently on the smaller scale.
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 1996 and 1995 and Management does not expect any
significant change in the future.
Consulting Arrangement - Related Party
The Company entered into a consulting agreement with Beta in March 1996. Fees
and reimbursed expenses incurred by the Company in connection with Beta's
contract were $257,199 for the year ended December 31, 1996 with no similar
expenditures in 1995.
Depreciation, Depletion and Amortization
Depreciation, Depletion and Amortization ("DD&A") for the periods presented by
cost center consisted of the following:
For the Year Ended December 31
------------------------------
1996 1995
---- ----
Oil and Gas Properties ............ $ 589,853 $ 741,924
Gas Plant Operations .............. 234,534 245,953
Service and Supply Operations ..... 140,132 166,173
Furniture and Fixtures ............ 45,126 46,437
Non-Compete Agreements ............ 45,994 91,827
---------- ----------
Total ........................... $1,055,639 $1,292,314
========== ==========
As discussed above under the caption Oil and Gas, DD&A per BOE for oil and gas
properties has remained relatively constant for the periods presented. The
decrease in DD&A for the Service and Supply Operations can be attributed to the
disposition of the corresponding assets during the restructuring initiatives
conducted in 1995. The decrease in the amortization of the Non-compete
Agreements can be attributed to one agreement which became fully amortized in
1995. That particular agreement had an original cost basis of $100,000 and was
amortized over a 24 month period.
Dry Hole, Plugging and Abandonment
As previously discussed under the caption Capital Expenditures, the Company
charged $450,000 to dry hole costs for the estimated costs attributable to
drilling the Timpas leg attempted on the horizontal well in Loveland Field,
Colorado and another $75,000 for a dry hole on a wildcat prospect in Southern
Louisiana that was generated by NEGX. The remaining costs in 1996 as well as all
the costs in 1995 relate to plugging and abandonment of a few depleted wells in
the Rocky Mountain Region.
Restructuring Charges
The restructuring charges incurred in 1995 were directly related to the
initiatives discussed above under the caption Overview and consisted primarily
of severance pay, relocation costs and a loss on the abandonment of the
administrative office lease in Denver, Colorado. The Company did not incur any
such costs in 1996.
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 the private placement
completed in November 1996 and previously discussed under the caption Liquidity
and Capital Resources.
(Loss) Gain on Sale of Assets
The gain on sale of assets in 1995 is primarily related to the sale of oil field
service equipment in connection with the Company's restructuring initiatives and
the sale of various oil and gas properties. The loss on sale of assets in 1996
is primarily related to the sale of certain oil and gas properties and the
abandonment of obsolete or unusable office equipment, furniture and fixtures.
24
<PAGE>
Net Loss Per Common Share
Net loss per common share is computed by dividing the net loss applicable to
common stockholders (which includes accrued but unpaid preferred dividends) by
the weighted average number of common shares outstanding during the year. All
common stock equivalents have been excluded from the computations because their
effect would be anti-dilutive.
The Company completed a tender offer to the Company's preferred stockholders in
February 1995. In connection therewith, the Company offered the preferred
holders 4.5 common shares for each preferred share owned. The 4.5 shares
represented an increase from the original terms of the preferred stock which
provided for 2.625 common shares for each preferred share. In order to comply
with an accounting pronouncement, the Company was required to reduce earnings
available to common stockholders to convert their shares. Since the Company
issued an additional 1,750,000 common shares in the tender offer compared to the
shares that would have been issued under the original terms of the preferred
stock, the Company was required to deduct the fair value of these additional
shares of $1,523,906 from earnings available to common stockholders. This
non-cash charge resulted in the reduction of earnings per share by $.24 for the
year ended December 31, 1995.
While this charge is intended to show the cost of the inducement to the owners
of the Company's common shares immediately before the tender offer, management
does not believe that it accurately reflects the impact of the tender offer on
the Company's common stockholders. As disclosed to the preferred stockholders in
connection with the tender offer, the book value per share of common stock
increased from a negative amount to approximately $1.00 per share as a result of
the tender offer. Therefore, management believes that, even though the current
accounting rules require the $.24 charge per common share, there are other
significant offsetting factors by which the common shareholders benefited from
this conversion which are not reflected in the 1995 earnings per share
presentation.
25
<PAGE>
PART II - OTHER INFORMATION
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements that constitute Item 7 are included at the
end of this report beginning on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
This item is not applicable to the Registrant.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer of the Company. The executive officers of the Company are
elected annually by the Board of Directors. The Board of Directors is divided
into three approximately equal classes. The directors serve three year terms and
until their successors are elected. Each year the stockholders elect one class
of directors. The executive officers serve terms of one year or until their
death, resignation or removal by the Board of Directors. There are no family
relationships between any of the directors and executive officers. In addition,
there was no arrangement or understanding between any executive officer and any
other person pursuant to which any person was selected as an executive officer.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Served as
Name Age Position With the Company Director Since
- -------------------- --- ------------------------- ---------------
<S> <C> <C> <C>
Willard H. Pease, Jr. (1) 37 President, Chief Executive Officer 1983
and Director (Term Expires 1999)
James N. Burkhalter 61 Vice President of Engineering and 1993
Production and Director
(Term Expires 1997)
Patrick J. Duncan (1) 34 Chief Financial Officer, Treasurer, 1995
Corporate Secretary and Director
(Term Expires 1997)
Steve A. Antry 41 Director (Term Expires 1997) 1996
Richard A. Houlihan (1) 57 Director (Term Expires 1998) 1996
Homer C. Osborne (2) 68 Director (Term Expires 1998) 1994
James C. Ruane (2) 63 Director (Term Expires 1998) 1980
Leroy W. Smith 68 Director (Term Expires 1997) 1996
Robert V. Timlin 66 Director (Term Expires 1997) 1981
Clemons F. Walker (2) 58 Director (Term Expires 1999) 1996
William F. Warnick (2) 50 Director (Term Expires 1999) 1988
</TABLE>
26
<PAGE>
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee.
Willard H. Pease, Jr. has been President and Chief Executive Officer of the
Company since 1990. Mr. Pease was Executive Vice President and Chief Operating
Officer of the Company from 1983 to 1990. Mr. Pease is responsible for the
Company's corporate finance, managing the day-to-day operations of the Company
and is principally responsible for the Company's oil and gas exploration and
production activities. Mr. Pease has worked in the oil field business for over
17 years. Mr. Pease received a B.A. degree in management with additional
educational focuses in geology in 1983.
James N. Burkhalter has been Vice President of Engineering and Production of
the Company since 1993, and is responsible for the Company's engineering,
production, regulatory compliance, and gas plant operations. Prior to joining
the Company Mr. Burkhalter was owner and president of Burkhalter Engineering, an
engineering firm which he formed in 1975. Mr. Burkhalter has been Chairman of
the Colorado Board of Registration for Professional Engineers and Surveyors,
serving eight years. From 1959 to 1975 Mr. Burkhalter worked for Amoco and Rocky
Mountain Natural Gas as a petroleum engineer. Mr. Burkhalter received a B.S.
degree in petroleum engineering in 1959 from the Colorado School of Mines.
Patrick J. Duncan has been the Chief Financial Officer of the Company since
September, 1994, the Company's Corporate Secretary since April 1995 and the
Company's Treasurer since March 1996. Mr. Duncan is responsible for all the
financial, accounting and administrative reporting and compliance required by
his individual job titles. Mr. Duncan was an Audit Manager with HEIN +
ASSOCIATES LLP, Certified Public Accountants, from 1991 until joining the
Company as the Company's Controller in April 1994. From 1988 until 1991, Mr.
Duncan was an Audit Supervisor with Coopers & Lybrand, Certified Public
Accountants. Mr. Duncan received a B.S. degree from the University of Wyoming in
1985.
Steve A. Antry is founder and president of Beta Capital Group, Inc., a
financial consulting firm located in Newport Beach, California. Beta specializes
in advising emerging oil and gas exploration companies that have both capital
needs and market support requirements. Prior to forming Beta in 1992, Mr. Antry
was an executive officer of Benton Oil & Gas Company from 1989 to 1992 and a
Marketing Director for Swift Energy's income funds from 1987 to 1989. Mr. Antry
is also a registered representative with Signal Securities, Inc., a registered
broker/dealer, and has B.B.A. and M.B.A. degrees from Texas Christian
University.
Richard A. Houlihan is a Certified Public Accountant, Senior Member of the
American Society of Appraisers and a Certified General Appraiser in Nevada and
Utah. He has been a principal of Houlihan Valuation Advisors since 1986, Mr.
Houlihan also was founder and president of Solitude Ski Resort, founder and
president of Houlihan, Lokey, Howard & Zukin, Inc., one of the largest business
valuation firms in the United States, was financial vice president of
Carr-Sigoloff Industries Corporation specializing in mergers and acquisitions,
and MAS Manager at Price Waterhouse & Company Management Advisory Services. Mr.
Houlihan has a B.S. degree from Brigham Young University and a M.V.S. degree
from Lindenwood College.
Homer C. Osborne was an officer and director of Garrett Computing System,
Inc., a petroleum engineering and computing firm, from 1967 until 1976, at which
time he organized Osborne Oil Company as a wholly-owned subsidiary of Garrett
Computing Systems, Inc. Mr. Osborne has operated Osborne Oil Company as a
separate entity since 1976.
James C. Ruane has owned and operated Goodall's Charter Bus Service, Inc., a
bus chartering business representing Grey Line in the San Diego area, since
1958. Mr. Ruane has been an oil and gas investor for over 20 years.
Leroy W. Smith was president and owner of Doctors' Financial Management Co.,
Inc. from 1956 through 1994 with offices in Burbank and Santa Ana, California,
which provided accounting and business management services for professionals.
Since retiring in 1994 Mr. Smith has served as trustee and managed three
retirement trusts with total market value of approximately $5.5 million. Mr.
Smith is also an Enrolled Agent before the Internal Revenue Service.
27
<PAGE>
Robert V. Timlin has been self-employed as a consulting petroleum engineer
since 1989. Mr. Timlin has been involved in the oil and gas industry for over 30
years and has served in a managerial capacity with several companies, including
HMT Management Inc., an oil and gas management firm, from 1983 to 1988; T&M
Casing Service, Inc., from 1975 to 1983; Dowell Studer, Inc., and Husky Oil
Company. Mr. Timlin received an Associates Degree in petroleum engineering in
1957.
Clemons F. Walker has been an independent financial consultant since August
of 1996. Prior to that he was employed as an investment banker and stockbroker.
Between 1978 and August 1995 Mr. Walker worked for Wilson Davis in Las Vegas,
Nevada when Presidential Brokerage purchased the Wilson Davis office in Las
Vegas and he continued to work for the surviving entity until August of 1996.
Since 1978 Mr. Walker has focused his efforts in investment banking by
supporting small-cap companies through assistance in private placements, public
offerings and other capital raising efforts. During his career, Mr. Walker has
organized, advised, facilitated, sold and participated in numerous debt and
equity transactions (both public and private) in a variety of industries,
including the oil and gas industry. Mr. Walker has a bachelor of arts degree in
Business Administration from Brigham Young University with a concentration in
Finance.
William F. Warnick has been a practicing attorney in Lubbock, Texas since
1971. Mr. Warnick serves as the Texas Attorney General's appointee to the Texas
School Board Land Commission and is a member of the American, Texas, and Lubbock
Bar Associations. He is an oil and gas investor and has served in various
management positions of private independent oil and gas companies. Mr. Warnick
received a B.A. degree in finance and a J.D. degree in 1971.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of the
Company's Common Stock, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Officers, directors and
greater than ten percent stockholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.
The following disclosure is based solely upon a review of the Forms 3 and 4 and
any amendments thereto furnished to the Company during the Company's fiscal year
ended December 31, 1996, and Forms 5 and amendments thereto furnished to the
Company with respect to such fiscal year, or written representations that no
Forms 5 were required to be filed by such persons. Based on this review the
following persons who were directors, officers and beneficial owners of more
than 10% of the Company's outstanding Common Stock during such fiscal year filed
late reports on Forms 3 and 4.
James C. Ruane filed one late report on Form 4 reporting one transaction. LeRoy
W. Smith filed one late report on Form 4 reporting two transactions.
ITEM 10-EXECUTIVE COMPENSATION
Summary Compensation Table
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities during each of the last three fiscal years
by the Chief Executive Officer. No executive officer received salary and bonus
in excess of $100,000 in 1996. The following information for the Chief Executive
Officer includes the dollar value of base salaries, bonus awards, the number of
stock options granted and certain other compensation, if any, whether paid or
deferred.
28
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Awards
--------------------------------------------- -----------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying
Position Year Salary Bonus Compensation Awards Options/SARs(#)
- -------- ---- -------- ----- ------------ ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Willard H. Pease, Jr .... 1996 $78,530(1) $5,000(3) $101,250 (2) None 110,400
President and Chief 1995 $75,240(1) None None None 139,600
Executive Officer 1994 $75,240(1) None None None None
</TABLE>
(1) Includes $240 contributed by the Company to a qualified 401(k)
retirement plan.
(2) At December 31, 1995 the Company owed $60,000 to Willard H. Pease,
Jr., the Company's President and CEO. This loan was unsecured, bore
interest at 8% per annum and was originally cue on January 31, 1996.
On March 9, 1996 the Board of Directors agreed to change the terms of
the note to allow the note to be convertible into the Company's common
stock at $1.00 per share, the then current market rate, in exchange
for a one-year extension on the note. On December 16, 1996 Mr. Pease
elected to convert the note in its entirety, the note was canceled and
Mr. Pease was issued 60,000 shares of the Company's restricted common
stock. The $101,250 shown as other annual compensation represents the
difference between the closing sales price as reported by NASDAQ on
December 16, 1996 and the conversion price of $1.00 per share. No
additional amounts have been shown as Other Annual Compensation
because the aggregate incremental cost to the Company of personal
benefits provided to Mr. Pease did not exceed the lesser of $50,000 or
10% of his annual salary in any given year.
(3) On March 9, 1996 the Board of Directors granted Mr. Pease 5,000 shares
of the Company's common stock for prior services. The shares were
valued at $5,000 or $1.00 per share which represented the market price
of the Company's common stock on the date of grant. The shares are
fully vested.
Option Grants in the Last Fiscal Year
Set forth below is information relating to grants of stock options to the Chief
Executive Officer pursuant to the Company's Stock Option Plans during the fiscal
year ended December 31, 1996.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
- -------------------------------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options/SARs
Options/ Granted to Exercise or
SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
---- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Willard H. Pease, Jr................. 110,400 (1) 33.9% $1.00(3) 03/08/01
President and Chief 60,000 (2) 18.4% $1.00(3) 01/31/97
Executive Officer
</TABLE>
(1) Consists of 8,900 shares underlying options issued under one of the
Company's qualified stock option plans and 101,500 shares underlying
warrants to purchase common stock. All these Options and Warrants became
exercisable on September 8, 1996.
(2) At December 31, 1995 the Company owed $60,000 to Willard H. Pease, Jr., the
Company's President and CEO. This loan was unsecured, bore interest at 8%
per annum and was originally cue on January 31, 1996. On March 9, 1996 the
Board of Directors agreed to change the terms of the note to allow the note
to be convertible into the Company's common stock at $1.00 per share, the
then current market price, in exchange for a one-year extension on the
note.
(3) The exercise price listed above was 100% of the market price of the Common
Stock on the date the options, warrants or convertible notes were granted
or approved by the Company's Board of Directors.
29
<PAGE>
Aggregated Option Exercises in the Last Fiscal Year and the Fiscal Year-End
Option Values
Set forth below is information with respect to the unexercised options to
purchase the Company's Common Stock held by Willard H. Pease, Jr. at December
31, 1996. No options were exercised during fiscal 1996.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
- -------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Willard H. Pease, Jr. 60,000 (1) $101,250 (1) 250,000/-0- $544,557/-0- (2)
President and Chief
Executive Officer
</TABLE>
(1) On December 16, 1996, Mr. Pease converted a $60,000 promissory note
into 60,000 shares of the Company's common stock pursuant to the terms
of the underlying promissory note. The $101,250 shown as other annual
compensation represents the difference between the closing sales price
as reported by NASDAQ on December 16, 1996 and the conversion price of
$1.00 per share.
(2) The value of the unexercised In-the-Money Options 1996 was determined
by multiplying the number of unexercised options by the closing sales
of the Company's common stock on December 31,1996 as reported by
NASDAQ and from that total, subtracting the total exercise price.
Employment Contract
The Company has entered into an employment agreement with a Director, Willard
Pease, Jr., who is also the Company's President and Chief Executive Officer. The
employment agreement was entered into in 1993 and may be terminated by the
Company without cause on 30 days notice provided the Company continues to pay
the salary of Mr. Pease for 36 months. The salary must be paid in a lump sum if
the termination occurs after a change in control of the Company as defined in
the employment agreement. Mr. Pease may terminate the employment agreement on 90
days written notice. The base salary of Mr. Pease under the employment agreement
was increased to a base salary of $95,000 per year effective October 1, 1996.
Compensation of Directors
Directors who are employees do not receive additional compensation for service
as directors. Other directors each receive a $1,000 annual retainer fee, $750
per meeting attended and $100 per meeting conducted via telephone conference.
Directors may elect to receive the compensation either in cash or stock. All the
compensation paid to the outside directors in 1995 and 1996 was in the form of
stock.
ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, its only class of outstanding voting
securities as of February 21, 1997, by (i) each person who is known to the
Company to own beneficially more than 5% of the outstanding Common Stock with
the address of each such person, (ii) each of the Company's directors and
officers, and (iii) all officers and directors as a group:
30
<PAGE>
<TABLE>
<CAPTION>
Name and Address of
Beneficial Owner or Amount and Nature of
Name of Officer or Director Beneficial Ownership(1) Percent of Class
- --------------------------- ---------------------- ----------------
<S> <C> <C> <C>
Steve Allen Antry
901 Dove Street, Suite 230
Newport Beach, CA 92660 .............. 671,832 Shares (2) 7.4%
James N. Burkhalter
P.O. Box 60219
Grand Junction, CO 81506 ............. 165,710 Shares (3) 2.0%
Patrick J. Duncan
P.O. Box 60219
Grand Junction, CO 81506 ............. 170,625 Shares (4) 2.0%
Richard A. Houlihan
650 Town Center Drive, Suite 550
Costa Mesa, CA 92625 ................. 288,983 Shares (5) 3.4%
Homer C. Osborne
1200 Preston Road #900
Dallas, TX 75230 ..................... 49,407 Shares (6) 0.6%
Willard H. Pease, Jr ....................
P.O. Box 60219
Grand Junction, CO 81506 ............. 786,139 Shares (7) 9.2%
James C. Ruane
5010 Market St.
San Diego, CA 92102 .................. 281,838 Shares (8) 3.3%
Leroy W. Smith
P.O. Box 10040
Santa Ana, CA 92711-0040 ............. 181,280 Shares (9) 1.8%
Robert V. Timlin
1989 South Balsam
Lakewood, CO 80277 ................... 63,490 Shares (10) 0.8%
Clemons F. Walker
748 Rising Star Drive
Henderson, NV 89104 .................. 362,763 Shares (11) 4.2%
William F. Warnick
2022 Broadway
Lubbock, TX 79401 .................... 84,193 Shares (12) 1.0%
All Officers and Directors as a
group (eleven persons) ................ 3,106,260 Shares (13) 29.8%
</TABLE>
(1) Beneficial owners listed have sole voting and investment power with respect
to the shares unless otherwise indicated. On December 18, 1996, Mr. Pease
converted a $60,000 promissory note into 60,000 shares of the Company's
common stock pursuant to the terms of the underlying promissory note. The
$101,250 shown as other annual compensation represents the difference
between the closing sales price as reported by NASDAQ on December 16, 1996
and the conversion price of $1.00 per share.
(2) Includes 2,680 shares that are owned directly by Mr. Antry, 7,500 shares
underlying options that become exercisable on July 27, 1997, 61,137 shares
underlying presently exercisable warrants, 515 shares underlying
convertible preferred stock and 600,000 shares underlying presently
exercisable warrants that are held by Mr. Antry's wife.
(3) Includes 15,710 shares owned directly by Mr. Burkhalter, 115,000 shares
underlying presently exercisable options, and 35,000 shares underlying
options that become exercisable on July 27, 1997.
31
<PAGE>
(4) Includes 20,625 shares owned directly by Mr. Duncan, 105,000 shares
underlying presently exercisable options, and 45,000 shares underlying
options that become exercisable on July 27, 1997.
(5) Includes 151,150 shares owned directly by Mr. Houlihan, 7,500 shares
underlying options that become exercisable on July 27, 1997, 97,500 shares
underlying presently exercisable options, 8,333 shares underlying a
convertible debenture, and 24,500 shares owned by a trust that Mr. Houlihan
has sole voting and investment power.
(6) Includes 6,607 shares owned directly by Mr. Osborne, 35,300 shares
underlying presently exercisable options, and 7,500 shares underlying
options that become exercisable on July 27, 1997.
(7) Includes 121,173 shares that are owned directly by Mr. Pease, 364,966
shares are owned by entities affiliated with Mr. Pease over which shares
Mr. Pease has sole voting and investment power, 148,500 shares underlying
presently exercisable options, 50,000 shares underlying options that become
exercisable on July 24, 1997, and 101,500 shares underlying presently
exercisable warrants.
(8) Includes 107,528 shares owned directly by Mr. Ruane, 4,560 shares held by
Mr. Ruane as trustee for two trusts, over which shares Mr. Ruane may be
deemed to have shared voting and investment power, 12,500 shares underlying
presently exercisable warrants, 70,000 shares underlying presently
exercisable options, and 7,500 shares underlying options that become
exercisable on July 27, 1997.
(9) Includes 1,280 shares owned directly by Mr. Smith, 10,000 shares owned by a
trust that Mr. Smith acts as the Trustee and is therefore deemed to have
beneficial ownership, 5,000 shares owned by his wife, 10,000 shares
underlying presently exercisable options, 7,500 shares underlying options
that become exercisable on July 27, 1997, 100,000 shares underlying
presently exercisable warrants that are owned by two separate trusts that
Mr. Smith acts as the Trustee and is therefore deemed to have beneficial
ownership, 12,500 shares underlying convertible preferred stock owned
directly by Mr. Smith; 12,500 shares underlying convertible preferred stock
held by his wife, and 22,500 shares underlying convertible preferred stock
that are owned by two separate trusts that Mr. Smith acts as the Trustee
and is therefore deemed to have beneficial ownership.
(10) Includes 5,990 shares owned directly by Mr. Timlin, 26,693 shares
underlying presently exercisable options, and 7,500 shares underlying
options that become exercisable on July 27, 1997.
(11) Includes 142,062 shares owned directly by Mr. Walker, 212,686 shares
underlying presently exercisable warrants, 7,500 shares underlying options
that become exercisable on July 27, 1997, and 515 shares underlying
convertible preferred stock.
(12) Includes 26,693 shares owned directly by Mr. Warnick, 50,000 shares
underlying presently exercisable options, and 7,500 shares underlying
options that become exercisable on July 27, 1997.
(13) Includes 583.800 shares underlying presently exercisable options, 190,000
shares underlying options that become exercisable on July 27, 1997,
1,185,073 shares underlying presently exercisable warrants, 48,530 shares
underlying convertible preferred stock, and 8,333 shares underlying a
convertible note.
ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From time to time, various officers and directors of the Company and their
affiliates have participated in the drilling of oil and gas wells which were
drilled and operated by the Company. All such persons and entities have taken
working interests in the wells and have paid the drilling, completion and
related costs of the wells on the same basis as the Company and all other
working interest owners. On occasions of such participation the Company retained
the maximum interest in the well that it could justify, given its cash
availability and the risk involved.
32
<PAGE>
In August 1996, Richard A. Houlihan, a director of the Company purchased a
$25,000 10% collateralized debenture that included warrants to purchase 25,000
shares of Common Stock at $1.25 per share on the same terms as other
nonaffiliated purchasers.
At December 31, 1996 the Company owed certain affiliates of Willard H. Pease,
Jr. $116,719 principal, plus $31,398 in accrued interest, for oil and gas
revenue attributable to interests in wells operated by the Company that are
owned by the individuals and related entities. Of the principal amount, $2,877
was incurred in 1994, $4,603 was incurred in 1993, $20,992 was incurred in 1992,
$85,518 was incurred in 1991 and $2,729 was incurred in 1990.
At December 31, 1995 the Company owed $60,000 to Willard H. Pease, Jr., the
Company's President and CEO. This loan was unsecured, bears interest at 8% per
annum and was originally due in January 1996. In March 1996 the Board of
Directors agreed to change the terms of the note to allow the note to be
convertible into the Company's common stock at $1.00 per share, the then current
market price, in exchange for a one-year extension of the note. In December 1996
Mr. Pease elected to convert the note in its entirety, the note was canceled and
Mr. Pease was issued 60,000 shares of the Company's restricted common stock.
Until June 1993, Willard H. Pease, Jr. owned an oil well servicing business,
Grand Junction Well Services, Inc. ("GJWS"), which operated a workover and
completion rig. In June 1993, the Company acquired GJWS from Mr. Pease by
merging GJWS into a newly-formed subsidiary of the Company. In the merger, the
Company issued Mr. Pease 46,667 shares of Common Stock and the Company's 6%
secured convertible promissory note in the principal amount of $175,000, for a
total value of $350,000, which was the estimated fair market value of the GJWS
assets and business. The note was originally payable in three annual principal
installments of $45,000 on October 1, 1994, $65,000 on April 1, 1995 and $65,000
on April 1, 1996. The October 1, 1994 principal payment of $45,000 was paid and
the remaining installments were extended to October 1, 1997 and October 1, 1998,
respectively. The unpaid principal portion of $130,000 is convertible at the
election of Mr. Pease into Common Stock at $5.00 per share. The transaction was
approved unanimously by the disinterested directors of the Company.
In March 1996 the Company entered into a three-year consulting agreement with
Beta Capital Group, Inc. ("Beta"). 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. The Company also agreed to pay Beta additional fees, as
defined in the agreement, that are based on a percentage of the gross proceeds
generated from any public financing, private financing or from any warrants that
are exercised during the term of the agreement. During 1996 the Company paid
Beta, or its agents, a total of $424,706 under the terms of the agreement. The
total amount paid consisted of: a.) $162,500 for monthly consulting fees; b.)
$94,700 for the reimbursement of out-of-pocket expenses; c.) $163,000 for fees
related to funds generated from private placements; and d.) $4,506 for fees
related to funds generated from the exercise of warrants. In addition to the
cash compensation, the Company granted Beta warrants to purchase 1.0 million
shares of the Company's common stock for $.75 per share. As allowed under the
terms of the agreement, Beta assigned 400,000 of those warrants to other
parties, including 100,000 to a Mr. Richard Houlihan, a director of the Company.
All these warrants expire in April 2001.
All existing loans or similar advances to, and transactions with, officers and
their affiliates were approved or ratified by the independent and disinterested
directors. Any future material transactions with officers, directors and owners
of 5% or more of the Company's outstanding Common Stock or any affiliate of any
such person shall be on terms no less favorable to the Company than could be
obtained from independent unaffiliated third parties and must be approved by a
majority of the independent disinterested directors.
33
<PAGE>
PART IV
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description and Method of Filing
- ---------- --------------------------------
(3.1) Articles of Incorporation, as amended. (1)
(3.2) Plan of Recapitalization. (1)
(3.3) Certificate of Amendment to the Articles of Incorporation filed on July 6,
1994. (2)
(3.4) Certificate of Amendment to the Articles of Incorporation filed on
December 19, 1994. (2)
(3.5) Bylaws, as amended and restated May 11, 1993. (1)
(4.1) Representative's Preferred Stock Purchase Warrant. (1)
(4.2) Warrant Agency Agreement between Willard Pease Oil and Gas Company and
American Securities Transfer, Inc. dated August 23, 1993. (1)
(4.3) Amendment to Warrant Agency Agreement dated January 5, 1995. (2)
(4.4) Certificate of Designation of Series A Cumulative Convertible Preferred
Stock. (1)
(4.5) Certificate of Amendment of Certificate of Designation of Series A
Cumulative Convertible Preferred Stock filed on August 16, 1993. (2)
(4.6) Second Certificate of Amendment of Certificate of Designation of Series A
Cumulative Convertible Preferred Stock filed on November 1, 1994. (2)
(10.1) Residue Gas Sales and Purchase Agreement dated June 22, 1986, between
Western Gas Supply Company and Loveland Gas Processing, Ltd., and
Amendments dated July 30, 1986, August 12, 1986, September 11, 1986,
April 16, 1987, April 1, 1988, January 2, 1992, March 26, 1992 and May 1,
1992. (1)
(10.2) Amendment dated December 1, 1993, between Public Service Company of
Colorado and Loveland Gas Processing Co., Ltd., to Residue Gas Sales and
Purchase Agreement dated June 22, 1986, between Western Gas Supply
Company and Loveland Gas Processing, Ltd. (2)
(10.3) Gas Purchase and Sale Contract dated November 1, 1988, between Fuel
Resources Development Co. as seller and Loveland Gas Processing Co.,
Ltd., as buyer, pertaining to the purchase of gas, and Amendments dated
November 1, 1990, January 24, 1991, May 1, 1991, July 5, 1991, August 1,
1991, April 1, 1992 and August 1, 1992. (1)
(10.4) Purchase Order No. 5 dated January 1, 1994 from Loveland Gas Processing
Co., Ltd. to Fuel Resources Development Co. that amends the Gas Purchase
and Sale Contract dated November 1, 1988, between Fuel Resources
Development Co. and Loveland Gas Processing, Ltd. (2)
(10.5) Form of Warrants issued to Ronin Group Ltd., and Clemons F. Walker for
the purchase of an aggregate of 240,000 shares of Common Stock. (3)
(10.6) 1990 Stock Option Plan. (1)
(10.7) 1993 Stock Option Plan (1)
(10.8) 1994 Employee Stock Option Plan. (2)
(10.9) Form of 12% Convertible Unsecured Promissory Notes issued by Pease Oil
and Gas Company in 1994 Private Placement. (2)
(10.10) Form of Warrants issued to brokers Sales Agents in 1994 Private
Placements. (2)
(10.11) Employment Agreement effective September 16, 1994 between Pease Oil and
Gas Company and Willard H. Pease, Jr. (2)
(10.12) Employment Agreement effective December 27, 1994 between Pease Oil and
Gas Company and Patrick J. Duncan. (2)
(10.13) Employment Agreement effective December 27, 1994 between Pease Oil and
Gas Company and James N. Burkhalter. (2)
(10.18) Interconnect Agreement dated January 1, 1995, between KN Front Range
Gathering Company and Loveland Gas Processing Co., Ltd.(2)
(10.19) Gas Gathering Agreement dated February 1, 1995, between KN Front Range
Gathering Company and Loveland Gas Processing Co., Ltd. (2)
34
<PAGE>
(10.20) Agreement dated August 15, 1994, between Hewlett-Packard Company,
Loveland Gas Processing Co., Ltd., Pease Oil and Gas Company and Pease
Operating Company. (2)
(10.21) Purchase and Sale Agreement dated April 24, 1995 among Pease Oil and Gas
Company, Thermo Cogeneration Partnership, L.P and Seahawk Energy, Inc.
(3)
(10.22) Agreement between Beta Capital Group, Inc., and Pease Oil and Gas
Company dated March 9, 1996. (4)
(10.24) Form of Warrant issued to Beta Capital Group, Inc.
(10.25) 1996 Stock Option Plan.
(10.26) Mortgage, Assignment of Proceeds, Security Agreement and Financing
Statement from Pease Oil and Gas Company to Holders of 1996
Collateralized Subordinated Convertible Debentures dated as of November
15, 1996.
(10.27) Purchase and Sale Agreement dated December 31, 1996 by and between
Atocha Exploration, Inc., Browning Oil Company, Inc., Potosky Oil and
Gas, Inc. and Pease Oil and Gas Company. (5)
(10.28) Letter Agreement dated February 4, 1997 by and between National Energy
Group, Inc. and Pease Oil and Gas Company. (6)
(10.29) Purchase and Sale Agreement dated February 26, 1997 by and between
Transworld Exploration & Production, Inc. (7)
(21) List of Subsidiaries. (3)
(23) Consents of Experts
(23.1) Consent of McCartney Engineering, LLC Consulting Petroleum Engineers
(23.2) Consent of Hein + Associates LLP, Certified Public Accountants
(27) Financial Data Schedule.
Footnotes:
(1) Incorporated by reference to Registration Statement No. 33-64448 on
Form SB-2.
(2) Incorporated by reference to the Registrant's 1994 Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994.
(3) Incorporated by reference to Registration Statement No. 33-94536 on
Form SB-2.
(4) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995.
(5) Incorporated by reference to Form 8-K filed January 10, 1997.
(6) Incorporated by reference to Form 8-K filed February 19, 1997.
(7) Incorporated by reference to Form 8-K filed March 17, 1997.
35
<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: March 27, 1997 By:/s/ Willard H. Pease, Jr.
----------------------------
Willard H. Pease, Jr.
President and Chief Executive Officer
Date: March 27, 1997 By: /s/ Patrick J. Duncan
-------------------------
Patrick J. Duncan
Chief Financial Officer, Treasurer,
and Principal Accounting Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Date: March 27, 1997 By:/s/ Willard H. Pease, Jr.
----------------------------
Willard H. Pease, Jr., President
and Chairman of the Board
Date: March 27, 1997 By: /s/ Patrick J. Duncan
-------------------------
Patrick J. Duncan
Chief Financial Officer,
Treasurer, and Director
Date: March 27, 1997 By:/s/ James N. Burkhalter
--------------------------
James N. Burkhalter, Vice-President
Engineering and Production, and Director
Date: March 27, 1997 By:/s/ Steve A. Antry
---------------------------
Steve A. Antry, Director
Date: March 27, 1997 By:/s/ Richard A. Houlihan
----------------------------
Richard A. Houlihan, Director
Date: March 27, 1997 By:/s/ Homer C. Osborne
----------------------------
Homer C. Osborne, Director
Date: March 27, 1997 By:/s/ James C. Ruane
----------------------------
James C. Ruane, Director
Date: March 27, 1997 By:/s/ Leroy W. Smith
-----------------------------
Leroy W. Smith, Director
Date: March 27, 1997 By:/s/ Robert V. Timlin
------------------------------
Robert V. Timlin, Director
Date: March 27, 1997 By:/s/ Clemons F. Walker
------------------------------
Clemons F. Walker, Director
Date: March 27, 1997 By:/s/ William F. Warnick
------------------------------
William F. Warnick, Director
36
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report.................................................F-2
Consolidated Balance Sheets - December 31, 1996 and 1995 ....................F-3
Consolidated Statements of Operations - For the Years Ended December 31, 1996
and 1995................................................................F-5
Consolidated Statements of Stockholders' Equity - For the Years Ended
December 31, 1996 and 1995..............................................F-6
Consolidated Statements of Cash Flows - For the Years Ended December 31,
1996 and 1995...........................................................F-7
Notes to Consolidated Financial Statements...................................F-8
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Pease Oil and Gas Company
Grand Junction, Colorado
We have audited the accompanying consolidated balance sheets of Pease Oil and
Gas Company and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pease Oil and Gas
Company and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Denver, Colorado
February 21, 1997
F-2
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents ........................................... $ 1,995,860 $ 677,275
Trade receivables, net of allowance for bad debts of $25,000 and
$51,000, respectively ..................................... 599,648 963,315
Inventory ...................................................... 408,787 532,289
Prepaid expenses and other ..................................... 56,327 77,844
Common stock subscription receivable, 91,667 shares ............ -- 68,750
------------ ------------
Total current assets ................................. 3,060,622 2,319,473
------------ ------------
OIL AND GAS PROPERTIES, at cost (successful efforts method):
Undeveloped properties ......................................... 351,727 377,606
Wells in progress .............................................. 181,312 --
Developed properties ........................................... 9,505,408 9,149,516
------------ ------------
Total oil and gas properties ......................... 10,038,447 9,527,122
Less accumulated depreciation and depletion .................... (3,946,974) (3,608,917)
------------ ------------
Net oil and gas properties ........................... 6,091,473 5,918,205
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Gas plant ...................................................... 4,099,285 4,095,227
Service equipment and vehicles ................................. 879,313 855,025
Buildings and office equipment ................................. 459,228 529,703
------------ ------------
Total property, plant and equipment .................. 5,437,826 5,479,955
Less accumulated depreciation .................................. (1,376,154) (1,034,731)
------------ ------------
Net property, plant and equipment .................... 4,061,672 4,445,224
------------ ------------
OTHER ASSETS:
Debt issuance costs, net of accumulated amortization of $170,134
and $29,167, respectively ................................. 1,105,874 20,833
Non-compete agreements, net of accumulated amortization
of $253,322 ............................................... 306,678 352,674
Other .......................................................... 274,830 383,317
------------ ------------
Total other assets ................................... 1,687,382 756,824
------------ ------------
TOTAL ASSETS ........................................................ $ 14,901,149 $ 13,439,726
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt:
Related parties ....................................... $ 285,895 $ --
Other ................................................. 45,944 1,100,474
Accounts payable, trade .................................... 267,540 1,172,567
Accrued production taxes ................................... 288,122 303,287
Other accrued expenses ..................................... 265,427 243,325
------------ ------------
Total current liabilities ........................ 1,152,928 2,819,653
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities:
Convertible debentures ................................ 5,000,000 --
Other ................................................. 19,945 1,223,159
Accrued production taxes ................................... 256,088 379,652
------------ ------------
Total long-term liabilities ...................... 5,276,033 1,602,811
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 5, 6, and 11)
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share, 2,000,000 shares
authorized, 179,938 and 202,688 shares of Series A
Cumulative Convertible Preferred Stock issued and
outstanding (liquidation preference of $2,204,000 and
$2,280,000, respectively) ............................. 1,799 2,027
Common Stock, par value $.10 per share, 25,000,000 shares
authorized, issued and outstanding 7,526,817 shares and
7,180,804 shares, respectively ........................ 752,682 718,081
Additional paid-in capital ................................. 17,392,329 16,560,194
Accumulated deficit ........................................ (9,674,622) (8,263,040)
------------ ------------
Total stockholders' equity ....................... 8,472,188 9,017,262
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $ 14,901,149 $ 13,439,726
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
REVENUE:
Oil and gas sales ............................. $ 2,546,676 $ 2,623,782
Natural gas marketing and trading ............. 2,067,379 3,872,565
Gas plant processing .......................... 818,356 1,135,050
Oil field services and supply ................. 618,225 1,302,741
Well administration and other income .......... 115,028 97,678
----------- -----------
Total revenue .......................... 6,165,664 9,031,816
----------- -----------
OPERATING COSTS AND EXPENSES:
Oil and gas production ........................ 1,426,549 1,617,318
Natural gas marketing and trading ............. 1,745,446 3,404,169
Gas plant processing .......................... 464,512 942,867
Oil field services and supply ................. 553,343 1,391,588
General and administrative .................... 1,092,342 1,059,306
Consulting arrangement - related party ........ 257,199 --
Depreciation, depletion and amortization ...... 1,055,639 1,292,314
Dry holes, plugging, and abandonments ......... 555,685 18,786
Restructuring costs ........................... -- 226,986
----------- -----------
Total operating costs and expenses ..... 7,150,715 9,953,334
----------- -----------
LOSS FROM OPERATIONS ................................ (985,051) (921,518)
----------- -----------
OTHER INCOME (EXPENSES):
Interest income ............................... 41,148 8,444
Interest expense:
Amortization of debt issuance costs .... (190,967) (17,554)
Other .................................. (311,461) (288,881)
Gain (loss) on sale of assets ................. (6,660) 75,073
----------- -----------
Net .................................... (467,940) (222,918)
----------- -----------
LOSS BEFORE INCOME TAXES ............................ (1,452,991) (1,144,436)
Income tax benefit ............................ 41,409 379,000
----------- -----------
NET LOSS ............................................ (1,411,582) (765,436)
Preferred stock dividends:
Converted .............................. (22,750) (117,000)
In arrears ............................. (179,938) (202,688)
----------- -----------
Total preferred stock dividends... (202,688) (319,688)
----------- -----------
Loss before non-cash inducement... (1,614,270) (1,085,124)
Non-cash inducement in tender offer (Note 1)... -- (1,523,906)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS .......... $(1,614,270) $(2,609,030)
=========== ===========
NET LOSS PER COMMON SHARE:
Before non-cash inducement .................... $ (.22) $ (.18)
Non-cash inducement (Note 1) .................. -- (.24)
----------- -----------
$ (.22) $ (.42)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING................................. 7,278,000 6,190,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------- ------------------------ Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
BALANCES January 1, 1995 ....................... 1,157,780 $ 11,578 2,286,028 $ 228,603 $ 16,744,348
Conversion of preferred stock to
common stock:
In tender offer ...................... (933,492) (9,335) 4,200,716 420,072 (410,737)
Other ................................ (21,600) (216) 56,739 5,673 (5,457)
Acquisition of oil and gas properties for
common stock ......................... -- -- 65,000 6,500 53,422
Sale of common stock in private placement . -- -- 500,000 50,000 325,000
Offering costs ............................ -- -- -- -- (77,953)
Issuance of common stock to directors and
employees for services and other ..... -- -- 21,036 2,104 11,327
Settlement of trade payable for common
stock ................................ -- -- 63,206 6,321 (30,948)
Cancellation of trestury shares ........... -- -- (11,921) (1,192) (48,808)
Net loss .................................. -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCES December 31, 1995 ..................... 202,688 2,027 7,180,804 718,081 16,560,194
Issuance of common stock to officers,
directors, and employees for
compensation ......................... -- -- 51,490 5,149 57,162
Fair value of warrants granted for debt
issuance costs ....................... -- -- -- -- 600,000
Conversion of debentures into common
stock ................................ -- -- 82,353 8,235 61,765
Issuance of common stock for engineering
services ............................. -- -- 15,000 1,500 21,477
Exercise of options and warrants to
purchase common stock ................ -- -- 67,500 6,750 57,625
Conversion of note payable to director into
common stock ......................... -- -- 60,000 6,000 54,000
Conversion of preferred stock to common
stock ................................ (22,750) (228) 69,670 6,967 (6,739)
Offering costs ............................ -- -- -- -- (13,155)
Net loss .................................. -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCES, December 31, 1996 .................... 179,938 $ 1,799 7,526,817 $ 752,682 $ 17,392,329
============ ============ ============ ============ ============
<PAGE>
<CAPTION>
Tresury Stock Total
Accumulated --------------------------- Stockholders'
Deficit Shares Amount Equity
----------- ------ ------ -------------
<S> <C> <C> <C> <C>
BALANCES January 1, 1995 ....................... $ (7,497,604) 28,715 $ (132,588) $ 9,354,337
Conversion of preferred stock to
common stock:
In tender offer ...................... -- -- -- --
Other ................................ -- -- -- --
Acquisition of oil and gas properties for
common stock ......................... -- -- -- 59,922
Sale of common stock in private placement . -- -- -- 375,000
Offering costs ............................ -- -- -- (77,935)
Issuance of common stock to directors and
employees for services and other ..... -- -- -- 13,431
Settlement of trade payable for common
stock ................................ -- (16,794) 82,588 57,961
Cancellation of trestury shares ........... -- (11,921) 50,000 --
Net loss .................................. (765,436) -- -- (765,436)
---------- ----------- ---------- ----------
BALANCES December 31, 1995 ..................... (8,263,040) -- -- 9,017,262
Issuance of common stock to officers,
directors, and employees for
compensation ......................... -- -- -- 62,311
Fair value of warrants granted for debt
issuance costs ....................... -- -- -- 600,000
Conversion of debentures into common
stock ................................ -- -- -- 70,000
Issuance of common stock for engineering
services ............................. -- -- -- 22,977
Exercise of options and warrants to
purchase common stock ................ -- -- -- 64,375
Conversion of note payable to director into
common stock ......................... -- -- -- 60,000
Conversion of preferred stock to common
stock ................................ -- -- -- --
Offering costs ............................ -- -- -- (13,155)
Net loss .................................. (1,411,582) -- -- (1,411,582)
---------- ----------- ---------- ----------
BALANCES, December 31, 1996 .................... $ (9,674,622) -- $ -- $ 8,472,188
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $(1,411,582) $ (765,436)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for depreciation and depletion .................... 1,009,645 1,200,487
Amortization of intangible assets ........................... 236,963 109,381
Deferred income taxes ....................................... -- (400,000)
Loss (gain) on sale of property and equipment ............... 6,660 (75,073)
Provision for bad debts ..................................... 21,497 35,176
Dry holes and abandonments .................................. 525,000 --
Issuance of common stock for services ....................... 85,288 71,392
Other ....................................................... (54,942) (41,770)
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade receivables ........................................ 342,170 625,286
Inventory ................................................ 124,502 296,824
Prepaid expenses and other ............................... (14,316) 14,001
Increase (decrease) in:
Accounts payable ......................................... (905,027) (529,581)
Accrued expenses ......................................... (109,473) (160,512)
----------- -----------
Net cash provided by (used in) operating activities ......... (143,615) 380,175
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant and equipment ...... (1,403,413) (387,403)
Proceeds from redemption of certificate of deposit .......... 53,500 43,000
Proceeds from sale of property and equipment ................ 163,821 823,631
----------- -----------
Net cash provided by (used in) investing activities ...... (1,186,092) 479,228
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures ............ 5,000,000 --
Repayment of long-term debt ................................. (1,795,670) (943,341)
Proceeds from sale of common stock .......................... 133,125 281,250
Offering costs .............................................. (13,155) (52,953)
Debt issuance costs ......................................... (676,008) --
----------- -----------
Net cash provided by (used in) financing activities ...... 2,648,292 (715,044)
----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS ................... 1,318,585 144,359
CASH AND EQUIVALENTS, beginning of year ....................... 677,275 532,916
----------- -----------
CASH AND EQUIVALENTS, end of year ............................. $ 1,995,860 $ 677,275
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest ...................................... $ 192,502 $ 273,735
=========== ===========
Cash received (paid) for income taxes ....................... $ 41,409 $ (21,000)
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Fair value of warrants granted for debt issuance costs ...... $ 600,000 $ --
Conversion of long-term debt to common stock ................ 130,000 --
Long-term debt incurred for purchase of vehicles ............ -- 24,992
Acquisition of oil and gas properties for common stock ...... -- 59,922
Common stock subscription receivable ........................ -- 68,750
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations - Pease Oil and Gas Company (the "Company") explores
for, develops, produces and sells oil and natural gas; transports,
processes, sells, markets and trades natural gas and natural gas liquids at
a gas processing plant; performs oil and gas well completion and
operational services; and sells new, used and reconditioned oil and gas
production equipment and oil field supplies. The Company conducts its
business through the following wholly-owned subsidiaries: Loveland Gas
Processing Company, Ltd. ("LGPCo"); Pease Oil Field Services, Inc.; Pease
Oil Field Supply, Inc.; and Pease Operating Company, Inc.
Principles of Consolidation - The accompanying financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All material
intercompany transactions and accounts have been eliminated in
consolidation.
Cash and Equivalents - For purposes of the statements of cash flows, the
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Oil and Gas Producing Activities - The Company follows the "successful
efforts" method of accounting for its oil and gas properties. Under this
method of accounting, all property acquisition costs and costs of
exploratory and development wells are capitalized when incurred, pending
determination of whether the well has found proved reserves. If an
exploratory well has not found proved reserves, the costs of drilling the
well are charged to expense. The costs of development wells are capitalized
whether productive or nonproductive. Geological and geophysical costs and
the costs of carrying and retaining undeveloped properties are expensed as
incurred. Management estimates that the salvage value of lease and well
equipment will approximately offset the future liability for plugging and
abandonment of the related wells. Accordingly, no accrual for such costs
has been recorded.
Depletion and depreciation of capitalized costs for producing oil and gas
properties is provided using the units-of-production method based upon
proved reserves. Depletion and depreciation expense for the Company's oil
and gas properties amounted to $589,853 and $741,924 for the years ended
December 31, 1996 and 1995, respectively.
Impairment of Long-Lived Assets - The Company performs an assessment for
impairment whenever events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable. When an
assessment for impairment of oil and gas properties is performed, the
Company compares the net carrying value of proved oil and gas properties on
a lease-by-lease basis (the lowest level at which cash flows can be
determined on a consistent basis) to the related estimates of undiscounted
future net cash flows for such properties. If the net carrying value
exceeds the net cash flows, then impairment is recognized to reduce the
carrying value to the estimated fair value. The allowance for impairment is
included in accumulated depreciation and depletion in the accompanying
balance sheets.
F-8
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment - Property, plant, and equipment is stated at
cost. Depreciation of property, plant and equipment is calculated using the
straight-line method over the estimated useful lives of the assets, as
follows:
YEARS
-----
Gas plant 17
Service equipment and vehicles 4-7
Buildings and office equipment 7-15
Depreciation expense related to property, plant and equipment amounted to
$419,792 and $458,563 for the years ended December 31, 1996 and 1995,
respectively.
The cost of normal maintenance and repairs is charged to operating expenses
as incurred. Material expenditures which increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of properties sold, or otherwise disposed of, and the
related accumulated depreciation or amortization are removed from the
accounts, and any gains or losses are reflected in current operations.
Non-compete Agreements - The costs of non-compete agreements were incurred
in connection with the 1993 acquisition of substantially all of the
Company's assets. These costs are being amortized over the terms of the two
to ten-year agreements on a straight-line basis. Amortization expense
related to the non-compete agreements was $45,994 and $91,827 for the years
ended December 31, 1996 and 1995, respectively.
Debt Issuance Costs - Debt issuance costs relate to the $5 million private
placement of convertible debentures discussed in Note 3. These costs are
being amortized using the straight-line method (which approximates the
interest method) over the 5-year term of the debentures.
Inventory - Inventory consists primarily of oil and gas production
equipment and oil field supplies. These items are generally held for
resale. At December 31, 1996 and 1995, inventory also includes
approximately $72,000 and $100,000, respectively, of crude oil, fuel, and
propane. Inventory is carried at the lower of cost or market, cost being
determined generally under the first-in, first-out (FIFO) method of
accounting, or where possible, by specific identification. At December 31,
1996 and 1995, the Company has classified $200,000 of used oil field
equipment inventory as long-term (included in other assets) because, based
on current inventory usage, it is not expected to be sold within the next
year.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and the accompanying notes. The actual
results could differ from those estimates.
F-9
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's financial statements are based on a number of significant
estimates including the allowance for doubtful accounts, accrued production
taxes, realizability of intangible assets, assumptions affecting the fair
value of stock options and warrants, selection of the useful lives for
property, plant and equipment, and oil and gas reserve quantities which are
the basis for the calculation of depreciation, depletion, and impairment of
oil and gas properties. Management emphasizes that reserve estimates are
inherently imprecise and that estimates of more recent discoveries are more
imprecise than those for properties with long production histories. At
December 31, 1996, approximately 35% of the Company's oil and gas reserves
are attributable to non-producing properties. Accordingly, the Company's
estimates are expected to change as future information becomes available.
The Company is required under certain circumstances to evaluate the
possible impairment of the carrying value of its long-lived assets. For
proved oil and gas properties, this involves a comparison to the estimated
future undiscounted cash flows, which is the primary basis for determining
the related fair values for such properties. In addition to the
uncertainties inherent in the reserve estimation process, these amounts are
affected by historical and projected prices for oil and natural gas which
have typically been volatile. It is reasonably possible that the Company's
oil and gas reserve estimates will materially change in the forthcoming
year.
At December 31, 1996, the Company's gas plant had a net carrying value of
approximately $3,340,000. The determination of impairment of the gas plant
may change in the future based on the Company's ability to continue to
develop its properties whereby sufficient quantities of natural gas and
liquids are available to operate the plant profitably.
Income Taxes - Income taxes are provided for in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires an asset and liability approach in the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the
tax bases of the Company's assets and liabilities.
Revenue Recognition - The Company recognizes gas plant revenues and oil and
gas sales upon delivery to the purchaser. Revenues from oil field services
are recognized as the services are performed. Oil field supply and
equipment sales are recognized when the goods are shipped to the customer.
Net Loss Per Common Share - Net loss per common share is computed by
dividing the net loss applicable to common stockholders (which includes
accrued but unpaid preferred dividends) by the weighted average number of
common shares outstanding during the year. All common stock equivalents
have been excluded from the computations because their effect would be
anti-dilutive.
In connection with the 1995 conversion of preferred stock to common stock
discussed in Note 6, the Company experienced a significant change in its
capital structure. The pro forma effect of these changes, as if the
conversions occurred on January 1, 1995, would have resulted in a reduction
in the 1995 loss applicable to common stockholders before non-cash
inducement from $.18 per share to $.14 per share. The pro forma loss per
F-10
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
share calculations give effect to 4,257,455 common shares which were issued
in the conversion and the elimination of dividends related to the converted
preferred shares of approximately $117,000 for 1995. However, the pro forma
information does not give effect to the inducement discussed in the
following paragraph.
The Company completed a tender offer to the Company's preferred
stockholders in February 1995. In connection therewith, the Company offered
the preferred holders 4.5 common shares for each preferred share owned. The
4.5 shares represented an increase from the original terms of the preferred
stock which provided for 2.625 common shares for each preferred share.
Under a recently issued accounting pronouncement, the Company was required
to reduce earnings available to common stockholders by the fair value of
the additional shares which were issued to induce the preferred
stockholders to convert their shares. Since the Company issued an
additional 1,750,000 common shares in the tender offer compared to the
shares that would have been issued under the original terms of the
preferred stock, the Company was required to deduct the fair value of these
additional shares of $1,523,906 from earnings available to common
stockholders. This non-cash charge resulted in the reduction of earnings
per share by $.24 for the year ended December 31, 1995.
While this charge is intended to show the cost of the inducement to the
owners of the Company's common shares immediately before the tender offer,
management does not believe that it accurately reflects the impact of the
tender offer on the Company's common stockholders. As disclosed to the
preferred stockholders in connection with the tender offer, the book value
per share of common stock increased from a negative amount to approximately
$1.00 per share as a result of the tender offer. Therefore, management
believes that, even though the current accounting rules require the $.24
charge per common share, there are other significant offsetting factors by
which the common shareholders benefited from this conversion which are not
reflected in the 1995 earnings per share presentation.
Stock-Based Compensation - The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options granted to employees is measured as the excess, if any, of
the quoted market price of the Company's common stock at the measurement
date (generally, the date of grant) over the amount an employee must pay to
acquire the stock.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock-Based Compensation" (FAS 123). FAS
123 requires that options, warrants, and similar instruments which are
granted to non-employees for goods and services be recorded at fair value
on the grant date. Fair value is generally determined under an option
pricing model using the criteria set forth in FAS 123.
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.
2. RESTRUCTURING:
During 1995, in light of declining natural gas prices, declining rig
counts, lackluster margins and the competitive environment inherent in the
F-11
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
oil and gas industry, the Company undertook steps to reduce operating
costs, increase efficiencies, reduce operating risks and generate
additional working capital. During the second quarter of 1995, the Company
announced a restructuring program that included substantially downsizing
its service and supply businesses and closing its administrative office in
Denver, Colorado. As a result of this restructuring, 35 of the Company's 70
employees were terminated, and service equipment, land and buildings were
sold.
As of December 31, 1995, the Company recognized $226,986 of costs incurred
in connection with both the tender offer discussed in Note 6, and the
restructuring discussed above. The costs recognized in the restructuring
consist primarily of severance pay, a loss on the abandonment of the office
lease, and a $90,000 loss from the liquidation of inventory at an auction.
For the year ended December 31, 1995, the operating revenues and net
operating loss of the service and supply businesses, exclusive of
restructuring charges and gains on sales of assets, were as follows:
Revenues $1,302,741
Operating costs (1,391,588)
Depreciation (157,380)
----------
Net operating loss $(246,227)
==========
Substantially, all of the 1995 net operating loss from these operations was
incurred prior to completion of the restructuring discussed above.
3. DEBT FINANCING ARRANGEMENTS:
Long-Term Debt - Long-term debt at December 31, 1996 and 1995, consists of
the following:
<TABLE>
<CAPTION>
1996 1995
----- ----
<S> <C> <C>
Unaffiliated Parties:
Collateralized convertible 10% debentures due April 2001 ............. $5,000,000 $ --
Other installment notes. Interest at 6.9% to 9.75%, monthly principal
and interest payments of approximately $3,440 through 1998. All of
the notes are collateralized by vehicles ............................. 52,555 85,423
Contract payable, $4,444 credited monthly against gas purchases, due
July 1997, collateralized by certificate of deposit ................... 13,334 66,667
Note payabel to a bank, interest at prime plus 3% ..................... -- 1,762,802
F-12
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
1996 1995
----- ----
<S> <C> <C>
Convertible 12% debentures, due May 1996, convertible into
82,353 share of common stock .......................................... -- 70,000
---------- ---------
Total unaffiliated parties ...................................... 5,065,889 1,984,892
---------- ---------
Related Parties:
Note payable to the Company's president and CEO. Interest at 6%
annual principal payments of $65,000 due January 1997 and 1998.
note is convertible into common stock at $5.00 per share and is
collateralized by equipment ........................................... 130,000 130,000
Unsecured notes payable to the Company's president and CEO and
various entities controlled by him. Interest at 8% to 10% with
principal and interest due January 1, 1997 ............................ 116,719 176,717
Accrued interest ...................................................... 39,177 32,024
--------- ---------
Total related parties ............................................. 285,896 338,741
--------- ---------
Total long-term debt .................................................. 5,351,785 2,323,633
Less current maturities:
Related parties .................................................... (285,896) --
Other .............................................................. (45,944) (1,100,474)
--------- ---------
Total long-term debt, less current maturities ..................... $5,019,945 $1,223,159
========= ==========
</TABLE>
In March 1996, the Company's president agreed to extend the due date of a
delinquent $60,000 note payable to him. As consideration for the extension,
the Company's Board of Directors approved amending the note to provide for
conversion to common stock at $1.00 per share. In December 1996, the
president exercised the conversion feature. The Company's Board of
Directors has resolved to repay all outstanding loans from related parties
during 1997. Accordingly, all such amounts are included in current
liabilities in the 1996 balance sheet.
F-13
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate Debt Maturities - The aggregate maturities of long-term debt are
as follows:
Year Ending Related
December 31, Parties Others Total
------------ ------- ------ -----
1997 $285,896 $ 45,944 $ 331,840
1998 -- 19,945 19,945
2001 -- 5,000,000 5,000,000
-------- --------- ---------
$285,896 $5,065,889 $5,351,785
======== ========== ==========
Convertible Debt and Consulting Agreement - In March 1996, the Company
entered into a consulting agreement with a company (the "Consultant") that
specializes in developing and implementing capitalization plans, including
the utilization of debt capital in business operations. The initial term of
the agreement is for two years and provides for minimum monthly cash
payments of $17,500. The Consultant can elect to extend the agreement for
an additional period of one year. In addition to cash compensation, the
Company agreed to grant warrants to purchase 1,000,000 shares of the
Company's common stock. The exercise price of the warrants is $.75 per
share and they expire in March 2001.
In April 1996, the Company, with the assistance of the Consultant,
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% collateralized convertible debenture and warrants to
purchase 25,000 shares of the Company's common stock at $1.25 per share
(see Note 7 for additional information with respect to the warrants). In
November 1996, the offering was completed and the Company was successful in
selling the entire $5,000,000 generating net cash proceeds of $4,300,000.
The debentures are collateralized by a first priority interest in certain
oil and gas properties owned and operated by the Company.
The debentures are convertible, at the holders option, into the Company's
common stock for $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 is payable quarterly commencing on September 30, 1996 and
the entire principal balance is due on April 15, 2001.
The Company also agreed to pay the Consultant a fee equal to 2% of the net
proceeds from the private placement and up to 7% from the net proceeds from
any warrants which are exercised during the term of the agreement or up to
six months after termination in certain circumstances. All of the
compensation paid to the Consultant is limited to 15% of the gross proceeds
generated from the private placement, exercise of warrants, or other debt
or equity financings that may be consummated during the term of the
agreement. In August 1996, a major shareholder of the Consultant was
elected to the Company's Board of Directors.
F-14
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INCOME TAXES:
The Company's income tax benefit for the years ended December 31, 1996 and
1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current benefit (provision) $ 41,409 $ (21,000)
Deferred benefit -- 400,000
--------- ----------
Total $ 41,409 $ 379,000
========= ==========
</TABLE>
A reconciliation of the income tax benefit at the statutory rate to the
income tax benefit reported in the accompanying financial statements is as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computed tax benefit at the expected statutory rate $ 494,000 $ 389,100
State income taxes and other 39,000 10,900
Federal income taxes assessed in audit -- (21,000)
Increase in valuation allowance (533,000) --
Federal income tax refund 41,409 --
--------- ----------
Total $ 41,409 $ 379,000
========= ==========
</TABLE>
Deferred tax assets (liabilities) as of December 31, 1996 and 1995 are
comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Long-term Assets:
Net operating loss carryforwards $ 3,616,000 $ 3,050,000
Tax credit carryforwards 294,000 294,000
Percentage depletion carryforwards 58,000 58,000
Other 25,000 45,000
--------- ----------
Total 3,993,000 3,447,000
Less valuation allowance (1,770,000) (1,237,000)
--------- ----------
2,223,000 2,210,000
Long-term liability for property and equipment (2,223,000) (2,210,000)
--------- ----------
Net long-term liability $ -- $ --
========= ==========
</TABLE>
F-15
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has provided a valuation allowance for the net operating loss
and credit carryforwards based upon the various expiration dates and the
limitations which exist under IRS Sections 382 and 384.
During the year ended December 31, 1996, the Company increased the
valuation allowance by $533,000 primarily due to an increase in the net
operating loss carryforwards which are not considered to be realizable.
At December 31, 1996, the Company has net operating loss carryforwards for
income tax purposes of approximately $9,600,000, which expire primarily in
2008 through 2011. Approximately $2,880,000 of these net operating losses
are subject to limitations under IRS Sections 382 and 384. These losses may
only offset future taxable income to the extent of approximately $335,000
per year and generally may not offset any gain on the sale of assets
acquired in the acquisition of Skaer Enterprises, Inc. Additionally, the
Company has tax credit carryforwards at December 31, 1996, of approximately
$294,000 and percentage depletion carryforwards of approximately $150,000.
5. COMMITMENTS AND CONTINGENCIES:
Gas Contracts - The Company operates a natural gas processing plant (the
"Gas Plant"). The Company had a contract with a major utility which called
for the major utility to purchase a minimum of 2.92 billion cubic feet
("BCF") and a maximum of 3.65 BCF of natural gas annually. The price paid
by the major utility was on an MMBTU basis above the Colorado Interstate
Gas Company's Northern Pipeline "spot" price. The contract expired on June
30, 1996.
Historically, the price paid under this contract was at a premium above the
market which allowed the Company to conduct its marketing and trading
activities. The expiration of this contract and the corresponding loss of
the market premium resulted in the elimination of the Company's marketing
and trading activities beginning in July 1996. Management is continuing to
explore alternatives with the major utility and other purchasers of natural
gas in order to maximize the Company's natural gas revenue.
The Company also had a contract with an independent producer that required
purchases of gas quantities at a fixed margin per MMBTU for any difference
between plant sales and the contract volumes with the utility. This
contract also expired in June 1996. The revenue and corresponding costs
incurred pursuant to these contracts have been reflected as Gas Marketing
and Trading in the consolidated statements of operations.
Leases - The Company leases its office facilities under noncancellable
operating leases. The total minimum commitments under these leases amounted
to approximately $100,000 as of December 31, 1996. Total rent expense under
all operating leases for the years ended December 31, 1996 and 1995, was
$26,807 and $90,569, respectively.
F-16
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employment Agreements - During 1994, the Board of Directors approved
employment agreements with the Company's executive officers. The agreements
may be terminated by the officers upon 90 days notice or by the Company
without cause upon 30 days notice. In the event of a termination by the
Company without cause, the Company would be required to pay the officers
their respective salaries for one to three years. If the termination occurs
following a change in control, the Company would be required to make lump
sum payments equivalent to two to three years salary for each of the
officers.
Profit Sharing Plan - The Company has established a 401(k) profit sharing
plan that covers all employees with one month of service who elect to
participate in the Plan. The Plan provides that the employees may elect to
contribute up to 15% of their salary to the Plan. All of the Company's
contributions are discretionary and amounted to $8,926 and $2,996 for the
years ended December 31, 1996 and 1995, respectively.
Contingencies - 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
operations 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.
6. PREFERRED STOCK:
The Company has the authority to issue up to 2,000,000 shares of Preferred
Stock, which may be issued in such series and with such preferences as
determined by the Board of Directors. During 1993, the Company issued
1,170,000 shares of Series A Cumulative Convertible Preferred Stock (the
"Preferred Stock").
At December 31, 1996, the Preferred Stock had a liquidation preference of
$12.25 per share ($10 liquidation value plus $2.25 of dividends in
arrears), and each share of Preferred Stock was convertible into 3.0625
shares of common stock and warrants to purchase 3.0625 common shares. Each
warrant entitles the holder to purchase one share of common stock at $6.00
per share through August 13, 1998, when the warrants expire. The Preferred
Stock will automatically convert into common stock if the reported sale of
Preferred Stock equals or exceeds $13.00 per share for ten consecutive
days. The Company may redeem the Preferred Stock at $10.00 per share plus
any dividends in arrears. Each share of Preferred Stock is entitled to
receive dividends at 10% per annum when, as and if declared by the
Company's Board of Directors. Unpaid dividends accrue and are cumulative.
In February 1995, the Company completed a tender offer to the preferred
stockholders whereby the holders of the Preferred Stock were given the
opportunity to convert each share of Preferred Stock and all accrued and
undeclared dividends (including the full dividend for the quarters ended
December 31, 1994 and March 31, 1995) into 4.5 shares of the Company's
common stock. As a result of this tender offer, 933,492 shares of the
preferred stock converted into 4,200,716 shares of the Company's common
stock. In connection with the tender offer and other conversions of
preferred stock through December 31, 1996, warrants for an aggregate of
2,605,900 shares are outstanding.
F-17
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Through December 31, 1996, the Board of Directors has elected to forego the
declaration of the regular quarterly dividend for five consecutive quarters
resulting in dividends in arrears of approximately $405,000 ($2.25 per
share) related to 179,938 outstanding shares of Preferred Stock. The
Company is precluded from paying dividends on its common stock so long as
any dividends on the Preferred Stock are in arrears. The terms of the
Preferred Stock prohibited the Company from entering into certain
transactions without an affirmative vote of the preferred stockholders.
Otherwise, the preferred stockholders have no voting rights.
In connection with the Company's 1993 preferred stock offering, the Company
issued warrants to the underwriter to purchase 90,000 shares of preferred
stock at $12.00 per share. If not previously exercised, these warrants will
expire in August 1998. In 1993, the Company also granted warrants to a
consultant for the purchase of 60,000 shares of common stock. The warrants
are exercisable for $6.00 per share and expired in November 1996.
7. STOCK BASED COMPENSATION:
Stock Option Plans - The Company's shareholders have approved four stock
option plans that authorize an aggregate of 900,000 shares for stock
options that may be granted to officers, directors, employees, and
consultants. The plans permit the issuance of incentive and non-statutory
options and provide for a minimum exercise price equal to 100% of the fair
market value of the Company's common stock on the date of grant. The
maximum term of options granted under the plans is 10 years and options
granted to employees expire three months after the termination of
employment. None of the options may be exercised during the first six
months of the option term.
No options may be granted after 10 years from the adoption date of each
plan. The following is a summary of activity under these stock option plans
for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------------------------- ---------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 459,600 $.94 347,000 $3.53
Canceled - - (224,000) 3.43
Expired (4,000) 7.19 (99,000) 3.70
Granted 165,700 1.39 435,600 .79
------- -------
Outstanding, end of year 621,300 1.02 459,600 .94
======= =======
</TABLE>
F-18
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For all options granted during 1996 and 1995, the weighted average market
price of the Company's common stock on the grant date was approximately
equal to the weighted average exercise price. At December 31, 1996, options
for 542,000 shares were exercisable and options for the remaining 79,300
shares became exercisable in February 1997. If not previously exercised,
options outstanding at December 31, 1996, will expire as follows:
Weighted
Average
Number Exercise
Year Ending December 31, of Shares Price
----------------------- --------- --------
1997 5,000 $3.44
1998 15,000 2.94
2000 295,600 .83
2000 140,000 .70
2001 86,400 1.00
2001 79,300 1.81
-------
621,300
=======
Warrants and Non-Qualified Stock Options - The Company has also granted
warrants and non-qualified options which are summarized as follows for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------- ---------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 3,359,418 $5.00 232,302 $4.05
Granted to:
Officer and director 101,500 1.00 -- --
Consultants 1,090,000 .75 358,000 .97
Former officer and director -- -- 77,000 3.61
Investors in private placements of:
Common stock -- -- 250,000 1.25
Convertible debentures 2,500,000 1.25 -- --
Brokers in private placement of convertible
debentures 223,500 2.00 -- --
Issued to former holders of preferred stock
upon conversion 69,670 6.00 2,507,116 6.00
Repriced -- -- (15,000) 6.00
Expired (60,000) 6.00 (50,000) .85
Exercised (67,500) .95 -- --
--------- ---------
Outstanding, end of year 7,216,588 2.94 3,359,418 5.00
========= =========
</TABLE>
F-19
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All outstanding warrants and non-qualified options were exercisable at
December 31, 1996. If not previously exercised, warrants and non-qualified
options outstanding at December 31, 1996, will expire as follows:
Weighted
Average
Number Exercise
Year Ending December 31, of Shares Price
------------------------ --------- --------
1997 400,000 $1.25
1998 2,605,900 6.00
1998 118,188 1.51
1999 223,500 2.00
1999 50,000 3.34
2000 118,000 .76
2000 77,000 3.61
2001 1,040,000 .75
2001 101,500 1.00
2001 2,482,500 1.25
---------
Total 7,216,588
=========
Presented below is a comparison of the weighted average exercise price and
market price of the Company's common stock on the measurement date for all
warrants and stock options granted to non-employees during 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- -------------------------------
Number of Exercise Market Number of Exercise Market
Shares Price Price Shares Price Price
--------- -------- ------ --------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Market price equal to
exercise price 101,500 $1.00 $1.00 118,000 $ .76 $ .76
Market price greater than
exercise price 50,000 .85 1.00 -- -- --
Exercise price greater than
market price 3,763,500 1.16 .69 567,000 1.50 .79
</TABLE>
Fair value of all warrants and stock options granted to non-employees
during the year ended December 31, 1996, was determined using the
Black-Scholes option pricing model. Significant assumptions included a
risk-free interest rate of 6.5%, expected volatility of 63%, and that no
dividends would be declared during the expected term of the options. The
F-20
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
weighted average contractual term of the options was approximately 4.8
years compared to a weighted average expected term of 1.9 years. The
estimated fair value of warrants granted to non-employees in 1996 amounted
to $600,000, which is recorded as a debt issuance cost in the 1996 balance
sheet.
In connection with private placements of debt and equity securities, the
Company granted common stock purchase warrants that are redeemable at the
option of the Company. Presented below is a summary of these warrants:
Redemption
Year Expiration Exercise Number of Price Per
Granted Date Price Shares Share
------- ---------- -------- --------- ----------
1994 August 1998 $1.92 83,188 $.25
1995 April 1997 1.25 250,000 .25
1996 July 2001 1.25 2,500,000 .10
In December 1996, the Company provided notice of redemption to the holders
of the warrants granted in 1995. Accordingly, the holders must exercise
their warrants by January 31, 1997 or accept the redemption price (see Note
11).
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for stock options and
warrants which are granted to employees. Accordingly, no compensation cost
has been recognized for grants of options and warrants to employees since
the exercise prices were not less than the fair value of the Company's
common stock on the grant dates. Had compensation cost been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of FAS 123, the Company's net loss and loss per
share would have been changed to the pro forma amounts indicated below.
Year Ended December 31,
------------------------
1996 1995
---- ----
Net loss applicable to common stockholders:
As reported $(1,614,270) $(2,609,030)
Pro forma (1,764,270) (2,772,030)
Net loss per common share:
As reported $ (.22) $ (.42)
Pro forma (.24) (.45)
F-21
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each employee option and warrant granted in 1996 and 1995
was estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Year Ended December 31,
-----------------------
1996 1995
---- ----
Expected volatility 64% 61%
Risk-free interest rate 6.5% 6.5%
Expected dividends -- --
Expected terms (in years) 3.4 3.3
8. FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their
financial statements. Accordingly, at December 31, 1996, management's best
estimate is that the carrying amount of cash, receivables, notes payable to
unaffiliated parties, accounts payable, and accrued expenses approximates
fair value due to the short maturity of these instruments. Management
estimates that fair value is approximately equal to carrying value of the
convertible debentures since market interest rates have not changed
significantly since the offering commenced. Management estimates that fair
value differs from carrying value for the following instruments as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------------------- ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Long-term portion of accrued $256,088 $225,000 $379,652 $335,000
production taxes
Notes payable to related parties 285,896 271,000 338,741 300,000
</TABLE>
Fair value of the above debt instruments was estimated using market
interest rates at December 31, 1996 for debt with comparable terms.
9. SIGNIFICANT CONCENTRATIONS:
Substantially all of the Company's accounts receivable at December 31, 1996
and 1995, result from crude oil, natural gas sales, and joint interest
billings to companies in the oil and gas industry. This concentration of
customers and joint interest owners may impact the Company's overall credit
risk, either positively or negatively, since these entities may be
similarly affected by changes in economic or other conditions. In
determining whether or not to require collateral from a customer or joint
F-22
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest owner, the Company analyzes the entity's net worth, cash flows,
earnings, and/or credit ratings. Receivables are generally not
collateralized; however, receivables from joint interest owners are subject
to collection under operating agreements which generally provide lien
rights. Historical credit losses incurred on trade receivables by the
Company have been insignificant.
The Company's oil and gas properties are predominantly located in a single
basin in which the gas marketing arrangements are influenced by local
supply and demand. Accordingly, in comparison to the net price received by
gas producers in many other areas of the United States, the Company often
realizes a lower net sales price. Additionally, since the Company's gas
plant is located in this basin and its oil field service and supply
operations are conducted in this basin, the Company is vulnerable to a
curtailment in drilling activity in order to realize the value of oil field
inventories and related operating assets.
At December 31, 1996, the Company had a receivable from a single customer
for $67,718, which was collected in January 1997. For the years ended
December 31, 1996 and 1995, the Company had natural gas sales to the major
utility discussed in Note 5 which accounted for 34% and 46% of total
revenues, respectively. For the year ended December 31, 1996, the Company
also had oil sales to a single customer which accounted for 11% of total
revenues.
At December 31, 1996, the Company has temporary cash investments of
$1,941,550 with a single financial institution.
10. FOURTH QUARTER ADJUSTMENTS:
During the fourth quarter of 1996, the Company recognized a charge of
$450,000 for drilling costs related to an unsuccessful well. This charge is
included in dry holes, plugging and abandonments in the 1996 statement of
operations.
11. SUBSEQUENT EVENTS (UNAUDITED):
Property Acquisitions - In January 1997, the Company completed the
acquisition of a 7.8125% after prospect payout working interest in a
producing oil and gas prospect in Louisiana. The prospect is operated by
Natural Energy Group, Inc. (NEGX), an independent oil and gas producer. The
purchase price was $1,750,000 which consisted of $875,000 in cash and the
issuance of 315,000 shares of the Company's common stock with a fair value
of $875,000. In February 1997, the Company entered into agreements with
unaffiliated parties for the purchase of a 10% working interest in this
prospect. The purchase price totals $2.5 million and the agreements provide
for an effective date of October 16, 1996. NEGX is the operator of these
properties.
F-23
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 1997, the Company entered into an agreement with NEGX that
provides the Company with the right and the obligation to participate as a
12.5% working interest owner in NEGX's defined drilling program. The
agreement provides that the Company will be required to pay 16.7% of the
costs to earn its 12.5% interest, under certain circumstances. The Company
is also committed to participate in other prospects operated by NEGX
through February 1999 when the initial term of the agreement expires.
Management estimates that the Company's capital requirements under this
agreement will be between $5 million and $20 million for the year ending
December 31, 1997.
Financing Arrangements - In January 1997, the Company commenced a private
placement of up to 1,500,000 shares of common stock for $2.50 per share. In
connection with the private placement, the Company agreed to use its best
efforts to register the shares for sale by including such securities in a
registration statement. As of March 10, 1997, the Company had received
subscriptions for the entire 1,500,000 shares resulting in total proceeds
of $3,750,000. Commissions and other costs of the offering are estimated to
be approximately 10% of the gross proceeds.
Through March 25, 1997, options and warrants were exercised for an
aggregate of 1.65 million shares, resulting in net proceeds of $1.9
million.
In February 1997, the Company entered into a letter of intent with an
underwriter for a proposed private placement of the Company's common stock.
The aggregate gross proceeds of the offering will be at least $6 million
unless otherwise agreed by the parties. The underwriter would receive
commissions equal to 10% of the gross proceeds and warrants to purchase the
Company's common stock.
In January 1997, options for 190,000 shares of the Company's common stock
were granted to officers and directors. The options are exercisable at
$2.97 per share and expire in January 2002.
12. SUPPLEMENTAL OIL AND GAS DISCLOSURES:
Costs Incurred in Oil and Gas Producing Activities - The following is a
summary of costs incurred in oil and gas producing activities for the years
ended December 31, 1996 and 1995:
1996 1995
---- ----
Property acquisition costs $ 16,022 $ 60,000
Development costs 806,564 161,000
Exploration costs 555,685 --
--------- --------
Total $1,378,271 $ 221,000
========= ========
F-24
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Results of Operations from Oil and Gas Producing Activities - Results of
operations from oil and gas producing activities (excluding natural gas
marketing and trading, well administration fees, general and administrative
expenses, and interest expense) for the years ended December 31, 1996 and
1995 are presented below.
1996 1995
---- ----
Oil and gas sales:
LGPCo $ 340,000 $ 373,000
Unaffiliated entities 2,207,000 2,251,000
--------- ---------
Total oil and gas sales 2,547,000 2,624,000
Exploration and abandonment expenses (556,000) (19,000)
Production costs (1,427,000) (1,617,000)
Depletion, depreciation and impairment (590,000) (742,000)
Imputed income tax benefit (provision) 10,000 (91,000)
--------- ---------
Results of operations from oil and gas
producing activities $ (16,000) $ 155,000
========= =========
Oil and Gas Reserve Quantities (Unaudited) - Proved oil and gas reserves
are the estimated quantities of crude oil, natural gas, and natural gas
liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed oil and gas
reserves are those reserves expected to be recovered through existing wells
with existing equipment and operating methods. The reserve data is based on
studies prepared by the Company's consulting petroleum engineers. Reserve
estimates require substantial judgment on the part of petroleum engineers
resulting in imprecise determinations, particularly with respect to new
discoveries. Accordingly, it is expected that the estimates of reserves
will change as future production and development information becomes
available. Approximately 25% of the Company's proved developed reserves are
currently non-producing as certain wells require workovers, recompletions,
or construction of a gathering system to an existing gas pipeline at an
estimated total cost of $1.4 million. All proved oil and gas reserves are
located in the United States. The following table presents estimates of the
Company's net proved oil and gas reserves, and changes therein for the
years ended December 31, 1996 and 1995.
F-25
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in Net Quantities of Proved Reserves (Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------------------- ---------------------------
Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf)
<S> <C> <C> <C> <C>
Proved reserves, beginning of year 1,294,000 5,851,000 1,352,000 5,724,000
Purchase of minerals in place 7,000 - 38,000 447,000
Sale of minerals in place (27,000) (26,000) (14,000) (107,000)
Extensions, discoveries
other additions 72,000 455,000 82,000 382,000
Revisions of previous estimates (71,000) (1,035,000) (43,000) (98,000)
Production (100,000) (412,000) (121,000) (497,000)
--------- ---------- --------- ---------
Proved reserves, end of year 1,175,000 4,833,000 1,294,000 5,851,000
========= ========== ========= =========
Proved developed reserves, end of year 1,034,000 4,078,000 1,014,000 4,302,000
========= ========== ========= ---------
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows (Unaudited) -
Statement of Financial Accounting Standards No. 69 prescribes guidelines
for computing a standardized measure of future net cash flows and changes
therein relating to estimated proved reserves. The Company has followed
these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated
quantities of oil and gas to be produced. Estimated future income taxes are
computed using current statutory income tax rates including consideration
for estimated future statutory depletion and tax credits. The resulting
future net cash flows are reduced to present value amounts by applying a
10% annual discount factor.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do not
necessarily reflect the Company's expectations for actual revenues to be
derived from those reserves nor their present worth. The limitations
inherent in the reserve quantity estimation process, as discussed
previously, are equally applicable to the standardized measure computations
since these estimates are the basis for the valuation process.
F-26
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summary sets forth the Company's future net cash flows
relating to proved oil and gas reserves as of December 31, 1996 and 1995
based on the standardized measure prescribed in Statement of Financial
Accounting Standards No. 69.
1996 1995
---- ----
Future cash inflows $ 46,727,000 $ 32,620,000
Future production costs (17,220,000) (13,871,000)
Future development costs (3,001,000) (3,269,000)
Future income tax expense (6,200,000) (1,800,000)
----------- -----------
Future net cash flows 20,306,000 13,680,000
10% annual discount for estimated
timing of cash flow (8,326,000) (5,200,000)
----------- ----------
Standardized Measure of Discounted
Future Net Cash Flows $ 11,980,000 $ 8,480,000
========== ==========
Changes in Standardized Measure (Unaudited) - The following are the
principal sources of change in the standardized measure of discounted
future net cash flows for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Standardized measure, beginning of year $ 8,480,000 $ 6,500,000
Sale of oil and gas produced, net of
production costs (1,120,000) (1,006,000)
Purchase of minerals in place 45,000 228,000
Sale of minerals in place (45,000) (80,000)
Net changes in prices and production costs 8,815,000 617,000
Net changes in estimated development costs 233,000 785,000
Revisions of previous quantity estimates (3,769,000) (803,000)
Discoveries, extensions, and other additions 1,089,000 620,000
Accretion of discount 848,000 650,000
Changes in income taxes, net (2,596,000) 969,000
----------- ----------
Standardized Measure, end of year $ 11,980,000 $ 8,480,000
========== ==========
</TABLE>
F-27
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gas Plant (Unaudited) - The Company processes most of the natural gas from
its properties in a gas plant owned by the Company. Since the revenues from
the Company's properties are subject to agreements with royalty owners and,
in some cases, other working interest owners, gas processing agreements
have been entered into to set forth the contractual arrangements for
processing charges. Generally, the Company's processing fee consists of
ownership of the natural gas liquids and a portion of the residue gas that
results from processing. The Standardized Measure of Discounted Future Net
Cash Flows shown above excludes the Company's share of the natural gas
liquids and residue gas related to the Company's gas processing activities,
as well as marketing and trading activities.
The Company's reserve engineer has prepared the following estimates for the
reserves related to these activities as of December 31, 1996.
Future net revenues, discounted at 10% $ 537,000
=========
Net quantities:
Natural gas (mcf) 1,514,000
=========
Liquids (bbls) 237,000
=========
F-28
<PAGE>
EXHIBIT INDEX
Exhibit Description Page No.
- ------- ----------- --------
(3.1) Articles of Incorporation, as amended. (1)
(3.2) Plan of Recapitalization. (1)
(3.3) Certificate of Amendment to the Articles of Incorporation filed
on July 6, 1994. (2)
(3.4) Certificate of Amendment to the Articles of Incorporation filed
on December 19, 1994. (2)
(3.5) Bylaws, as amended and restated May 11, 1993. (1)
(4.1) Representative's Preferred Stock Purchase Warrant. (1)
(4.2) Warrant Agency Agreement between Willard Pease Oil and Gas
Company and American Securities Transfer, Inc. dated August 23,
1993. (1)
(4.3) Amendment to Warrant Agency Agreement dated January 5, 1995. (2)
(4.4) Certificate of Designation of Series A Cumulative Convertible
Preferred Stock. (1)
(4.5) Certificate of Amendment of Certificate of Designation of Series
A Cumulative Convertible Preferred Stock filed on August 16,
1993. (2)
(4.6) Second Certificate of Amendment of Certificate of Designation of
Series A Cumulative Convertible Preferred Stock filed on November
1, 1994. (2)
(10.1) Residue Gas Sales and Purchase Agreement dated June 22, 1986,
between Western Gas Supply Company and Loveland Gas Processing,
Ltd., and Amendments dated July 30, 1986, August 12, 1986,
September 11, 1986, April 16, 1987, April 1, 1988, January 2,
1992, March 26, 1992 and May 1, 1992. (1)
(10.2) Amendment dated December 1, 1993, between Public Service
Company of Colorado and Loveland Gas Processing Co., Ltd., to
Residue Gas Sales and Purchase Agreement dated June 22, 1986,
between Western Gas Supply Company and Loveland Gas Processing,
Ltd. (2)
(10.3) Gas Purchase and Sale Contract dated November 1, 1988, between
Fuel Resources Development Co. as seller and Loveland Gas
Processing Co., Ltd., as buyer, pertaining to the purchase of
gas, and Amendments dated November 1, 1990, January 24, 1991, May
1, 1991, July 5, 1991, August 1, 1991, April 1, 1992 and August
1, 1992. (1)
(10.4) Purchase Order No. 5 dated January 1, 1994 from Loveland Gas
Processing Co., Ltd. to Fuel Resources Development Co. that
amends the Gas Purchase and Sale Contract dated November 1, 1988,
between Fuel Resources Development Co. and Loveland Gas
Processing, Ltd. (2)
(10.5) Form of Warrants issued to Ronin Group Ltd., and Clemons F.
Walker for the purchase of an aggregate of 240,000 shares of
Common Stock. (3)
(10.6) 1990 Stock Option Plan. (1)
(10.7) 1993 Stock Option Plan (1)
(10.8) 1994 Employee Stock Option Plan. (2)
(10.9) Form of 12% Convertible Unsecured Promissory Notes issued by
Pease Oil and Gas Company in 1994 Private Placement. (2)
(10.10) Form of Warrants issued to brokers Sales Agents in 1994
Private Placements. (2)
(10.11) Employment Agreement effective September 16, 1994 between
Pease Oil and Gas Company and Willard H. Pease, Jr. (2)
(10.12) Employment Agreement effective December 27, 1994 between Pease
Oil and Gas Company and Patrick J. Duncan. (2)
(10.13) Employment Agreement effective December 27, 1994 between Pease
Oil and Gas Company and James N. Burkhalter. (2)
<PAGE>
Exhibit Description Page No.
- ------- ----------- --------
(10.18) Interconnect Agreement dated January 1, 1995, between KN Front
Range Gathering Company and Loveland Gas Processing Co., Ltd.(2)
(10.19) Gas Gathering Agreement dated February 1, 1995, between KN
Front Range Gathering Company and Loveland Gas Processing Co.,
Ltd. (2)
(10.20) Agreement dated August 15, 1994, between Hewlett-Packard
Company, Loveland Gas Processing Co., Ltd., Pease Oil and Gas
Company and Pease Operating Company. (2)
(10.21) Purchase and Sale Agreement dated April 24, 1995 among Pease
Oil and Gas Company, Thermo Cogeneration Partnership, L.P and
Seahawk Energy, Inc. (3)
(10.22) Agreement between Beta Capital Group, Inc., and Pease Oil and
Gas Company dated March 9, 1996. (4)
(10.24) Form of Warrant issued to Beta Capital Group, Inc.
(10.25) 1996 Stock Option Plan.
(10.26) Mortgage, Assignment of Proceeds, Security Agreement and
Financing Statement from Pease Oil and Gas Company to Holders of
1996 Collateralized Subordinated Convertible Debentures dated as
of November 15, 1996.
(10.27) Purchase and Sale Agreement dated December 31, 1996 by and
between Atocha Exploration, Inc., Browning Oil Company, Inc.,
Potosky Oil and Gas, Inc. and Pease Oil and Gas Company. (5)
(10.28) Letter Agreement dated February 4, 1997 by and between
National Energy Group, Inc. and Pease Oil and Gas Company. (6)
(10.29) Purchase and Sale Agreement dated February 26, 1997 by and
between Transworld Exploration & Production, Inc. (7)
(21) List of Subsidiaries. (3)
(23) Consents of Experts
(23.1) Consent of McCartney Engineering, LLC Consulting Petroleum
Engineers
(23.2) Consent of Hein + Associates LLP, Certified Public Accountants
(27) Financial Data Schedule.
(1) Incorporated by reference to Registration Statement No. 33-64448 on
Form SB-2.
(2) Incorporated by reference to the Registrant's 1994 Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994.
(3) Incorporated by reference to Registration Statement No. 33-94536 on
Form SB-2.
(4) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995.
(5) Incorporated by reference to Form 8-K filed January 10, 1997.
(6) Incorporated by reference to Form 8-K filed February 19, 1997.
(7) Incorporated by reference to Form 8-K filed March 17, 1997.
1996-- - WARRANT A
- ---------------- -----------------
WARRANT NO. Number of Shares
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION, UNLESS AN EXEMPTION FROM THE
REQUIREMENT OF SUCH REGISTRA TION IS AVAILABLE UNDER THE
CIRCUMSTANCES AT THE TIME OBTAINING.
Void After 5:00 P.M. Denver, Colorado Time on February 12, 2001
PEASE OIL AND GAS COMPANY
Common Stock Purchase Warrant
PEASE OIL AND GAS COMPANY, a NEVADA corporation ("Pease" or the "Company"),
hereby certifies that, ----------------, with an address of
- ------------------------------------------------------, or ------ permitted
assigns, for valuable consideration received, is entitled, subject to the terms
and conditions herein set forth, to purchase from the Company up to -------
fully paid and nonassessable shares of Common Stock, $0.10 par value per share,
of the Company, at the per share purchase price of $0.75 per share (the
"Purchase Price"), at any time or from time to time on or after the date hereof
and up to 5:00 P.M. Denver, Colorado time on February 12, 2001 (the "Expiration
Date"). The number and character of such shares of Common Stock are subject to
adjustment as provided herein.
1. Definitions. As used herein, unless the context otherwise requires, the
following terms have the following respective meanings:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "Additional Shares of Common Stock" shall mean all shares
(including treasury shares) of Common Stock issued or sold (or, pursuant to
Section 3.7 hereof, deemed to be issued) by the Company after the date
hereof, whether or not subsequently reacquired or retired by the Company,
other than shares of Common Stock issuable pursuant to this Warrant.
(c) "Adjusted Exercise Price" shall have the meaning specified in
Section 3.2 hereof.
(d) "Company" means Pease Oil and Gas Company or any corporation which
shall succeed to or assume the obligations of Pease Oil and Gas Company
hereunder.
- 1 -
<PAGE>
(e) "Common Stock" shall mean the Common Stock, par value $0.10 per
share, of the Company and any stock into which such common stock shall have
been changed or any stock resulting from any reclassification of such
common stock, and shall include all other stock of any class (however
designated) of the Company the holders of which have the right, without
limitation as to amount, either to all or to a share of the balance of
current dividends and liquidating dividends after the payment of dividends
and distributions of any shares entitled to preference.
(f) "Convertible Securities" shall mean any evidences of indebtedness,
shares of stock (other than Common Stock) or other securities directly or
indirectly convertible into or exchangeable for Common Stock, other than
any securities issuable pursuant to this Warrant.
(g) "Market Price", as used with reference to any share of stock on
any specified date, shall mean:
(i) if such stock is listed and registered on any national
securities exchange or traded on The Nasdaq Stock Market ("Nasdaq"),
(A) the last reported sale price on such exchange or Nasdaq of such
stock on the business day immediately preceding the specified date, or
(B) if there shall have been no such reported sale price of such stock
on the business day immediately preceding the specified date, the
average of the last reported sale price on such exchange or on Nasdaq
on (x) the day next preceding the specified date for which there was a
reported sale price and (y) the day next succeeding the specified date
for which there was a reported sale price; or
(ii) if such stock is not at the time listed on any such exchange
or traded on Nasdaq but is traded on the over-the-counter market as
reported by the National Quotation Bureau or other comparable service,
(A) the average of the closing bid and asked prices for such stock on
the business day immediately preceding the specified date, or (B) if
there shall have been no such reported bid and asked prices for such
stock on the business day immediately preceding the specified date,
the average of the last bid and asked prices on (x) the day next
preceding the specified date for which such information is available
and (y) the day next succeeding the specified date for which such
information is available; or
(iii) if clauses (i) and (ii) above are not applicable, the fair
value per share of such stock as determined in good faith and on a
reasonable basis by the Board of Directors of the Company and, if
requested, set forth in a certificate delivered to the holder of this
Warrant upon the exercise hereof.
- 2 -
<PAGE>
(h) "Options" shall mean rights, options or warrants to subscribe for,
purchase or otherwise acquire either Common Stock or Convertible
Securities.
(i) "Other Securities" shall mean any stock and other securities of
the Company or any other person (corporate or otherwise) which the holders
of this Warrant at any time shall be entitled to receive, or shall have
received, upon the exercise of this Warrant, in lieu of or in addition to
the Common Stock, or which at any time shall be issuable or shall have been
issued to holders of the Common Stock in exchange for, in addition to or in
replace ment of the Common Stock or Other Securities pursuant to Section
3.5 or otherwise.
(j) "Purchase Price" shall mean $0.75 per share, subject to adjustment
as provided herein.
2. Exercise of Warrant.
2.1. Manner of Exercise. This Warrant may be exercised by the holder
hereof, in whole or in part (but not as to fewer than 10,000 shares of the
Common Stock unless, at the time of exercise, this Warrant entitles the holder
to purchase fewer than 10,000 shares of the Common Stock), on any business day
on or after the date hereof and before the Expiration Date, by surrender of this
Warrant, with the form of subscription at the end hereof (or a reasonable
facsimile thereof) duly executed by such holder, to the Company at its office in
Grand Junction, Colorado, and, except as otherwise provided in Section 2.1(b),
accompanied by payment, by certified or official bank check payable to the order
of the Company, in the amount obtained by multiplying (x) the number of shares
of the Common Stock (without giving effect to any adjustment therein) designated
in such form of subscription (or such reasonable facsimile) by (y) the Purchase
Price, and such holder shall thereupon be entitled to receive the number of
shares of the Common Stock determined as provided hereunder.
2.2. When Exercise Effective. Each exercise of this Warrant shall be deemed
to have been effected immediately prior to the close of business on the business
day on which this Warrant shall have been surrendered to the Company as provided
in Section 2.1, and the person(s) in whose name(s) the certificate(s) for shares
of the Common Stock (or Other Securities) that are to be issued upon such
exercise in accordance with Section 2.3 shall be deemed the holder(s) of record
thereof at such time.
2.3. Delivery of Stock Certificates, etc. As soon as practicable after the
exercise of this Warrant in full or in part in accordance herewith the Company,
at its expense (including the payment by it of any applicable issue taxes), will
cause to be issued in the name of and delivered to the holder hereof, or as such
holder (upon payment by such holder of any applicable transfer taxes) may
direct,
(a) a certificate or certificates, marked with an appropriate legend
referring to the terms of this Warrant and any applicable restrictions on
such shares imposed by the Federal or any state securities laws, for the
- 3 -
<PAGE>
number of full shares of the Common Stock (or Other Securities) to which
such holder shall be entitled upon such exercise plus, in lieu of any
fractional share to which such holder would otherwise be entitled, cash in
an amount equal to the same fraction of the Market Price of one full share
of the Common Preferred Stock on the business day next preceding the date
of such exercise, and
(b) in case such exercise is in part only, a new Warrant or Warrants
of like tenor, calling in the aggregate on the face or faces thereof for
the number of shares of the Common Stock equal (without giving effect to
any adjustment therein) to the number of such shares called for on the face
of this Warrant minus the number of shares designated by the holder upon
such exercise as provided in Section 2.1.
3. Common Stock Issuable Upon Exercise.
3.1. General. The number of shares of the Common Stock which the holder of
this Warrant shall be entitled to receive upon the exercise hereof or, if
securities or other property in addition to or in lieu of the Common Stock shall
by reason of the operation of the provisions of this Section be issuable upon
such exercise, the amount and kind of such securities or other property, shall
be adjusted or determined as provided in this Section 3.
3.2. Adjusted Exercise Price. The number of shares of the Common Stock
which the holder of this Warrant shall be entitled to receive upon the exercise
hereof shall be determined by multiplying the number of shares of the Common
Stock which, but for the provisions of this Section 3, would otherwise be
issuable upon such exercise, as designated by the holder hereof pursuant to
Section 2.1, by the fraction of which the numerator is the per share Purchase
Price and the denominator is the per share Adjusted Exercise Price (as herein
defined) in effect on the date of such exercise. The per share Adjusted Exercise
Price of the Common Stock shall initially be the Purchase Price (as defined in
Section 1) and shall be adjusted and readjusted from time to time as provided in
this Section 3 (and, as so adjusted or readjusted, shall remain in effect until
a further adjustment or readjustment thereof is required by this Section 3).
3.3. Stock Dividends, Stock Splits, etc. In case the Company at any time or
from time to time after the date hereof shall declare or pay any dividend on the
Common Stock payable in Common Stock, or effect a subdivision of the outstanding
shares of the Common Stock into a greater number of shares of the Common Stock
(by reclassification or otherwise than by payment of a dividend in shares of
Common Stock), then, in any such event, the per share Adjusted Exercise Price
per share shall be adjusted effective as of the close of business on (i) the
record date for the determination of shareholders entitled to receive such
dividend if such dividend is in fact paid, or (ii) the day immediately preceding
the day upon which such subdivision shall become effective (any such day, as the
case may be, shall be referred to herein as the "Subdivision Effective Date"),
by multiplying the per share Adjusted Exercise Price in effect immediately prior
to the Subdivision Effective Date by the fraction of which (x) the numerator
- 4 -
<PAGE>
shall be the number of shares of the Common Stock outstanding immediately prior
to the Subdivision Effective Date and (y) the denominator shall be the number of
shares of the Common Stock outstanding immediately prior to the Subdivision
Effective Date plus the number of shares of the Common Stock issuable upon the
payment of such dividend or the consummation of such subdivision, as the case
may be.
3.4. Adjustments for Combinations, etc. In case the outstanding shares of
the Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Adjusted Exercise
Price shall be adjusted, effective as of the close of business on the day
immediately preceding the day upon which such combination or consolidation is
effective (the "Combination Effective Date"), by multiplying the per share
Adjusted Exercise Price in effect immediately prior to the Combination Effective
Date by the fraction of which (x) the numerator shall be the number of shares of
the Common Stock outstanding immediately prior to the Combination Effective Date
and (y) the denominator shall be the number of shares of the Common Stock
outstanding immediately after the Combination Effective Date.
3.5. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization,
etc. In case the Company, after the date hereof, (a) shall consolidate with or
merge into any other person and shall not be the continuing or surviving
corporation of such consolidation or merger, or (b) shall permit any other
person to consolidate with or merge into the Company and the Company shall be
the continuing or surviving person but, in connection with such consolidation or
merger, the Common Stock shall be changed into or exchanged for stock or other
securities or property of any other person, or (c) shall effect a capital
reorganization or reclassification of the Common Stock (other than a
reclassification subject to Sections 3.3 or 3.4), then, and in each such case,
proper provision shall be made so that the holder of this Warrant, upon the
exercise hereof at any time after the consummation of such consolidation,
merger, reorganization or reclassification, shall be entitled to receive, in
lieu of the Common Stock (or Other Securities) issuable upon such exercise prior
to such consummation, the stock and other securities and property to which such
holder would have been entitled upon such consummation if such holder had so
exercised this Warrant immediately prior thereto, subject to adjustments
(subsequent to such corporate action) as nearly equivalent as possible to the
adjustments provided for in this Section 3.
4. No Dilution or Impairment. The Company will not, by amendment of its
articles of organization or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the holder of this
Warrant against dilution or other impairment.
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<PAGE>
5. Notices of Record Date, etc. In the event of
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of
stock of any class or any other securities or property, or to receive
any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of
all or substantially all the assets of the Company to any other person
or any consolidation or merger involving the Company and any other
person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-up
of the Company,
the Company will give to the holder of this Warrant a notice specifying (i) the
date or expected date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and stating the amount and character of
such dividend, distribution or right, and (ii) the date or expected date on
which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take place
and the time, if any such time is to be fixed, as of which the holders of record
of the Common Stock (or Other Securities) shall be entitled to exchange their
shares of the Common Stock (or Other Securities) for securities or other
property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up. Unless otherwise required by law to be given sooner, such notice
shall be mailed within a reasonable time prior to the date therein specified.
6. Reservation of Stock, etc. The Company will at all times reserve and
keep available out of its authorized but unissued Common Stock, solely for
issuance and delivery upon the exercise of this Warrant, the full number of
shares of Common Stock (or Other Securities) then issuable upon the exercise of
this Warrant. All shares of the Common Stock issuable upon the exercise of this
Warrant shall be duly authorized, and when issued and paid for in full, validly
issued, fully paid and non-assessable with no liability on the part of the
holders thereof.
7. Registration Rights.
(a) Definitions. For purposes of this Section 7, the following terms shall
have the following respective meanings:
(i) "Commission" shall mean the United States Securities and Exchange
Commission or any other Federal agency at the time administering the Act.
(ii) The term "holder or holders of Registrable Stock" shall mean the
holders of Common Stock or Other Securities issued pursuant to this Warrant.
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<PAGE>
(iii) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document by the Commission.
(iv) The term "Registration Period" shall mean the period commencing
on the date hereof and ending (a) if this Warrant shall expire without having
been exercised in whole or in part, the Expiration Date or (b) if this Warrant
shall have been exercised in whole or in part, at such time as all shares of
Registrable Stock have been sold by the initial holder or can be sold publicly
without registration under the Act.
(v) The term "Registrable Stock" means (a) the shares of Common Stock
issued or issuable upon the exercise of this Warrant, and (b) any Other
Securities issued or issuable pursuant to this Warrant; provided, however, that
shares of Registrable Stock shall cease to be Registrable Stock if they are sold
or transferred pursuant to a registered public offering or other transaction
which does not result in restrictions on resale being imposed on the transfer by
virtue of Federal or state securities laws; and provided further that
Registrable Stock shall cease to be Registrable Stock if the holder could sell
or transfer such securities held by him in one or more transactions pursuant to
Rule 144 promulgated under the Act.
(b) Incidental Registration ("Piggyback").
(i) If, during the Registration Period, the Company at any time or
from time to time proposes to file with the Commission a registration statement
under the Act with respect to any proposed distribution of any of its securities
(other than a registration to be effected on Form S-4, S-8 or other similar
limited purpose form), whether for sale for its own account or for the account
of any other person holding registration rights with respect to the securities
of the Company, then the Company shall give written notice of such proposed
filing to the holders of Registrable Stock at least thirty (30) days before the
anticipated filing date, and such notice shall describe in detail the proposed
registration and distribution (including those jurisdictions where registration
or qualification under the securities or blue sky laws is intended) and shall
offer the holders of Registrable Stock the opportunity to register such number
of shares of Registrable Stock as the holders of Registrable Stock may request.
Upon receipt by the Company by the anticipated filing date of written requests
from the holders of Registrable Stock ("Participating Holders") for the Company
to register their Registrable Stock, the Company shall permit, or in the event
of an underwritten offering, shall use its best efforts to cause the managing
underwriter or underwriters of such proposed underwritten offering to permit,
the Participating Holders to include such securities in such offering on the
same terms and conditions as any similar securities of the Company included
therein; provided, however, that if in the opinion of the managing underwriter
or underwriters of such offering, the inclusion of the total amount or kind of
securities which it or the Company, and any other persons or entities, intend to
include in such offering would interfere, hinder, delay, reduce or prevent the
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<PAGE>
effectiveness or sale of the Company's shares of Common Stock proposed to be so
registered or would otherwise adversely affect the success of such offering,
then the amount or kind of securities to be offered for the accounts of the
Company and each holder of Common Stock (including without limitation
Registrable Stock) or securities convertible into or exercisable for Common
Stock proposed to be registered (other than any persons exercising demand
registration rights) shall be reduced (or eliminated) in proportion to their
respective values to the extent necessary to reduce the total amount of
securities to be included in such offering on behalf of such holders of
securities to the amount recommended by such managing underwriter. For purposes
of this Section, "value" shall mean principal amount with respect to debt
securities and the proposed offering price per share with respect to equity
securities. Notwithstanding the foregoing, if, at any time after giving written
notice of its intention to register Common Stock or other securities convertible
into or exercisable for Common Stock and prior to the effectiveness of the
registration statement filed in connection with such registration, the Company
determines for any reason either not to effect such registration or to delay
such registration, the Company may, at its election, by delivery of written
notice to the Participating Holders, (i) in the case of a determination not to
effect registration, relieve itself of its obligations to register any
Registrable Stock in connection with such registration, or (ii) in the case of
determination to delay the registration, delay the registration of such
Registrable Stock for the same period as the delay in the registration of such
other shares of Common Stock or other securities convertible into or exercisable
for Common Stock.
(ii) Exception. The Company shall not be required to include any of
the Registrable Stock of a Participating Holder in any registration statement or
post-effective amendment prepared at its own instance unless such Participating
Holder shall furnish such information and sign such documents as may be required
by the Commission or reasonably requested by the Company in accordance with
generally accepted practices, in connection with such proposed distribution.
(c) Covenants of the Company with Respect to Registration. In connection
with any registration under this Section 7, the Company shall, as expeditiously
as is reasonably possible:
(i) Prepare and file with the Commission a registration statement with
respect to the Participating Holders' Registrable Stock and, subject to the last
sentence of Section 7(b(i) hereof, use its best efforts to cause such
registration statement to become effective.
(ii) Prepare and file with the Commission such amendments and
supplements to such registration statement and prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(iii) Furnish to the Participating Holders such numbers of copies of a
prospectus, including, if applicable, a preliminary prospectus, in conformity
with the requirements of the Act, and such other documents as the selling
shareholders may reasonably request in order to facilitate the disposition of
Registrable Stock owned by the Participating Holders.
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<PAGE>
(iv) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions within the United States as shall be reasonably
requested by the Participating Holders; provided, however, that the Company
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions.
(v) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. The Participating Holders
shall also enter into and perform their obligations under such an agreement.
(vi) Notify the Participating Holders, at any time when a prospectus
relating to Registrable Stock covered by such registration statement is required
to be delivered under the Act, of the happening of any event as a result of
which the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing.
(vii) Furnish to the Participating Holders, on the date that shares of
Registrable Stock are delivered to the underwriters for sale in connection with
a registration pursuant to this Section 7, if such securities are being sold by
underwriters, or, on the date that the registration statement with respect to
such securities becomes effective, (i) an opinion as to matters of law only,
dated such date, of counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and to
the Participating Holders and (ii) a letter dated such date, from the
independent certified public accountants of the Company, in form and substance
as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
and to the Participating Holders.
(d) The Company shall pay all costs, fees and expenses in connection with
all registration statements filed under this Section 7 including, without
limitation, the Company's legal and accounting fees, printing expenses and blue
sky fees and expenses, but not including the fees and expenses of counsel for
the Participating Holders in connection with such registration. However, the
Company shall not pay for underwriting discounts and commissions and
underwriters' expenses allocable to the Registrable Stock being registered or
state transfer taxes.
(e) Indemnification.
(i) The Company shall indemnify each Participating Holder under this
Agreement, its officers and directors and any person controlling it within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any loss, claim, damage, expense or liability (including without limitation all
expenses reasonably incurred in investigating, preparing, or defending against
any claim whatsoever, such expenses to be reimbursed by the Company as they are
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<PAGE>
incurred) to which it may become subject under the Act, the Exchange Act or
otherwise, arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in any registration statement or
prospectus or any amendments or supplements thereto in which Registrable Stock
is included or in any application, statement or other document filed by the
Company with the Commission or any securities exchange or in any jurisdiction in
connection with qualifying such shares under the securities laws thereof, or
(ii) the omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not misleading,
unless such statement or omission is made in reliance upon and in conformity
with written information furnished to the Company by or on behalf of such
Participating Holder or an underwriter expressly for use in any such
registration statement or other document.
(ii) Each Participating Holder shall, as a condition to such
registration of Registrable Stock, agree to indemnify the Company, its officers
and directors and any person controlling the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any loss,
claim, damage or expense or liability (including without limitation all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever, such expenses to be reimbursed by the undersigned as they are
incurred) to which they may become subject under the Act, the Exchange Act or
otherwise, arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in any registration statement or
prospectus or any amendments or supplements thereto in which Registrable Stock
is included or in any application, statement or other document filed by the
Company with the Commission or any securities exchange or in any jurisdiction in
connection with qualifying such shares under the securities laws thereof, or
(ii) the omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not misleading,
provided in each case that such statement or omission is made in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of such Participating Holder expressly for use in any such registration
statement or other document, or (iii) any misuse by the Participating Holder of
any prospectus included in the registration statement or any violation of the
Act by the Participating Holder in connection with the sale or distribution of
his or her Registrable Stock under the registration statement.
(iii) Promptly upon receipt by a party claiming indemnification
hereunder of notice of the commencement of any action involving a claim referred
to above, such indemnified party will, if a claim in respect thereof is to be
made against a party which may be required to indemnify such party hereunder,
give written notice to the latter of the commencement of such action. In case
any such action is brought against an indemnified party, the indemnifying party
shall be entitled to participate in and to assume the defense of such action, to
the extent that it may wish, with counsel reasonably satisfactory to such
indemnified party. Except as set forth herein, the indemnified party and any
party cooperating in the defense of such claim shall not settle or compromise
any such claim or admit liability without the express written consent of the
indemnifying party. The indemnified party shall have the right to be represented
by an advisory counsel and accountants, at its own expense, and the indemnified
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<PAGE>
party shall be kept fully informed of such action, suit or proceeding at all
stages thereof whether or not the indemnified party is so represented. After a
period of thirty days following the date the written notice of such claim was
given to the indemnifying party the indemnified party may settle any such claim
(and the amount of any such settlement shall be subject to indemnification
hereunder) unless within such thirty-day period the indemnifying party shall
have provided the indemnified party with notice and evidence to the indemnified
party's satisfaction that the indemnifying party reasonably disputes such claim
and has the financial ability to meet its indemnification obligations hereunder.
Notwithstanding the foregoing, the indemnified party may immediately cause to be
paid or discharged any asserted claim the nonpayment of which would have an
immediate substantial adverse impact on the indemnified party and any claim
which the indemnifying party has not disputed within thirty days of notice as
provided above.
(iv) If the indemnification provided for in this Section 7(e) is
unavailable or insufficient to hold harmless an indemnified party under such
subsection in respect of any losses, claims, damages or liabilities or action in
respect thereof or referred to therein, then each indemnifying party shall in
lieu of indemnifying such indemnified party contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities or actions in such proportion as is appropriate to reflect the
relative fault of the Company, on the one hand, and the Participating Holders,
on the other, in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or actions as well as any other
relevant equitable considerations, including the failure to give the notice
required under such subsections. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact relates to information supplied by the Company on the one
hand, or the Participating Holders, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Participating Holders agree that
it would not be just and equitable if contribution pursuant to this Section
7(e)(iv) were determined by pro rata allocation or by any other method of
allocation which did not take account of the equitable considerations referred
to above in this subsection. No person guilty of fraudulent misrepresentations
(within the meaning of Section 11(f) of the Securities Act), shall be entitled
to contribution from any person who is not guilty of such fraudulent
misrepresentations.
(v) The obligations of the Company and the Participating Holders under
this Section 7(e) shall survive the completion of any offering of Registrable
Stock in a registration statement under this Section 7.
(vi) The rights of indemnification contained in this Section 7 shall
not be deemed to be the exclusive remedy of the parties hereto and such rights
shall be in addition to any other rights or remedies which any party hereto may
have at law or equity.
(f) Assignment of Registration Rights. The undersigned's rights set forth
in this Section 7 shall automatically be deemed assigned to any transferee or
assignee of this Warrant or shares of Common Stock or Other Securities issuable
hereunder, provided that immediately following such transfer the further
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<PAGE>
disposition of such securities by the transferee or assignee is restricted under
the Act; provided however, that, the termination of registration rights in
respect of any shares of Registrable Stock shall be binding upon any transferee
of such shares. Upon the request of any such holder, the Company will confirm in
writing to any transferee of such holder's Registrable Stock the Company's
continuing obligation to afford such transferee the benefits of the Company's
agreements contained in this Section 7, but no failure of the Company to confirm
such obligations shall in any way impair such transferee's rights under this
Section 7.
8. Substitution of Warrants.
8.1. Exchange of Warrants. Subject to the provisions appearing at the top
of the first page of this Warrant concerning, inter alia, the sale, transfer,
encumbrance or other disposition of this Warrant, upon surrender or exchange of
this Warrant, properly endorsed, to the Company, the Company at its expense will
issue and deliver to or upon the order of the holder thereof a new Warrant or
Warrants of like tenor, in the name of such holder or as such holder (upon
payment by such holder of any applicable transfer taxes) may direct, calling in
the aggregate on the face or faces thereof for the number of shares of Common
Stock called for on the face or faces of the Warrant or Warrants so surrendered.
8.2. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction, upon
delivery of an indemnity agreement reasonably satisfactory to the Company, or,
in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Company at its expense will execute and deliver, in lieu thereof, a
new Warrant of like tenor.
9. Ownership of Warrant. Until this Warrant is transferred on the books of
the Company, the Company may treat the person in whose name this Warrant is
issued as the absolute owner hereof for all purposes, notwithstanding any notice
to the contrary, except that, if and when this Warrant is properly assigned in
blank, the Company may (but shall not be obligated to) treat the bearer hereof
as the absolute owner of this Warrant for all purposes, notwithstanding any
notice to the contrary. A Warrant, if properly assigned, may be exercised to the
extent provided herein by a new holder without first having a new Warrant
issued.
10. Notices, etc. All notices and other communications from the Company to
the holder of this Warrant or from the holder of this Warrant shall be delivered
personally, by facsimile (if confirmed and followed by delivery by first class
mail), reputable overnight courier service, or mailed by first class registered
or certified mail, postage prepaid, to the Company at 751 Horizon Court, Suite
203, P. O. Box 60219, Grand Junction, Colorado 81506-8758, Attn: President, or
to the holder at such address as may have been furnished to the Company in
writing by such holder, or, until an address is so furnished, to and at the
address of the last holder of this Warrant who has so furnished an address to
the Company. Any such notice shall be deemed to have been given on the date of
personal delivery, facsimile, delivery to a reputable overnight courier service
or deposit in the mail.
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<PAGE>
11. Warrant Holder Not a Shareholder. Holder shall not, by virtue of
anything contained in this Agreement or otherwise, prior to exercise of this
Warrant, be entitled to any right whatsoever, either in law or equity, of a
shareholder of the Company, including without limitation, the right to receive
dividends or to vote or to consent or to receive notice as a shareholder in
respect of the meetings of shareholders or the election of directors of the
Company or any other matter; provided however that all holders of Warrants will
be entitled to notice if: (a) the Company grants holders of its Common Stock
rights to purchase any shares of capital stock or any other rights, or (b) the
Company authorizes a reclassification, capital reorganization, consolidation,
merger or sale of substantially all of its assets.
12. Nontransferable. This Warrant is nontransferable without the prior
consent of the Company. Any such transfer shall be made in accordance with
Section 8.1 above.
13. Miscellaneous. The Company may from time to time supplement or amend
this Warrant without the approval of the holder in order to cure any ambiguity
or to be correct or supplement any provision contained herein which may be
defective or inconsistent with any other provision, or to make any other
provisions in regard to matters or questions herein arising hereunder which the
Company may deem necessary or desirable and which shall not materially adversely
affect the interest of the holder. This Warrant and any term hereof may be
amended, changed, waived, discharged or terminated only by an instrument in
writing signed by the Company and consented to in writing by the holder of this
Warrant. If for any reason any provision, paragraph or term of this Warrant is
held to be invalid or unenforceable, all other valid provisions herein shall
remain in full force and effect and all terms, provisions and paragraphs of this
Warrant shall be deemed to be severable. This Warrant shall be construed and
enforced in accordance with and governed by the laws of the state of Colorado
applicable to contracts made and to be performed entirely therein. The headings
in this Warrant are for reference purposes only and shall not limit or otherwise
affect the meaning hereof.
Dated as of: February 12, 1996.
PEASE OIL AND GAS COMPANY
By:
----------------------------------
Willard H. Pease, Jr., President
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FORM OF SUBSCRIPTION
[To be signed only upon exercise of the Warrant]
To: PEASE OIL AND GAS COMPANY
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, ------------* shares of the Common Stock of PEASE OIL AND
GAS COMPANY and herewith makes payment of $----------- therefor, and requests
that the certificates for such shares be issued in the name of, and delivered
to, ------------------, whose address is -----------------------------------.
Dated:
-----------------------------------------
-----------------------------------------
(Signature must conform in all
respects to the name of the holder
as specified on the face of the
Warrant)
-----------------------------------------
(Address)
- --------------
* Insert the number of shares called for on the face of the Warrant (or,
in the case of a partial exercise, the portion thereof as to which the
Warrant is being exercised), in either case without making any
adjustment for additional Common Stock or any other stock or other
securities or property or cash which, pursuant to the adjustment
provisions of the Warrant, may be deliverable upon exercise.
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<PAGE>
FORM OF ASSIGNMENT
[To be signed only upon transfer of the Warrant]
For value received, the undersigned hereby sells, assigns and transfers
unto ------------ the right represented by the within Warrant to purchase
- ----------- shares of the Common Stock of PEASE OIL AND GAS COMPANY to which the
within Warrant relates, and appoints ------------------------ Attorney to
transfer such right on the books of PEASE OIL AND GAS COMPANY, with full power
of substitution in the premises.
Dated:
-----------------------------------------
-----------------------------------------
(Signature must conform in all
respects to the name of the holder
as specified on the face of the
Warrant)
-----------------------------------------
(Address)
Signed in the presence of:
- ----------------------------
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PEASE OIL AND GAS COMPANY
1996 STOCK OPTION PLAN
1. Purpose of Plan. The purpose of this 1996 Employee Stock Option Plan
("Plan") is to secure and retain employees responsible for the success of Pease
Oil and Gas Company ("Company"), to motivate such persons to exert their best
efforts on behalf of the Company, to encourage stock ownership and to provide
such persons with proprietary interests in, and a greater concern for, the
welfare of, and an incentive to continue service with, the Company.
For purposes of this Plan, the term "Company" shall include where
appropriate in the context used any "parent corporation" or "subsidiary
corporation" of the Company, as those terms are defined in Sections 424(e) and
(f) of the Code, whether in existence on the date of adoption of the Plan or
formed after the adoption of this Plan.
Options issued pursuant to this Plan will constitute incentive stock
options within the meaning of ss. 422 of the Internal Revenue Code of 1986, as
amended ("Code"), at the time of grant ("Incentive Stock Options"), or other
options ("Nonstatutory Stock Options"). Incentive Stock Options and Nonstatutory
Stock Options may both be granted hereunder and any option granted which for any
reason does not qualify as an Incentive Stock Option shall be a Nonstatutory
Stock Option; provided, however, that in no event shall an Incentive Stock
Option and a Nonstatutory Stock Option granted to any Optionee under a single
stock option agreement be subject to a "tandem" exercise arrangement such that
the exercise of one such Option affects the Optionees's right to exercise the
other Option granted under such stock option agreement.
Unless the context requires otherwise, the term "Option" in this Plan
refers to both Incentive Stock Options and Nonstatutory Stock Options.
2. Stock Subject to the Plan. The number of shares of the Company's $.10
par value common stock ("Common Stock") which may be optioned under this Plan is
350,000 shares. Such shares may consist, in whole or in part, of unissued shares
or treasury shares. The maximum number of shares issuable pursuant to this Plan,
including shares subject to outstanding options, shall be subject to adjustment
as provided in Section 6 of this Plan. The aggregate fair market value of the
shares subject to Incentive Stock Options granted to any Optionee which become
exercisable in a particular calendar year shall not exceed $100,000. For
purposes of such limitation, the fair market value of Common Stock shall be
determined as of the date of grant and the limitations shall be applied by
taking into account Incentive Stock Options in the order granted. For purposes
of this Plan, market value of shares subject to an option shall be determined as
follows:
(i) If the Common Stock is listed on the New York Stock Exchange, the
American Stock Exchange or such other securities exchange designated by the
Committee, or admitted to unlisted trading privileges on any such exchange,
or if the Common Stock is quoted on a National Association of Securities
Dealers, Inc. system that reports closing prices, the fair market value
shall be the closing price of the Common Stock as reported by the Wall
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<PAGE>
Street Journal on the day the fair market value is to be determined, or if
no such price is reported for such day, then the determination of such
closing price shall be as of the last immediately preceding day on which
the closing price is so reported; or
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges or so quoted, the fair market value shall be the average
of the last reported highest bid and the lowest asked prices quoted on the
National Association of Securities Dealers, Inc. Automated Quotations
System or, if not so quoted, then by the National Quotation Bureau, Inc. on
the day the fair market value is determined; or
(iii) If the Common Stock is not so listed or admitted to unlisted
trading privileges or so quoted, and bid and asked prices are not reported,
the fair market value shall be determined in such reasonable manner as may
be prescribed by the Committee.
If any outstanding Option under this Plan for any reason expires or is
terminated, the shares of Common Stock allocable to the unexercised portion of
such Option may again be optioned under this Plan subject to the limitations,
terms and conditions of this Plan. The Board of Directors, and the proper
officers of the Company, shall from time to time take appropriate action
required for delivery of Common Stock, in accordance with any exercise of
Options under this Plan.
3. Administration. Administration of the Plan shall be administered by the
Compensation Committee of the Board of Directors of the Company, hereinafter
referred to as the "Committee." The Committee shall consist of at least two
members of the Board of Directors having full authority to act in the matter,
none of whom during the one year prior to such appointment or while serving on
the Committee, is granted an Option under this Plan or is granted or awarded
equity securities pursuant to any other plan of the Company or any of its
affiliates, except as permitted by Rule 16b-3 under the Securities Exchange Act
of 1934, as amended (the "1934 Act"). If the Committee thus established shall
consist of fewer than two members at the time of any action by the Committee,
then the directors shall select enough other shareholders to serve on the
Committee to have two members and to meet any requirements of ss. 422 of the
Code and regulations adopted thereunder and regulations adopted under the 1934
Act.
Once appointed, the Committee shall continue to serve until otherwise
directed by the Board. From time to time, the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan.
With respect to persons subject to Section 16 of the 1934 Act, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the 1934 Act. To the extent any provision of the
Plan or action by the Committee fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Committee.
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Subject to compliance with Section 16 of the 1934 Act, members of the Board
who are either eligible for Options or who have been granted Options may vote on
any matters affecting the administration of the Plan or the grant of any Options
pursuant to the Plan, except that no such member shall act upon the granting of
an Option to himself, but any such member may be counted in determining the
existence of a quorum at any meeting of the Board during which action is taken
with respect to the granting of Options to such member.
The decision of a majority of those present at any meeting of the Committee
where a quorum consisting of a majority of the Committee is present shall
constitute the decision of the Committee.
The Committee is authorized and empowered to administer the Plan insofar as
it relates to Options and, consistent with the terms of the Plan, to (a) select
the employees to whom Options are to be granted and to fix the number of shares
and other terms and conditions of the Options to be granted; (b) determine the
date upon which Options shall be granted and the terms and conditions of the
granted Options in a manner consistent with the Plan, which terms need not be
identical as between Options or Optionees; (c) interpret the Plan and the
Options granted under the Plan; (d) adopt, amend and rescind rules and
regulations for the administration of the Plan insofar as it relates to Options;
and (e) direct the Company to execute Stock Option agreements pursuant to the
Plan.
All such actions of the Committee shall be binding upon all participants in
the Plan.
4. Eligibility. The employees of the Company who shall be eligible to
receive grants of Options under this Plan shall be those key employees,
including officers or directors of the Company who are also employees, who are
from time to time responsible for the management, growth or success of the
business of the Company and who shall have been selected by the Committee. The
Company may also grant Options to Consultants and Directors who are not
employees of the Company; provided, however, that Consultants and Directors who
are not employees are eligible to receive only Nonstatutory Options.
The persons to receive Options under the Plan shall be selected from time
to time by the Committee, in its sole discretion, and the Committee shall
determine, in its sole discretion, the number of shares to be covered by the
Options granted to each person selected. Subject to the exception under Section
5(b), no person may be granted an Option if such person, at the time the Option
is granted, owns shares of Common Stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company. For purposes of
calculating such stock ownership, the attribution rules of stock ownership set
forth in Section 424(d) of the Code shall apply. Accordingly, an Optionee, with
respect to whom such 10% limitation is being determined, shall be considered as
owning Common Stock owned directly or indirectly by or for the Optionee's
brothers and sisters (whether by the whole or half-blood), spouse, ancestors and
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lineal descendants; and any Common Stock owned directly or indirectly by or for
a corporation, partnership, estate or trust, shall be considered as being owned
proportionately by or for its shareholders, partners or beneficiaries.
5. Terms and Conditions. The Plan shall become effective upon the approval
of a majority of the holders of the Company's Common Stock present, or
represented, and entitled to vote, at a meeting at which a quorum of
stockholders of the Company is present or represented. Such approval must occur
within 12 months after the date this Plan is adopted by the Board of Directors.
It shall continue in effect for a period of ten years from the date of its
effectiveness.
All Options granted under this Plan shall be subject to the terms and
conditions of this Plan, including all of the following:
(a) Option Price. Subject to the provisions of Section 5(b), the
Option price per share shall be determined by the Committee but shall not
be less than 100% of the fair market value of such shares at the time the
Option is granted.
(b) More than 10% Shareholder. If an employee owns more than 10% of
the total combined voting power of all classes of stock of the Company as
determined under Section 4, at the time an Incentive Stock Option is
granted under this Plan, the Committee may issue an Incentive Stock Option
to such person at 110% of the fair market value of the Common Stock. Any
Incentive Stock Option granted to any such employee shall not be
exercisable after the expiration of five years from the date such Incentive
Stock Option is granted.
(c) Limitations on Grant of Options. Subject to the limitations under
Section 5(b) of this Plan, no Option shall be granted which may be
exercised more than ten years after the date it was granted.
(d) Limitations on Exercise of Option. No Optionee granted an Option
under this Plan may exercise such Option for six months following the date
of grant of the Option and unless at all times during the period beginning
on the date of the granting of the Option and ending on the day three
months before the date of such exercise such Optionee was employed by the
Company or a corporation or subsidiary thereof issuing or assuming the
Option in a transaction set forth under Section 6 of this Plan.
(e) Payment for Shares. Payment in full, in cash, shall be made for
all shares issued pursuant to the exercise of an Incentive Stock Option,
provided that the Committee may permit payment to be made with shares of
the Company's Common Stock owned by the Optionee to be valued at the fair
market value at the date of exercise. All Options shall be exercised for
100 shares, or a multiple thereof, or for the full number of shares for
which the Option is then exercisable. No Optionee shall have the right to
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dividends or other rights of a stockholder with respect to shares subject
to an Option until the Optionee has given written notice of exercise of the
Optionee's Incentive Stock Option and paid in full for such shares.
(f) Manner of Exercise. Any Option granted pursuant to this Plan may
be exercised at such time or times as set forth in the Option, by the
delivery of written notice to any officer of the Company, other than the
Optionee, together with payment in full, for the number of shares to be
purchased pursuant to such exercise. Such notice (i) shall state the
election to exercise the Option, (ii) shall state the number of shares in
respect of which the Option is being exercised, (iii) shall state the
Optionee's address, (iv) shall state the Optionee's social security number,
(v) shall contain such representations and agreements concerning Optionee's
investment intent with respect to such shares of Common Stock as shall be
satisfactory to the Company's counsel, (vi) shall state that the
certificate evidencing the shares may be stamped with a restrictive legend
and the shares evidenced by such certificate will constitute "restricted
securities" as defined in Rule 144 promulgated under the Securities Act of
1933, as amended (the "Act") (unless the shares to be acquired are
registered under the Act) and (vii) shall be signed and dated by Optionee.
(g) Conditions of Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option
and the issuance and delivery of such Shares pursuant thereto shall comply
with all relevant provisions of law, including, without limitation, the
Act, the 1934 Act, the rules and regulations promulgated thereunder,
applicable state securities law, and the requirements of any stock exchange
or automated quotation system upon which the Share may be listed or quoted,
and shall be subject to the approval of legal counsel for the Company with
respect to such compliance.
(h) Limitation on Transfer of Shares. Unless shares issued upon
exercise are at the time of exercise registered under the Act, all shares
of Common Stock acquired by an Optionee upon exercise of an Option granted
under this Plan shall be deemed to be "restricted securities" as defined in
Rule 144 promulgated under the Act and the certificate evidencing such
shares shall contain a legend as follows:
"The securities represented by this certificate may not be
offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement under the
Securities Act of 1933 (the `Act') or pursuant to an
exemption from registration under the Act, the
availability of which is to be established to the
satisfaction of the Company."
(i) Other Representations or Warranties. As a further condition to the
exercise of any Option granted under this Plan, the Company may require
each Optionee to make any representation and warranty to the Company as may
be required by any applicable law or regulation.
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<PAGE>
(j) Holding Period of Shares. No shares of Common Stock acquired upon
exercise of an Incentive Stock Option granted under this Plan shall be sold
or otherwise disposed of, within the meaning of Section 424(c) of the Code,
at any time before the sooner of two years from the date of the grant of an
Incentive Stock Option under this Plan or one year after the date of
exercise of the Incentive Stock Option. However, an Optionee who has
acquired shares of Common Stock upon exercise of a stock option granted
under this Plan, who transfers such shares to a trustee, receiver, or other
similar fiduciary in any proceeding under Title 11 of the United States
Bankruptcy Law or any other similar insolvency proceeding at a time when
such Optionee is insolvent shall not have been deemed to have made a
transfer or disposition for purposes of this subsection, nor shall one who
acquires the shares from the Company with another person in joint tenancy
be deemed to have made a transfer or disposition. Shares of Common Stock
acquired by exercise of a Nonstatutory Stock Option under the Plan shall
not be sold or otherwise disposed of at any time before one year from the
date of the grant of the Nonstatutory Stock Option.
(k) Death of Optionee. If an Optionee dies, any Option previously
granted to the Optionee shall be exercisable by the personal representative
or administrator of the deceased Optionee's estate, or by any trustee,
heir, legatee or beneficiary (collectively referred to for convenience as
the "legal representative") who shall have acquired the Option directly
from the Optionee by will or by the laws of descent and distribution at any
time within one year after his death, but not more than ten years [five
years if Section 5(b) is applicable] after the date of granting of the
Option, provided the deceased Optionee was entitled to exercise such Option
at the time of his death. Prior to the exercise of any such Option, the
legal representative of the deceased Optionee shall furnish to the Company
written notice of such exercise, together with a certified copy of letters
testamentary or other proof deemed sufficient by the Committee of the right
of the legal representative to exercise such Option in accordance with the
provisions of this Plan.
(l) Retirement. If an Optionee's employment with the Company
terminates by reason of retirement, any Option previously granted to him
shall be exercisable as determined in the sole discretion of the Committee
at any time within three months after the date of such termination, but not
more than ten years [five years if Section 5(b) is applicable] after the
date of granting of the Option, and then only to the extent to which it was
exercisable at the time of such termination by retirement; provided,
however, that if the Optionee dies within three months after termination by
retirement, any unexercised Option, to the extent to which it was
exercisable at the time of his death, shall thereafter be exercisable for
one year after the date of his death, but not more than ten years [five
years if Section 5(b) is applicable] after the date of granting of the
Option.
(m) Disability. If an Optionee becomes disabled within the meaning of
Section 22(e)(3) of the Code, and at the time of such disability the
Optionee is entitled to exercise an Option, the Optionee shall have the
right to exercise such Option within one year after such disability
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<PAGE>
provided that the Optionee exercises within ten years after the date of
grant thereof [or five years if Section 5(b) is applicable], and then only
to the extent to which it was exercisable at the time of such disability.
(n) Optionee's Termination. If an Optionee ceases to serve an
Employee, Consultant or Director, as the case may be, for any reason other
than death, retirement or disability, any Option previously granted to the
Optionee which was exercisable at the time of termination shall terminate
three months after the date of such termination or at such earlier time as
provided in the terms of the Option granted to the Optionee. To the extent
that an Option is not exercised within the time specified herein, the
Option shall terminate.
(o) Leave of Absence. For the purposes of this Plan (i) a leave of
absence, duly authorized in writing by the Company for military service or
sickness, or for any other purpose approved by the Company, if the period
of such leave does not exceed 90 days and (ii) a leave of absence in excess
of 90 days, duly authorized in writing by the Company provided the
Optionee's right to re-employment is guaranteed either by statute or by
contract, shall not be deemed a termination of employment.
(p) Nontransferability of Options. No Option granted under this Plan
will be transferable by the Optionee other than by will or the laws of
descent and distribution. During the lifetime of the Optionee, the Option
will be exercisable only by Optionee.
(q) Exercisability of Options. No Optionee granted an Option under
this Plan shall be entitled to exercise such Option at any time after the
expiration of such Option as specified in the option certificate evidencing
such Option.
6. Adjustments Upon Recapitalization, Merger, Etc. If the outstanding
shares of $.10 par value Common Stock of the Company shall at any time be
changed or exchanged by declaration of a stock dividend, split-up, subdivision
or combination of shares, recapitalization, merger, consolidation or other
corporate reorganization in which the Company (including a merger or similar
reorganization which effects a reincorporation of the Company in a different
county or province) is the surviving corporation, the number and kind of shares
subject to this Plan or subject to any Options previously granted, and the
Option prices, shall be appropriately and equitably adjusted, so as to maintain
the proportionate number of shares without changing the aggregate Option price.
In the event of a dissolution or liquidation of the Company, or a merger,
consolidation, sale of all or substantially all of its assets, or other
corporate reorganization in which the Company is not the surviving corporation
and the holder of Common Stock receives securities of another corporation, then
any outstanding Options hereunder shall terminate as of the effective date of
such event; provided that immediately prior to such event each Optionee shall
have the right to exercise any unexpired Option in whole or in part whether or
not the Option would otherwise be exercisable. The Company shall afford each
person who holds an Incentive Stock Option under this Plan with at least 30 days
advance written notice of such event. The existence of this Plan, or of any
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Options hereunder, shall not in any way prevent any transaction described in
this section, nor shall anything contained in this Plan prevent the substitution
of a new Option by a surviving corporation.
7. Use of Proceeds. Proceeds from the sale of stock pursuant to Options
granted under this Plan shall constitute general funds of the Company may be
used for such general corporate purposes as the Company's Board of Directors
shall determine.
8. Reservation of Issuance of Shares. The Company shall at all times during
the duration of this Plan reserve and keep available such number of shares of
Common Stock as will be sufficient to satisfy the requirements of all Options
granted pursuant to this Plan, and shall pay all original issue and transfer
taxes with respect to the issuance of shares pursuant to the exercise of such
Options, and shall pay all of the fees and expenses necessarily incurred in
connection with the exercise of such Options and the issuance of such shares.
9. Amendments. The Board of Directors may amend, alter, or discontinue this
Plan, but no amendment, alteration or discontinuation shall be made which would
impair the rights of any Optionee under any Options previously granted, without
the Optionee's consent, or which, without the approval of the stockholders,
would:
(i) except as is provided in Section 6 of this Plan, increase the
total number of shares reserved for the purposes of this Plan;
(ii) decrease the Option price to less than 100% of the fair market
value or 110% if Section 5(b) is applicable on the date of the granting of
the Option;
(iii) change the persons (or class of persons) eligible to receive
Options under this Plan; or
(iv) so long as the Company has a class of equity security registered
under Section 12 of the 1934 Act, make any material amendment to the Plan.
Any such amendment or termination of the Plan shall not affect Options
already granted and such Options shall remain in full force and effect as if the
Plan had not been amended or terminated, unless mutually agreed otherwise
between the Optionee and the Board in a writing signed by both parties.
10. Indemnification. In addition to such other rights of indemnification as
they may have as directors, the members of the Committee and the Board of
Directors shall be indemnified by the Company against reasonable expenses,
including attorneys' fees actually incurred in connection with the defense of
any action, suit or proceeding, or in connection with any appeal therefrom, to
which they or any of them may be a party by reason of any action taken or
failure to act under or in connection with this Plan or any Option granted
hereunder, or shares purchased pursuant to the exercise of Options under this
Plan, and against all amounts paid by them in settlement thereof (provided such
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settlement is approved by independent legal counsel selected by the Company) or
paid by them in satisfaction of judgment in any action, suit or proceeding,
except in relation to matters as to which it shall be adjudged in such action,
suit or proceeding, that such member of the Board of Directors is liable for
gross negligence, fraud or willful misconduct in the performance of the
director's duties so long as within 60 days after institution of any such
action, suit or proceeding, the director shall in writing offer the Company the
opportunity, at its own expense, to handle and defend such action, suit or
proceeding.
11. Miscellaneous. Unless the context requires otherwise, words denoting
the singular may be construed as denoting the plural, and words denoting the
plural may be construed as denoting the singular, and words of one gender may be
construed as denoting such other gender as is appropriate. Paragraph headings
are not to be considered part of this Plan and are included solely for
convenience and are not intended to be full or accurate descriptions of the
contents thereof.
Adopted by Shareholders: August __, 1996
PEASE OIL AND GAS COMPANY
organized under the laws of Nevada
ATTEST:
By
--------------------------------
Willard H. Pease, Jr., Chairman
- --------------------------------------
Patrick J. Duncan, Secretary
S E A L
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MORTGAGE, ASSIGNMENT OF PROCEEDS,
SECURITY AGREEMENT AND FINANCING STATEMENT
(Oil and Gas)
FROM
PEASE OIL AND GAS COMPANY
TO
HOLDERS OF 1996 10% COLLATERALIZED SUBORDINATED
CONVERTIBLE DEBENTURES
DATED AS OF NOVEMBER 15, 1996
- --------------------------------------------------------------------------------
THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS.
THE OIL AND GAS INTERESTS INCLUDED IN THE MORTGAGED PROPERTY WILL BE FINANCED AT
THE WELLHEADS OF THE WELLS LOCATED ON THE PROPERTY DESCRIBED IN EXHIBIT A
HERETO, AND THIS FINANCING STATEMENT IS TO BE FILED FOR RECORD, AMONG OTHER
PLACES, IN THE REAL ESTATE RECORDS OF THE COUNTY RECORDER.
THE SECURED PARTY IS NOT A SELLER OR PURCHASE MONEY LENDER OF THE COLLATERAL
COVERED BY THIS INSTRUMENT.
THIS DOCUMENT WAS PREPARED BY AND WHEN RECORDED AND/OR FILED SHOULD BE RETURNED
TO:
Alan W. Peryam, Esq.
Hopper and Kanouff, P.C.
1610 Wynkoop Street, Suite 200
Denver, Colorado 80202
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<PAGE>
SUBORDINATED MORTGAGE, ASSIGNMENT OF PROCEEDS,
SECURITY AGREEMENT AND FINANCING STATEMENT
This SUBORDINATED Mortgage, Assignment of Proceeds, Security Agreement and
Financing Statement (the "Mortgage") is entered into as of the Effective Date
(as defined below) by and between the undersigned Pease Oil and Gas Company, a
Nevada corporation (formerly Willard Pease Oil and Gas Company and successor by
merger to Skaer Enterprises, Inc., a Colorado corporation, herein called
"Mortgagor"), whose address is 751 Horizon Court, Suite 203, Grand Junction,
Colorado 81506-8758, and those persons who are the registered holders of the
1996 10% Collateralized Subordinated Convertible Debentures of Pease Oil and Gas
Company, the total principal amount of which is Five Million Dollars
($5,000,000) (hereafter the "Debentures") and the names, addresses and principal
amount of Debentures held is set forth on Exhibit B, incorporated herein by this
reference (hereafter the "Debenture Mortgagees"), is subject and subordinate to
the Mortgage, Assignment, Proceeds, Security Agreement and Financing Statement
pertaining to the collateral, dated August 23, 1996, recorded in Larimer County,
Colorado as Reception No. 93062241 and No. 93062242 and in Weld County, Colorado
in Book 1399 at File 1122 as Reception No. 02348218 and Book 0189 at File 1186
as Reception No. U0253060.
The parties hereto agree as follows:
ARTICLE 1 - DEFINITIONS
Section 1.1 Defined Terms. For the purposes of this instrument:
"Collateral" includes Fixture Collateral, Personalty Collateral and Realty
Collateral as hereinafter defined.
"Dollars" and "US$" mean lawful money of the United States of America.
"Effective Date" means as of November 15, 1996.
"Environmental Laws" shall mean any and all laws,, statutes, ordinances,
rules, regulations, orders, or determinations of any Governmental Authority
pertaining to health or the environment in effect in any and all jurisdictions
in which Mortgagor is conducting or at any time has conducted business, or where
any Property of Mortgagor is located, or where any hazardous substances
generated by or disposed of by Mortgagor are located, including, without
limitation, the Clean Air Act, as amended; the Comprehensive Environmental,
Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended; the
Federal Water Pollution Control Act, as amended; the Occupational Safety and
Health Act of 1970, as amended; the Resource Conservation and Recovery Act of
1976 ("RCRA"), as amended; the Safe Drinking Water Act, as amended; the Toxic
Substances Control Act, as amended; the Superfund Amendments and Reauthorization
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<PAGE>
Act of 1986, as amended; and other environmental conservation or protection
laws. The terms "hazardous substance," "release" and "threatened release" have
the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or
"disposed") have the meanings specified in RCRA; provided, however, in the event
either CERCLA or RCRA is amended so as to broaden the meaning of any term
defined thereby, such broader meaning shall apply subsequent to the effective
date of such amendment with respect to all provisions of this Agreement, and
provided further that, to the extent the laws of the state in which any Property
of Mortgagor is located establish a meaning for "hazardous substance,"
"release," "solid waste" or "disposal" which is broader than that specified in
either CERCLA or RCRA, such broader meaning shall apply.
"Fixture Collateral" means all of Mortgagor's interest in and to all
Operating Equipment which is or becomes so related to the Oil and Gas Property
or any part thereof that an interest in the Operating Equipment arises under the
real property law of the State in which it is situated, including all oil or
natural gas delivery pipelines.
"Hazardous Materials" means (a) petroleum or petroleum products, natural or
synthetic gas other than crude oil, natural gas and natural gas liquids prior to
capture and production thereof; (b) asbestos in any form that is or could become
friable, urea formaldehyde foam insulation, and radon gas; and (c) any other
substances defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," "extremely hazardous wastes,"
"restricted hazardous wastes," "toxic substances," "toxic pollutants,"
"contaminants" or "pollutants" under any applicable Environmental Law.
"Hydrocarbons" means oil, gas and other liquid or gaseous hydrocarbons,
whether or not treated or processed.
"Obligations" means the aggregate of:
(a) all amounts payable pursuant to any of the Debentures at any time
outstanding in the aggregate principal amount not to exceed Five Million
Dollars ($5,000,000) issued by Mortgagor to the Debenture Mortgagees with a
stated maturity date of April 15. 2001, bearing interest at the rates
specified in and otherwise subject to the terms of the Debentures dated on
or about November 15, 1996 among the Mortgagor and the Debenture
Mortgagees, with such Debentures, and all modifications, extensions and
renewals thereof referred to as the "Debentures," and with the holders of
the Debentures and all subsequent holders of all or any part thereof
referred to as the "Secured Parties";
(b) claims, as defined in Section 3.5 which are identified (whether or
not the specific amount thereof has been determined) prior to payment of
all principal and interest due under the Debentures;
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<PAGE>
(c) any and all other or additional indebtedness or liabilities for
which Mortgagor is now or may become liable to any Secured Party or
Debenture Mortgagees in any manner pursuant to the Debentures;
(d) all sums advanced and costs and expenses incurred by or on behalf
of the Debenture Mortgagees, including without limitation all legal,
accounting, engineering, management, consulting or like fees, made and
incurred in connection with the Obligations described in paragraphs (i) and
(ii) above or any part thereof, any renewal, extension or modification of,
or substitution for, the foregoing Obligations or any part thereof, or the
acquisition, perfection or maintenance and preservation of the security
therefor, whether such advances, costs or expenses shall have been made and
incurred at the request of Mortgagor or the Debenture Mortgagees; and
(e) any and all extensions and renewals of, substitutions for, or
modifications or amendments of any of the foregoing Obligations or any part
thereof.
"Oil and Gas Property" means all of the oil and gas leasehold interests and
estates and other interests of Mortgagor in the lands, leases and agreements
described in Exhibit A attached hereto and made a part hereof, (it being
expressly understood and agreed that the undivided interests in such properties
set forth in Exhibit A are for information purposes and do not establish a limit
on Mortgagor's interests therein which are subject to this Mortgage) whether now
owned or hereafter acquired, by operation of law or otherwise, together with all
of Mortgagor's interests of any nature whatsoever now or hereafter incident or
appurtenant thereto, including, but not limited to, fee mineral and surface
interests in said lands, royalty interests therein, all unsevered and
unextracted Hydrocarbons in, under or attributable to Mortgagor's interests in
said lands, oil and gas (or oil, gas and mineral) leases, subleases, mineral
agreements, farmin agreements, farmout agreements, bottom hole agreements, other
participation agreements of any kind, royalties, overriding royalties, net
profits interests, production payments, licenses, servitudes, orders, acreage
contribution agreements, processing agreements, options and similar interests,
and all rights-of-way, surface leases, and easements affecting the foregoing
interests of Mortgagor or useful or appropriate in exploring and/or drilling
for, producing, processing, treating, handling, storing, transporting or
marketing Hydrocarbons therefrom or the disposal of water, Hydrocarbons or
associated substances from said lands.
"Operating Equipment" means all surface or subsurface machinery, equipment,
facilities, supplies or other property of whatsoever kind or nature and any
replacements thereof, substitutions therefor or accessions thereto (including
leases of equipment), now or hereafter located in, on or under, affixed or
attributable to or obtained or used in connection with any of the Oil and Gas
Property or any portion thereof or interest therein, including, without limiting
the generality of the foregoing, goods which are or are to become fixtures on
the Oil and Gas Property, oil wells, gas wells, water wells, injection wells,
casing, tubing, rods, pumps, pumping units and engines, Christmas trees,
derricks, separators, gun barrels, flow lines, tanks, gas systems (for
gathering, treatment, compression and transmission), chemicals, solutions, water
systems (for treating, disposal and injection), power plants, boilers, poles,
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<PAGE>
lines, transformers, starters and controllers, valves, meters, measuring
devices, machine shops, tools, storage yards and equipment stored therein,
buildings and camps, secondary and other recovery equipment, systems and
processes, plans, drawings, specifications, surveys, engineering, geological and
geophysical studies and reports, well logs, reports and related data,
seismographic studies, reports and information, office and personnel books,
files, records and correspondence, computer output and data files, maps, plats,
abstracts of title, lease files, unit files, production marketing files, title
curative opinions, title files and title records, division orders and division
order records, ownership maps, warranties and guarantees of manufacturers and
others, telegraph, telephone and other communication systems, roads, loading
docks, shipping facilities and building and construction materials.
"Personalty Collateral" means all of Mortgagor's interest now owned or
hereafter acquired in and to: (i) all Operating Equipment; (ii) all
Hydrocarbons, whether or not extracted from or attributable to the Oil and Gas
Property; (iii) all Production Sales Contracts; and (iv) all other personal
property, movable and immovable, tangible or intangible, of whatsoever nature
and kind, wherever located, including, without limitation, all accounts,
contract rights, general intangibles, equipment, inventory, goods, chattel
paper, permits, authorizations, seismic or other data, title information, title
abstracts and maps, now owned or existing or hereafter acquired by Mortgagor or
arising in connection with the conduct by Mortgagor of any activity on or
relating to the Collateral, except that organizational, tax and other internal
records, agreements or documents of the Mortgagor or any partner therein which
are not related to or necessary for the ownership and operation of the
Collateral and sale of Hydrocarbons are excluded from Personalty Collateral.
"Proceeds" includes whatever is received upon the sale, exchange,
collection or other disposition of the Collateral and insurance payable or
damages or other payments by reason of loss or damage to the Collateral, and all
additions thereto, substitutions and replacements thereof or accessions thereto.
"Production Sales Contract" means each contract now in effect or hereafter
entered into by Mortgagor or Mortgagor's predecessors in title for the sale,
purchase, exchange or processing of Hydrocarbons extracted from or attributable
to the Oil and Gas Property.
"Realty Collateral" means all of Mortgagor's interest in and to the Oil and
Gas Property, including, but not limited to, the interests of Mortgagor
described or specified in Exhibit A hereto.
ARTICLE 2 - CREATION OF SECURITY
Section 2.1 Grant. In consideration of the Debenture Mortgagees'
acquisition of the Debentures constituting the Obligations, and in consideration
of the mutual covenants contained herein, and for the purpose of securing
payment of the Obligations, Mortgagor hereby grants, bargains, sells, warrants,
mortgages, assigns, transfers and conveys the Realty Collateral and Fixture
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Collateral to the Debenture Mortgagees, pari passu among all the Debenture
Mortgagees with power of sale to have and to hold the Realty Collateral and
Fixture Collateral, together with all and singular the rights, privileges,
contracts, and appurtenances now or hereafter at any time before the foreclosure
or release hereof, in any way appertaining or belonging thereto, unto the
Debenture Mortgagees and to their substitutes or successors, forever, upon the
terms and conditions herein set forth; and Mortgagor hereby binds and obligates
Mortgagor and Mortgagor's successors and assigns, to warrant and to defend, all
and singular, title to the Collateral unto the Debenture Mortgagees and its
substitutes or successors, forever, against the claims of any and all persons
whomsoever claiming any part thereof.
Section 2.2 Creation of Security Interest. In addition to the grant
contained in Section 2.1, and for the same consideration and purpose, Mortgagor
hereby grants to the Debenture Mortgagees, pari passu among all the Debenture
Mortgagees, security interest in all Personalty Collateral, now owned or
hereafter acquired by the Mortgagor, and in all Proceeds. Without limiting the
foregoing provisions of this Section 2.2, Mortgagor stipulates that the grant
made by this Section 2.2 includes a grant of a security interest in Hydrocarbons
extracted from or attributable to the Oil and Gas Property and in the Proceeds
resulting from sale of such Hydrocarbons (including, but not limited to, sales
at the wellhead), such security interest to attach to such Hydrocarbons as
extracted and to the accounts resulting from such sales.
Section 2.3 Proceeds. The security interest of Debenture Mortgagees
hereunder in the Proceeds shall not be construed to mean that any Debenture
Mortgagees consent to the sale or other disposition of any part of the
Collateral other than Hydrocarbons extracted from or attributable to the Oil and
Gas Property and sold in the ordinary course of business.
ARTICLE 3 - ASSIGNMENT OF PRODUCTION PROCEEDS
Section 3.1 Assignment. As further security for the payment of the
Obligations, upon default by the Company under the terms of the Debentures, the
Mortgagor shall transfer, assign, warrant and convey to Debenture Mortgagees,
pari passu among all the Debenture Mortgagees, all Hydrocarbons (and the
Proceeds therefrom) which are extracted from or attributable to the Oil and Gas
Property. All parties producing, purchasing and receiving such Hydrocarbons or
the Proceeds therefrom are authorized and directed to treat Debenture
Mortgagees, pari passu among all the Debenture Mortgagees, as the person
entitled in Mortgagor's place and stead to receive the same; and further, those
parties will be fully protected in so treating Debenture Mortgagees and will be
under no obligation to see to the application by Debenture Mortgagees of any
Proceeds received by it.
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Section 3.2 Application of Proceeds.
(a) All payments received by Debenture Mortgagees pursuant to Section 3.1
above shall be placed in a collateral collection account at the financial
institution designated by the Debenture Mortgagees and on the last day of each
month shall be applied as follows:
(i) first, toward satisfaction of all costs and expenses incurred in
connection with the collection of Proceeds and the payment of any part of
the Obligations not represented by a written instrument;
(ii) second, to the payment of all accrued interest on the Debentures
and of all other fees or payments required in the Debentures;
(iii) third, to the payment of any then due and owing principal on the
Debentures; and
(iv) the balance, if any, shall be released to Mortgagor.
(b) If any date of application specified above (herein called a "regular
application date") shall be a Saturday, Sunday or legal banking holiday under
the laws of the jurisdiction in which such proceeds shall be applied, the
proceeds to be applied by Debenture Mortgagees pursuant to this Section 3.2
shall be applied on the last business day next preceding such regular
application date that is not a Saturday, Sunday or legal banking holiday, but
the amount to be applied pursuant to paragraph (a)(ii) of this Section 3.2 shall
nevertheless be the amount accrued up to, but not including, such regular
application date.
Section 3.3 Mortgagor's Payment Duties. Nothing contained herein will limit
Mortgagor's duty to make payment on the Obligations when the Proceeds received
by Debenture Mortgagees pursuant to this Article 3 are insufficient to pay the
costs, interest, principal and any other portion of the Obligations then owing,
and the receipt of Proceeds by Debenture Mortgagees will be in addition to all
other security now or hereafter existing to secure payment of the Obliga tions.
Section 3.4 Debenture Mortgagees Collection Duties. Debenture Mortgagees
have no obligation to enforce collection of any Proceeds and are hereby released
from all responsibility in connection therewith, except the responsibility to
account to Mortgagor for Proceeds actually received.
Section 3.5 Indemnification. Mortgagor agrees to indemnify Debenture
Mortgagees and each other Secured Party against and hold Debenture Mortgagees
and each other Secured Party harmless from all claims, actions, liabilities,
losses, judgments, attorneys' fees, costs and expenses and other charges of any
description whatsoever (all of which are hereafter referred to in this Section
3.5 as "Claims") made against or sustained or incurred by Debenture Mortgagees
or any other Secured Party as a consequence of the assertion, either before or
after the payment in full of the Obligations, that Debenture Mortgagees or any
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other Secured Party received Hydrocarbons or Proceeds pursuant to this
instrument. Debenture Mortgagees and each other Secured Party will have the
right to employ attorneys and to defend against any Claims and unless furnished
with satisfactory indemnity, after notice to Mortgagor, Debenture Mortgagees or
any other Secured Party will have the right to pay or compromise and adjust all
Claims in its sole reasonable discretion. Mortgagor shall indemnify and pay to
Debenture Mortgagees or any other Secured Party all amounts paid by Debenture
Mortgagees or any other Secured Party in compromise or adjustment of any of the
Claims or amounts adjudged against Debenture Mortgagees or any other Secured
Party in respect of any of the Claims. The liabilities of Mortgagor as set forth
in this Section 3.5 will constitute Obligations and will survive the termination
of this instrument for a period of six months.
Section 3.6 Limitation of Liability. The Mortgagor is liable for the full
amount of the Obligations, including, without limitation, the Obligations
evidenced by the Debentures. If, in connection with this Mortgage and the
transactions contemplated hereby, there is a foreclosure of Liens by private
power of sale or otherwise, and attachment, execution or other writ against the
assets of the Mortgagor, no judgment for any deficiency upon the Obligations
shall be sought or obtained by the Debenture Mortgagees or any other Secured
Party against any general partner (other than as may be required to enforce
rights and remedies against the Mortgagor).
ARTICLE 4 - MORTGAGOR'S WARRANTIES AND COVENANTS
Section 4.1 Warranties and Covenants.
(a) Mortgagor warrants and covenants that:
(i) Mortgagor, to the extent of the interests of Mortgagor in Exhibit
A, has good and defensible title (as defined in the Credit Agreement) to
each property right or interest constituting the Collateral free of any
adverse claim, burden, mortgage, lien, security interest, pledge, charge,
encumbrance or interest of or in favor of any third party other than as
stated in Exhibit A, except as previously disclosed to Debenture Mortgagees
in writing, or as previously disclosed to Debenture Mortgagees, no
financing statement covering any of the Collateral in favor of any third
party is on file in any public office; Mortgagor holds the working
interests in the Oil and Gas Property described in Exhibit A; and Mortgagor
has a good and legal right and full authority to grant and convey same to
Debenture Mortgagees pursuant to this instrument;
(ii) the oil and gas (or oil, gas and mineral) leases and mineral
agreements included in the Oil and Gas Property are valid and subsisting
and all payments, rentals and royalties due under each of them have been
properly and timely paid, and all conditions and obligations necessary to
keep them in force have been fully satisfied and performed; and all
producing wells located on the Oil and Gas Property or properties unitized
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therewith have been drilled, operated and produced in conformity with all
applicable laws and rules, regulations and orders of all governmental
authorities having jurisdiction and are subject to no penalties on account
of past production;
(iii) no approval or consent of any regulatory or administrative
commission or authority or of any other governmental body or any other
party is necessary to authorize the execution and delivery of this
instrument or of any other written instrument constituting or evidencing
the Obligations, or to authorize the observance or performance by Mortgagor
of the covenants contained in this instrument or in the other written
instruments constitut ing or evidencing the Obligations or to enable the
Debenture Mortgagees to exercise its rights hereunder; and
(iv) Mortgagor has taken all proper corporate action to authorize the
execution and delivery of the Debentures secured hereby and of this
instrument and to make the Debentures and this instrument the legal, valid
and binding obligations of Mortgagor.
(b) Mortgagor warrants and shall forever defend the Collateral against
every person whomsoever lawfully claiming the same or any part thereof, and
Mortgagor shall maintain and preserve the lien and security interest herein
created until this instrument has been terminated as provided herein.
Section 4.2 Operation of Mortgaged Property. As long as this instrument has
not been released in accordance with Section 9.5, and whether or not Mortgagor
is the operator of all or any part of the Oil and Gas Property, Mortgagor shall,
at Mortgagor's own expense:
(a) comply, or cause the operator to comply, fully with all of the
terms and conditions of all leases, mineral agreements and other
instruments of title described in Exhibit A and all rights-of-way,
easements and privileges necessary for the proper operation of such leases
and instruments, and otherwise do all things necessary to keep Mortgagor's
rights and Debenture Mortgagees' interest in the Collateral unimpaired;
(b) except to the extent a prudent operator would do so, not abandon
any well which is producing or capable of production or forfeit, surrender
or release any lease, sublease, mineral agreement or farmout or any
operating agreement or other agreement or instrument comprising or
affecting the Oil and Gas Property without Debenture Mortgagees's prior
written consent, which consent shall not be withheld unreasonably;
(c) cause the Oil and Gas Property to be maintained, developed and
protected against drainage and continuously operated for the production of
Hydrocarbons in a good and workmanlike manner as a prudent operator would
in accordance with generally accepted practices, applicable operating
agreements and all applicable federal, state, tribal and local laws, rules,
regulations and orders;
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(d) promptly pay or cause to be paid when due and owing all rentals,
other payments and royalties payable in respect of the Oil and Gas
Property, if any; all expenses incurred in or arising from the operation or
development of the Collateral; and all taxes, assessments and governmental
charges imposed upon the Collateral or Mortgagor;
(e) cause the Operating Equipment to be kept in good and effective
operating condition and cause to be made all repairs, renewals,
replacements, additions and improvements thereof or thereto necessary or
appropriate for the production Hydrocarbons from the Oil and Gas Property
and permit the Debenture Mortgagees (through its agents and employees),
upon reasonable prior notice and during normal business hours, to enter
upon the Oil and Gas Property for the purpose of investigating and
inspecting the condition and operation of the Collateral;
(f) cause the Collateral to be kept free and clear of liens, charges,
security interests, encumbrances, adverse claims and title defects of every
character other than (i) the lien and security interest created by this
instrument, (ii) taxes constituting a lien but not due and payable, (iii)
defects or irregularities in title which are not such as interfere
materially with the development, operation or value of the Collateral and
not such as to materially affect title thereto, (iv) those set forth or
referred to in Exhibit A hereto, (v) those being contested in good faith by
Mortgagor and which do not, in the judgment of Debenture Mortgagees,
jeopardize the Debenture Mortgagees's rights in and to the Collateral, and
(vi) those consented to in writing by Debenture Mortgagees; provided,
however, that Debenture Mortgagees may take such reasonable independent
action in connection with any such matters affecting the Collateral as it
deems advisable, and all costs and expenses thereof, including, without
limitation, attorneys' fees incurred by Debenture Mortgagees in taking such
action, shall be part of the Obligations hereunder;
(g) defend, indemnify and hold harmless the Debenture Mortgagees and
other Secured Parties, and their respective employees, agents, officers and
directors, from and against any claims, demands, penalties, fines,
liabilities, settlements, damages, costs and expenses of whatever kind or
nature known or unknown, contingent or otherwise, arising out of, or in any
way relating to the violation of or noncompliance with any Environmental
Laws applicable to the properties owned or operated by the Mortgagor, or
any orders, requirements or demands of governmental authorities related
thereto, including, without limitation, attorney's and consultant's fees,
investigation and laboratory fees, environmental response and cleanup
costs, court costs and litigation expenses, except to the extent that any
of the foregoing arise out of the gross negligence or willful misconduct of
the party seeking indemnification therefor; and
(h) execute, acknowledge and deliver to Debenture Mortgagees such
other and further instruments and do such other acts as in the opinion of
Debenture Mortgagees are necessary or desirable to effect the intent of
this instrument or otherwise protect and preserve the interests of
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Debenture Mortgagees hereunder, promptly upon request of Debenture
Mortgagees.
Section 4.3 Recording and Filing. Mortgagor shall pay all costs of filing,
registering and recording this and every other instrument in addition or
supplemental hereto and all financing state ments Debenture Mortgagees may
require, in such offices and places and at such times and as often as may be, in
the judgment of Debenture Mortgagees, necessary to preserve, protect and renew
the lien and security interest herein created as a second lien and
second-in-priority security interest on and in the Collateral and otherwise do
and perform all matters or things necessary or expedient to be done or observed
by reason of any law or regulation of any state or of the United States or of
any other competent authority for the purpose of effectively creating,
maintaining and preserving the lien and security interest created herein and on
the Collateral and the priority thereof. Mortgagor shall also pay the costs of
obtaining reports from appropriate filing officers concerning financing
statement filings in respect of any of the Collateral in which a security
interest is granted herein.
Section 4.4 Debenture Mortgagees' Right to Perform Mortgagor's Obligations.
Mortgagor agrees that, if Mortgagor fails to perform any act which Mortgagor is
required to perform under this instrument, any Debenture Mortgagees or any
receiver appointed hereunder may, but shall not be obligated to, perform or
cause to be performed such act, and any expense incurred by Debenture Mortgagees
in so doing shall be a demand obligation owing by Mortgagor to Debenture
Mortgagees, shall bear interest at an annual rate equal to the maximum interest
rate provided in the Note until paid and shall be a part of the Obligations, and
Debenture Mortgagees, or any receiver shall be subrogated to all of the rights
of the party receiving the benefit of such performance. The undertaking of such
performance by Debenture Mortgagees or any receiver as aforesaid shall not
obligate such person to continue such performance or to engage in such
performance or performance of any other act in the future, shall not relieve
Mortgagor from the observance or performance of any covenant, warranty or
agreement contained in this instrument or constitute a waiver of default
hereunder and shall not affect the right of Debenture Mortgagees to accelerate
the payment of all indebtedness and other sums secured hereby or to resort to
any other of its rights or remedies hereunder or under applicable law. In the
event the Debenture Mortgagees or any receiver appointed hereunder undertakes
any such action, no such party shall have any liability to the Mortgagor in the
absence of a showing of gross negligence or willful misconduct of such party,
and in all events no party other than the acting party shall be liable to
Mortgagor.
ARTICLE 5 - DEFAULT
Section 5.1 Events of Default. The term "Event of Default" means the
occurrence of any of the following events or the existence of any of the
following conditions:
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(a) failure by Mortgagor to make any payment when due of any of the
Obligations provided for herein or other failure to keep, punctually
perform or observe any of the covenants, obligations or prohibitions
contained herein or in any other agreement with Debenture Mortgagees
(whether now existing or entered into hereafter) or the occurrence of any
other event which is, or is deemed to be, an Event of Default under and as
that term is defined in any such other written instrument or agreement; or
(b) any warranty, information, representation or statement by
Mortgagor made or furnished to Debenture Mortgagees by or on behalf of
Mortgagor in connection with the Obligations is determined by Debenture
Mortgagees to be untrue or misleading in any material respect.
Section 5.2 Acceleration Upon Default. Upon the occurrence of any Event of
Default, or at any time thereafter, the holders of at least 25% of the
outstanding principal amount of the Debentures may, at their option, on behalf
of all Debenture Mortgagees pari passu, by notice to Mortgagor, declare the
entire unpaid principal of and the interest accrued on the Obligations to be due
and payable forthwith without any further notice, presentment or demand of any
kind, all of which are hereby expressly waived.
Section 5.3 Possession and Operation of Property. Upon the occurrence of
any Event of Default, or at any time thereafter, and in addition to all other
rights therein conferred on the Debenture Mortgagees, the Debenture Mortgagees
or any person, firm or corporation designated by Debenture Mortgagees, will have
the right and power, but will not be obligated, to have an audit performed, at
Mortgagor's expense, of the books and records of Mortgagor, and to enter upon
and take possession of all or any part of the Collateral, to exclude Mortgagor
therefrom, and to hold, use, administer, manage and operate the same (in
compliance with the terms of contracts binding on the Oil and Gas Property known
to the Debenture Mortgagees and all applicable laws) to the extent that
Mortgagor could do so. The Debenture Mortgagees or any person, firm or
corporation designated by the Debenture Mortgagees, may operate and develop the
Collateral, or any portion thereof, without any liability to Mortgagor in
connection with the operations except with respect to gross negligence and
willful misconduct; and the Debenture Mortgagees or any person, firm or
corporation designated by Debenture Mortgagees will have the right to collect,
receive and receipt for all Hydrocarbons produced and sold from the Oil and Gas
Property, to make repairs, to purchase machinery and equipment, to conduct
workover operations, to drill additional wells as necessary in Debenture
Mortgagees's good faith judgment for the protection of the Collateral, and to
exercise every power, right and privilege of Mortgagor with respect to the
Collateral. Providing there has been no foreclosure sale, when and if the
expenses of the operation and development (including costs of unsuccessful
workover operations or additional wells) have been paid and the Obligations paid
in full, the remaining Collateral shall be returned to the Mortgagor.
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Section 5.4 Ancillary Rights. Upon the occurrence of an Event of Default,
or at any time thereafter, and in addition to all other rights of Debenture
Mortgagees hereunder, Debenture Mortgagees may, without notice, demand or
declaration of default, all of which are hereby expressly waived by Mortgagor,
proceed by a suit or suits in equity or at law, (i) for the seizure and sale of
the Collateral or any part thereof, (ii) for the specific performance of any
covenant or agreement herein contained or in aid of the execution of any power
herein granted, (iii) for the foreclosure or sale of the Collateral or any part
thereof under the judgment or decree of any court of competent jurisdiction,
(iv) without regard to the solvency or insolvency of any person, and without
regard to the value of the Collateral, and without notice to Mortgagor (notice
being hereby expressly waived), for the ex parte appointment of a receiver to
serve without bond pending any foreclosure or sale hereunder, or (v) for the
enforcement of any other appropriate legal or equitable remedy. Notwithstanding
the foregoing, the Debenture Mortgagees agrees to give reasonable efforts to
give Mortgagor prior notice of any of the foregoing actions, provided that the
failure of Debenture Mortgagees to use such reasonable efforts to give prior
notice shall not invalidate any action so taken by Debenture Mortgagees. It is
hereby expressly agreed that Mortgagor's sole remedy for any such failure by
Debenture Mortgagees shall be an action for damages suffered by Mortgagor as a
direct and proximate result of such failure.
ARTICLE 6 - DEBENTURE MORTGAGEES'S RIGHTS AS TO
REALTY COLLATERAL UPON DEFAULT
Section 6.1 Foreclosure. Upon the occurrence of an Event of Default, or at
any time thereafter, Debenture Mortgagees may, subject to any mandatory
requirements of applicable law, proceed by suit to foreclose its lien hereunder
and to sell or have sold the Realty Collateral or any part thereof at one or
more sales, as an entirety or in parcels, at such place or places and otherwise,
in such manner and upon such notice as may be required by law, or, in the
absence of any such requirement, as Debenture Mortgagees may deem appropriate,
and Debenture Mortgagees shall thereafter make or cause to be made a conveyance
to the purchaser or purchasers thereof. Debenture Mortgagees may postpone the
sale of the real property included in the Collateral or any part thereof by
public announcement at the time and place of such sale, and from time to time
thereafter may further postpone such sale by public announcement made at the
time of sale fixed by the preceding postponement. Sale of a part of the Realty
Collateral will not exhaust the power of sale, and sales may be made from time
to time until all such property is sold or the Obligations are paid in full.
ARTICLE 7 - DEBENTURE MORTGAGEES'S RIGHTS AS TO PERSONALTY AND
FIXTURE COLLATERAL UPON DEFAULT
Section 7.1 Personalty Collateral. Upon the occurrence of an Event of
Default, or at any time thereafter, Debenture Mortgagees may, without notice to
Mortgagor, exercise their rights to declare all of the Obligations to be
immediately due and payable, in which case Debenture Mortgagees will have all
rights and remedies granted by law, and particularly by the Uniform Commercial
Code, including, but not limited to, the right to take possession of the
Personalty Collateral, and for this purpose Debenture Mortgagees may enter upon
any premises on which any or all of the Personalty Collateral is situated and
take possession of and operate the Personalty Collateral or remove it therefrom.
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Debenture Mortgagees may require Mortgagor to assemble the Personalty Collateral
and make it available to Debenture Mortgagees or a representative of the
Debenture Mortgagees at a place to be designated by Debenture Mortgagees which
is reasonably convenient to all parties. Unless the Personalty Collateral is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market, Debenture Mortgagees will give Mortgagor reasonable
notice of the time and place of any public sale or of the time after which any
private sale or other disposition of the Personalty Collateral is to be made.
This requirement of sending reasonable notice will be met if the notice is
mailed, postage prepaid, to Mortgagor at the address designated above at least
five days before the time of the sale or disposition.
Section 7.2 Sale with Realty Collateral. In the event of foreclosure,
whether judicial or nonjudicial, at Debenture Mortgagees's option it may proceed
under the Uniform Commercial Code as to the Personalty Collateral or Debenture
Mortgagees may proceed as to both Realty Collateral and Personalty Collateral in
accordance with their rights and remedies in respect of the Realty Collateral.
Section 7.3 Fixture Collateral. Upon the occurrence of an Event of Default,
or at any time thereafter, Debenture Mortgagees may elect to treat the Fixture
Collateral as either Realty Collateral or as Personalty Collateral and proceed
to exercise such rights as apply to the type of Collateral selected.
ARTICLE 8 - OTHER PROVISIONS CONCERNING FORECLOSURE
Section 8.1 Possession and Delivery of Collateral. It shall not be
necessary for Debenture Mortgagees to have physically present or constructively
in their possession any of the Collateral at any foreclosure sale, and Mortgagor
shall deliver to the purchasers at such sale on the date of sale the Collateral
purchased by such purchasers at such sale, and if it should be impossible or
impracticable for any of such purchasers to take actual delivery of the
Collateral, then the title and right of possession to the Collateral shall pass
to the purchaser at such sale as completely as if the same had been actually
present and delivered.
Section 8.2 Debenture Mortgagees as Purchaser. Debenture Mortgagees will
have the right to become the purchaser at any foreclosure sale, and it will have
the right to credit upon the amount of the bid the amount payable to it out of
the net proceeds of sale.
Section 8.3 Recitals Conclusive: Ratification. Recitals contained in any
conveyance to any purchaser at any sale made hereunder will conclusively
establish the truth and accuracy of the matters therein stated, including,
without limiting the generality of the foregoing, nonpayment of the unpaid
principal sum of, and the interest accrued on, the written instruments
constituting part or all of the Obligations after the same have become due and
payable, nonpayment of any other of the Obligations or advertisement and conduct
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of the sale in the manner provided herein. Mortgagor ratifies and confirms all
legal acts that Debenture Mortgagees may do in carrying out the provisions of
this instrument.
Section 8.4 Effect of Sale. Any sale or sales of the Collateral or any part
thereof will operate to divest all right, title, interest, claim and demand
whatsoever, either at law or in equity, of Mortgagor in and to the premises and
the property sold, and will be a perpetual bar, both at law and in equity,
against Mortgagor, Mortgagor's successors or assigns and against any and all
persons claiming or who shall thereafter claim all or any of the property sold
from, through or under Mortgagor, or Mortgagor's successors or assigns. The
purchaser or purchasers at the foreclosure sale will receive immediate
possession of the property purchased; and if Mortgagor retains possession of the
Realty Collateral, or any part thereof, subsequent to sale, Mortgagor will be
considered a tenant at sufferance of the purchaser or purchasers, and if
Mortgagor remains in such possession after demand of the purchaser or purchasers
to remove, Mortgagor will be guilty of forcible detainer and will be subject to
eviction and removal, forcible or otherwise, with or without process of law, and
without any right to damages arising out of such removal.
Section 8.5 Application of Proceeds. The proceeds of any sale of the
Collateral or any part thereof will be applied as follows:
(a) first, to the payment of all expenses incurred by the Debenture
Mortgagees in connection therewith, including, without limiting the
generality of the foregoing, court costs, legal fees and expenses, fees of
accountants, engineers, consultants, agents or managers and expenses of any
entry or taking of possession, holding, valuing, preparing for sale,
advertising, selling and conveying;
(b) second, to the payment of the Obligations; and
(c) third, any surplus thereafter remaining to Mortgagor or
Mortgagor's successors or assigns, as their interests may be established to
Debenture Mortgagees' reasonable satisfaction.
Section 8.6 Deficiency. Mortgagor will remain liable for any deficiency
owing to Debenture Mortgagees or any other Secured Party after application of
the net proceeds of any foreclosure sale.
Section 8.7 Mortgagor's Waiver of Appraisement, Marshalling, etc. Mortgagor
agrees that Mortgagor will not at any time insist upon or plead or in any manner
whatsoever claim the benefit of any appraisement, valuation, stay, extension or
redemption law now or hereafter in force, in order to prevent or hinder the
enforcement or foreclosure of this instrument, the absolute sale of the
Collateral or the possession thereof by any purchaser at any sale made pursuant
to this instrument or pursuant to the decree of any court of competent
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jurisdiction. Mortgagor, for Mortgagor and all who may claim through or under
Mortgagor, hereby waives the benefit of all such laws and to the extent that
Mortgagor may lawfully do so under applicable state law, waives any and all
right to have the Realty Collateral marshalled upon any foreclosure of the lien
hereof or sold in inverse order of alienation.
ARTICLE 9 - MISCELLANEOUS
Section 9.1 Pooling and Unitization. The interest of Mortgagor in any unit,
pooling agreement or other similar arrangement, whether voluntary or
involuntary, to which the Oil and Gas Property (or any part thereof) is or may
be subject will become a part of the Realty Collateral and the Personalty
Collateral, as the case may be, and will be subject to the lien and security
interest hereof in the same manner and with the same effect as though the unit,
pooling agreement or other arrangement and the interest of Mortgagor therein
were specifically described in Exhibit A.
Section 9.2 Discharge of Purchaser. Upon any sale made under the powers of
sale herein granted and conferred, the receipt of Debenture Mortgagees will be
sufficient discharge to the purchaser or purchasers at any sale for the purchase
money, and such purchaser or purchasers and the heirs, devisees, personal
representatives, successors and assigns thereof will not, after paying such
purchase money and receiving such receipt of Debenture Mortgagees, be obliged to
see to the application thereof or be in anyways answerable for any loss,
misapplication or nonapplication thereof.
Section 9.3 Indebtedness of Obligations Absolute. Nothing herein contained
shall be construed as limiting Debenture Mortgagees to the collection of any
indebtedness of Mortgagor to Debenture Mortgagees only out of the income,
revenue, rents, issues and profits from the Collateral or as obligating
Debenture Mortgagees to delay or withhold action upon any default which may be
occasioned by failure of such income or revenue to be sufficient to retire the
principal or interest when due on the indebtedness secured hereby. It is
expressly understood between Debenture Mortgagees and Mortgagor that any
indebtedness of Mortgagor to Debenture Mortgagees secured hereby shall
constitute an absolute, unconditional obligation of Mortgagor to pay as provided
herein or therein in accordance with the terms of the instrument evidencing such
indebtedness in the amount therein specified at the maturity date or at the
respective maturity dates of the installments thereof, whether by acceleration
or otherwise.
Section 9.4 Defense of Claims. Mortgagor will promptly notify Debenture
Mortgagees in writing of the commencement of any material proceedings or any
litigation affecting Debenture Mortgagees' interest in the Collateral, or any
part thereof, and shall take such action, employing attorneys (which must be
reasonably acceptable to Debenture Mortgagees), as may be necessary to preserve
Mortgagor's and Debenture Mortgagees's rights affected thereby; and should
Mortgagor fail or refuse to take any such action, Debenture Mortgagees may take
the action on behalf of and in the name of Mortgagor and at Mortgagor's expense.
- 16 -
<PAGE>
Moreover, Debenture Mortgagees may take independent action in connection
therewith as it may in its discretion deem proper, and Mortgagor hereby agrees
to make reimbursement for all sums advanced and all expenses incurred in such
actions plus interest at a rate equal to the maximum interest rate provided in
the Debentures.
Section 9.5 Termination. If (i) all amounts of principal and interest due
under all the Debentures, (ii) all other fees and expenses payable by Mortgagor
under the Debentures and hereunder, and (iii) all other Obligations which are in
sum certain amounts have been paid in full and no Claims have been identified,
then Debenture Mortgagees shall, upon the request of Mortgagor and at
Mortgagor's cost and expense, deliver to Mortgagor proper instruments executed
by or on behalf of the holders of at least eighty percent (80%) of the principal
amount of the Debentures evidencing the release of this instrument. Mortgagor
shall be authorized to file and record such instruments and upon delivery
thereof to Mortgagor, this instrument shall be terminated. Until such delivery,
this instrument shall remain and continue in full force and effect.
Section 9.6 Renewals, Amendments and Other Security. Renewals and
extensions of the Obligations may be given at any time, amendments may be made
to the agreements relating to any part of the Obligations or the Collateral in
accordance with the terms of the Debentures.
Section 9.7 Effect of Instrument. This instrument shall be deemed and
construed to be, and may be enforced as, an assignment, chattel mortgage or
security agreement, contract, deed of trust, financing statement, financing
statement filed as a fixture filing, and real estate mortgage, and as any one or
more of them if appropriate under applicable state law. This instrument shall be
effective as a financing statement filed as a fixture filing with respect to all
Fixture Collateral and is to be filed for record in the Office of the County
Clerk or other appropriate office of each county where any part of the
Collateral, including Fixture Collateral, is situated. This instrument shall
also be effective as a financing statement covering minerals or the like
(including oil and gas) and accounts subject to Section 9-103(5) (or
corresponding provision) of the Uniform Commercial Code as enacted in the
appropriate jurisdiction and is to be filed for record in the Office of the
County Clerk or other appropriate office of each county where any part of the
collateral is situated. A carbon, photographic, or other reproduction of this
Mortgage or of any financing statement relating to this Mortgage shall be
sufficient as a financing statement.
Section 9.8 Unenforceable or Inapplicable Provisions. If any provision
hereof or of any of the written instruments constituting part or all of the
Obligations is invalid or unenforceable in any jurisdiction, whether with
respect to all parties hereto or with respect to less than all of such parties,
the other provisions hereof and of the written instruments will remain in full
force and effect in that jurisdiction with respect to the parties as to which
such provision is valid and enforce able, and the remaining provisions hereof
will be liberally construed in favor of Debenture Mortgagees in order to carry
out the provisions hereof. The invalidity of any provision of this instrument in
any jurisdiction will not affect the validity or enforceability of any provision
in any other jurisdiction.
- 17 -
<PAGE>
Section 9.9 Rights Cumulative. Each and every right, power and remedy given
to Debenture Mortgagees herein or in any other written instrument relating to
the Obligations will be cumulative and not exclusive; and each and every right,
power and remedy whether specifically given herein or otherwise existing may be
exercised from time to time and as often and in such order as may be deemed
expedient by Debenture Mortgagees, and the exercise, or the beginning of the
exercise, of any such right, power or remedy will not be deemed a waiver of the
right to exercise, at the same time or thereafter, any other right, power or
remedy. A waiver by Debenture Mortgagees of any right or remedy hereunder or
under applicable law on any occasion will not be a bar to the exercise of any
right or remedy on any subsequent occasion.
Section 9.10 Non-Waiver. No act, delay, omission or course of dealing
between Debenture Mortgagees and Mortgagor will be a waiver of any of Debenture
Mortgagees' rights or remedies hereunder or under applicable law. No waiver,
change or modification in whole or in part of this instrument or any other
written instrument will be effective unless in a writing signed by Debenture
Mortgagees.
Section 9.11 Debenture Mortgagees's Expenses. Mortgagor agrees to pay in
full all expenses and reasonable attorneys' fees of Debenture Mortgagees which
may have been or may be incurred by Debenture Mortgagees in connection with the
collection of the Obligations and the enforcement of any of Mortgagor's
obligations hereunder and under any documents executed in connection with the
Obligations.
Section 9.12 Partial Releases. In the event Mortgagor sells for monetary
consideration or otherwise any portion of the Oil and Gas Property, Debenture
Mortgagees shall release the lien of this instrument with respect to the portion
sold, at the request of Mortgagor. No release from the lien of this instrument
of any part of the Collateral by Debenture Mortgagees shall in anyways alter,
vary or diminish the force, effect or lien of this instrument on the balance or
remainder of the Collateral.
Section 9.13 Notice. All notices and deliveries of information hereunder
shall be deemed to have been duly given if to the Debenture Mortgagees at the
addresses of the holders of the Debentures set forth on Exhibit B or at such
subsequent addresses as may be furnished to Mortgagor in writing by any holder
of a Debenture. Notwithstanding the provisions of Section 5.4 and Articles 6 and
7 wherein Debenture Mortgagees is authorized to exercise certain rights or take
certain actions without notice to Mortgagor, Debenture Mortgagees agrees to use
reasonable efforts to give Mortgagor prior notice of any such exercise of rights
or action. It is expressly agreed, however, that any failure by Debenture
Mortgagees to use reasonable efforts to give Mortgagor prior notice of an
exercise of rights or action shall not invalidate or preclude such exercise of
rights or action, but shall merely entitle the Mortgagor to recover from
Debenture Mortgagees any actual damages suffered by Mortgagor as the proximate
and direct result of such failure by Debenture Mortgagees.
- 18 -
<PAGE>
Section 9.14 Successors. This instrument shall bind and inure to the
benefit of the respective successors and assigns of the parties.
Section 9.15 Interpretation.
(a) Article and section headings used in this instrument are intended
for convenience only and shall be given no significance whatever in
interpreting and construing the provisions of this instrument.
(b) As used in this instrument, "Debenture Mortgagees" and "Mortgagor"
include their respective successors and assigns. Unless context otherwise
requires, words in the singular number include the plural and in the plural
number include the singular. Words of the masculine gender include the
feminine and neuter gender and words of the neuter gender may refer to any
gender.
Section 9.16 Inconsistencies with Related Documents. To the extent, if any,
the provisions hereof are inconsistent with the provisions of the Debentures,
such inconsistencies shall be resolved by giving controlling effect to the
Debentures.
Section 9.17 Counterparts. This instrument may be executed in any number of
counterparts, each of which will for all purposes be deemed to be an original,
and all of which are identical except that to facilitate recordation, in
particular counterparts hereof used for recordation, portions of Exhibit A
hereto which describe properties situated in counties other than the county in
which the counterpart is to be recorded have been omitted.
Executed as of the Effective Date.
MORTGAGOR:
ATTEST PEASE OIL AND GAS COMPANY
By
- ------------------------------------- ---------------------------------
Secretary Willard H. Pease, Jr., President
- 19 -
<PAGE>
DEBENTURE MORTGAGES:
By: PEASE OIL AND GAS COMPANY
By
---------------------------------
Willard H. Pease, Jr.,
as attorney-in-fact on behalf of
all holders of Debentures as
identified on Exhibit B.
STATE OF COLORADO )
) ss.
COUNTY OF MESA )
The foregoing instrument was acknowledged before me this ____ day of
___________, 1996, by Willard H. Pease, Jr. as President of Pease Oil and Gas
Company, a Nevada corporation.
Witness my hand and official seal.
My commission expires:
S E A L
--------------------------------------
Notary Public
- 20 -
<PAGE>
EXHIBIT B
Holders of 1996 10% Collateralized Subordinated Convertible Debentures of
Pease Oil and Gas Company (herein referred to as "Debenture Mortgagees"):
Name and Address of Holders Principal Amount of Debenture
--------------------------- -----------------------------
- 21 -
CONSENT OF McCARTNEY ENGINEERING, LLC
As Oil and gas consultants, McCartney Engineering, LLC hereby consents to: (a)
the use of our reserve report dated February 17, 1997 entitled "Pease Oil and
Gas Company's Estimated Remaining Reserves and Future Net Revenue Pursuant to
SEC Guidelines as of December 31, 1996"; (b) all references to our firm included
in or made a part of Pease Oil and Gas Company's Annual Report on Form 1O-KSB to
be filed with the Securities and Exchange Commission on or about March 27,1997;
and (c) the incorporation by reference of the said Form 10-KSB with and into
Registration Statements 33-44536 dated July 24, 1996 and 333-19589 dated
February 10, 1997.
/s/ Jack A. McCartney, Manager
-----------------------------------
McCARTNEY ENGINEERING, LLC
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT'S CONSENT
We consent to the incorporation by reference in the Registration Statements of
Pease Oil and Gas Company on Form S-3 (SEC File Nos. 33-94536 with an effective
date of July 24, 1996, and 333-19589 with an effective date of February 10,
1997) of our report dated February 21, 1997 on our audits of the consolidated
statements of Pease Oil and Gas Company as of December 31, 1996, and for the
years ended December 31, 1996 and 1995, which report is included in the Annual
Report of Pease Oil and Gas Company on Form 10-KSB.
/s/ Hein + Associates LLP
HEIN + ASSOCIATES LLP
Denver, Colorado
March 26, 1997
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,995,860
<SECURITIES> 0
<RECEIVABLES> 624,948
<ALLOWANCES> 25,000
<INVENTORY> 408,787
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0
1,799
<COMMON> 752,682
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<TOTAL-LIABILITY-AND-EQUITY> 14,901,149
<SALES> 6,050,636
<TOTAL-REVENUES> 6,165,664
<CGS> 4,189,850
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<OTHER-EXPENSES> 2,960,865
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 502,428
<INCOME-PRETAX> (1,452,991)
<INCOME-TAX> (41,409)
<INCOME-CONTINUING> (1,411,582)
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<NET-INCOME> (1,614,270)
<EPS-PRIMARY> (0.22)
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