U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
Commission File Number 0-6580
[GRAPHIC OMITTED]
PEASE OIL AND GAS COMPANY
(Exact 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)
(970) 245-5917
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
As of August 14, 1998 the registrant had 15,884,776 shares of its $0.10
par value Common Stock issued and outstanding.
Transitional Small Business Issuer Disclosure Format (check one): Yes ____ No X
- -------------------------------------------------------------------------------
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<PAGE>
TABLE OF CONTENTS
PAGE
NUMBER
PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1998 (unaudited) and December 31, 1997. . . . . . 3
Consolidated Statements of Operations (unaudited)
For the Three and Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (unaudited)
For the Three and Six Months Ended June 30, 1998 and 1997 . . . 5-6
Notes to Consolidated Financial Statements . . . . . . . . . . . .. 7
Item 2. Management's Discussion and Analysis . . . . . . . . . . . . . 8
Liquidity, Capital Expenditures and Capital Resources . . . . . . 8
Results of Operations . . . . . . . . . . . . . . . . . . . . . . 10.
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Change in Accounting Principle . . . . . . . . . . . . . . 10.
Assets Held For Sale. . . . . . . . . . . . . . . . . . . ..11
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . ..11
Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . . ..12
Gas Plant Processing . . . . . . . . . . . . . . . . . . . . ..13
Oil Field Services and Oil Field Supply . . . . . . . . . . . ..14
Well Administration and Other Income . . . . . . . . . . . . . 14.
Consulting Arrangement - Related Party . . . . . . . . . . . . 14.
General and Administrative . . . . . . . . . . . . . . . . . ..14
Depreciation, Depletion and Amortization . . . . . . . . . . ..15
Interest Expense . . . . . . . . . . . . . . . . . . . . . . 15.
Impairment Expense - Oil and Gas Properties. . . . . . . . 15.
Dividends and Net Loss Per Common Share. . . . . . . . . . 16
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 16.
Recently Issued Financial Accounting Standards. . . . . . ..16
Disclosure Regarding Forward-Looking Statements. . . . . . 17
Year 2000 Issue . . . . . . . . . . . . . . . . . . . . . ..17
PART II - Other Information . . . . . . . . . . . . . . . . . . . . . . . . .18
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 18.
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . 18.
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 18.
Item 4. Submission of Matters to a Vote of Security Holders . . . 19
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 19.
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . ..20
PART III - Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.
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<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents .............................. $ 1,970,837 $ 6,547,804
Trade receivables ................................. 496,339 757,434
Prepaid expenses and other ........................ 100,690 43,979
------------ ------------
Total current assets ......................... 2,567,866 7,349,217
------------ ------------
ASSETS HELD FOR SALE ................................. 3,385,455 4,048,000
------------ ------------
OIL AND GAS PROPERTIES, at cost (full cost method):
Unevaluated properties ............................ 6,578,604 4,522,917
Costs being amortized ............................. 11,463,014 9,424,932
------------ ------------
Total oil and gas properties ................. 18,041,618 13,947,849
Less accumulated amortization and impairment ...... (5,943,910) (4,965,232)
------------ ------------
Net oil and gas properties ................... 12,097,708 8,982,617
------------ ------------
OTHER ASSETS:
Debt issuance costs, net .......................... 562,115 664,318
Deposits and other ................................ 190,512 167,493
Office equipment and vehicles, net ................ 82,266 82,498
------------ ------------
Total other assets ......................... 834,893 914,309
------------ ------------
TOTAL ASSETS ......................................... $ 18,885,922 $ 21,294,143
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade ........................... $ 456,636 $ 1,500,239
Accrued production taxes .......................... 239,025 204,108
Other accrued expenses ............................ 413,762 349,396
------------ ------------
Total current liabilities ................... 1,109,423 2,053,743
------------ ------------
LONG-TERM LIABILITIES:
Convertible debentures, net of discount (Note 3) .. 3,084,595 2,922,703
Accrued production taxes .......................... 84,018 226,019
------------ ------------
Total long-term liabilities .................. 3,168,613 3,148,722
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.01 per share, 2,000,000 shares
authorized,112,836 and 113,333 shares of Series B 5% PIK Cumulative
Convertible Preferred Stock issued and outstanding, respectively
(liquidation preference of $5,641,800 at June 30, 1998) 1,128 1,133
Common Stock, par value $0.10 per share, 40,000,000
shares authorized, 15,821,232 and 15,789,955 shares
issued and outstanding, respectively ................ 1,582,124 1,578,996
Additional paid-in capital .............................. 36,731,852 36,875,394
Accumulated deficit ..................................... (23,707,218) (22,363,845)
------------ ------------
Total stockholders' equity ........................ 14,607,886 16,091,678
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................. $ 18,885,922 $ 21,294,143
============ ============
</TABLE>
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30,
------------------------- -----------------------
1998 1997 1998 1997
---------- ------------ ------------- -----------
(Note 2) (Note 2)
REVENUE:
<S> <C> <C> <C> <C>
Oil and gas sales ......................... $ 655,660 $ 670,373 $ 1,247,268 $ 1,459,579
Gas plant processing ...................... 88,408 162,346 179,527 371,856
Oil field services and supply ............. 63,687 145,893 217,836 344,212
Well administration and other income ...... 2,870 17,099 18,524 38,904
------------ ------------ ------------ ------------
Total revenue ........................ 810,625 995,711 1,663,155 2,214,551
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Oil and gas production .................... 389,467 405,677 710,107 734,496
Gas plant ................................. 93,335 99,461 175,148 204,299
Oil field services and supply ............. 83,939 139,475 223,865 293,133
Consulting agreement-related party ........ 62,549 97,795 125,461 181,178
General and administrative ................ 269,231 380,730 526,886 706,179
Depreciation, depletion and amortization .. 398,994 508,506 752,131 975,112
Impairment expense - oil & gas properties . 161,000 768,400 639,043 2,389,932
------------ ------------ ------------ ------------
Total operating costs and expenses 1,458,515 2,400,044 3,152,641 5,484,329
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ......................... (647,890) (1,404,333) (1,489,486) (3,269,778)
OTHER INCOME (EXPENSES):
Interest income ........................... 79,156 45,054 146,170 63,113
Gain (Loss) on Sale of Assets ............. 457 (8,547) 457 (6,191)
Interest expense .......................... (269) (186,539) (516) (402,012)
------------ ------------ ------------ ------------
NET LOSS ..................................... $ (568,546) $ (1,554,365) $ (1,343,375) $ (3,614,868)
============ ============ ============ ============
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS .............................. $ (949,587) $ (1,599,349) $ (2,577,755) $ (3,704,837)
============ ============ ============ ============
NET LOSS PER COMMON SHARE .................... $ (0.06) $ (0.13) $ (0.16) $ (0.34)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ................. 15,805,000 12,622,000 15,798,000 10,781,000
============ ============ ============ ============
</TABLE>
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For The Six Months
Ended June 30,
1998 1997
(Note 2)
<S> <C> <C>
Net loss ...................................................$1,343,375) $ (3,614,868)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation, depletion and amortization .......... 752,131 975,112
Impairment expense ................................ 639,043 2,389,932
Amortization of debt discount and issuance costs .. -- 225,393
(Gain) Loss on sale of assets ..................... (497) 6,191
Issuance of common stock for services ............. -- 10,155
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade receivables ..................... 261,095 113,379
Inventory ............................. 55,270 (6,639)
Prepaid expenses and other assets ..... (79,730) (30,548)
Increase (decrease) in:
Accounts payable ...................... (67,853) (62,128)
Accrued expenses ...................... (142,063) (130,686)
----------- -----------
Net cash provided by (used in) operating activities 74,021 (124,707)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant and equipment .....(5,417,691) (4,886,199)
Proceeds from sale of property and equipment ............... 987,150 49,811
Proceeds from redemption of certificate of deposit ......... -- 17,500
----------- -----------
Net cash provided by (used in) investing activities .....(4,430,541) (4,818,888)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants ......................... 939 3,608,525
Proceeds from sale of common stock ......................... -- 3,880,000
Offering costs ............................................. (146,765) (687,391)
Repayment of long-term debt ................................ (3,788) (323,821)
Payment of Preferred Stock dividends ....................... (70,833) --
----------- -----------
Net cash provided by (used in) financing activities ..... (220,447) 6,477,313
----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS ..................(4,576,967) 1,533,718
CASH AND EQUIVALENTS, beginning of period .................... 6,547,804 1,995,860
----------- -----------
CASH AND EQUIVALENTS, end of period .......................... 1,970,837 $ 3,529,578
----------- -----------
</TABLE>
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
For The Six Months
Ended June 30,
1998 1997
------------ ----------
(Note 2)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest (net of amount capitalized)$ 516 $ 220,611
=========== =============
Cash paid for income taxes $ - $ -
=========== ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of long-term debt, net of discount,
to common stock $ - $ 553,374
Debt incurred for purchase of vehicles 32,610 29,582
Increase (decrease) in accounts payable for
oil and gas exploration activities (828,984) 418,820
Issuance of common stock for oil and gas properties - 875,000
Capitalized portion of amortized debt discount and
issuance costs 264,094 82,451
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. They do not include all information and notes required by
generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there has been no material change in the
information disclosed in the notes to consolidated financial statements included
in the Annual Report on Form 10-KSB of Pease Oil and Gas Company (the Company)
for the year ended December 31, 1997. In the opinion of Management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the periods
presented are not necessarily indicative of the results that may be expected for
the full year.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's financial statements in Form 10-KSB for the year ended December 31,
1997. It is suggested that these financial statements be read in conjunction
with the financial statements and notes included in the Form 10-KSB.
Note 2 - Change In Accounting Principle:
As more thoroughly discussed in the Company's 1997 Annual Report on Form 10-KSB,
the Company changed its method of accounting for oil and gas producing
activities from the successful efforts method to the full cost method during the
fourth quarter of 1997. The 1997 financial statements presented herein have been
restated to reflect the change. As a result of the change in accounting method,
the net loss applicable to common shareholders increased in 1997 as follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, 1997 Ended June 30, 1997
Description ...................................... Net Loss Per Share Net Loss Per Share
<S> <C> <C> <C> <C>
As Previously Reported Under Successful Efforts . $ (764,248) $ (0.06) $(1,419,633) $ (0.13)
As Reported under Full Cost ..................... (1,599,349) (0.13) (3,704,837) (0.34)
--------------- ----- ----------- -----
Increase in Net Loss under Full Cost ...... $ (835,101) $ (0.07) $(2,285,204) $ (0.21)
=============== ===== =========== =====
</TABLE>
Note 3 - Long Term Debt:
Long-term debt at June 30, 1998 and December 31, 1997 consisted of the
following:
Dec. 31, 1997 June 30, 1998
----------- -----------
Convertible debentures, interest at 10%
collateralized by certain oil and gas properties,
due April 2001 ................................... $ 3,975,000 $ 3,975,000
Less unamortized discount ........................... (1,052,297) (890,405)
----------- -----------
Net carrying value ......................... $ 2,922,703 $ 3,084,595
=========== ===========
As more thoroughly discussed in the Company's 1997 Annual Report on Form 10-KSB,
the Company initiated a private placement in April 1996 to sell up to $5,000,000
of collateralized convertible debentures in the form of "Units". Each Unit
consisted of one $50,000 five-year 10% collateralized convertible debenture and
detachable warrants to purchase 25,000 shares of the Company's common stock at
$1.25 per share. 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 estimated fair value of the detachable warrants of $1,829,000
was treated as a discount and is bring amortized using the interest method. The
debentures are collateralized by a first priority interest in certain Rocky
Mountain oil and gas properties owned and operated by the Company. During 1997,
$1,025,000 of the debentures converted into common stock pursuant to the terms
of the debenture agreement.
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<PAGE>
Note 4 - Dividends and Net Loss Per Common Share:
Net loss per common share is computed by dividing the net loss applicable to
common stockholders 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 antidilutive.
The net loss applicable to common stockholders is determined by adding any
dividends accruing to the benefit of the preferred stockholders to the net loss.
The dividends included for this calculation include: 1) paid dividends; 2)
accrued but unpaid dividends; and 3) any imputed dividends attributable to the
beneficial conversion feature. During 1997, the net loss applicable to common
stockholders includes $89,969 for the six months ended and $44,984 for the three
months ended, respectively, of accrued but unpaid dividends related to the
Series A Preferred Stock. The Series A Preferred Stock automatically converted
into common on June 11, 1997. During 1998, the net loss applicable to common
stockholders includes the following charges associated with the Series B
Preferred Stock that was issued on December 31, 1997:
For the Period Ended June 30, 1998
Three Months Six Months
Dividends declared $ 70,523 $ 141,356
Imputed non-cash dividend 310,518 1,093,024
---------- ------------
Total $ 381,041 $ 1,234,380
========== ===========
The Series B Preferred Stock became convertible into common stock on April 1,
1998 at a conversion price equal to a 12% discount to the average trading price
of the common stock prior to conversion. This discount increases monthly through
March 1999 when the discount tops out at 25% (this discount is considered a
"beneficial conversion feature"). The additional non-cash imputed dividend
charge included in the net loss applicable to common stockholders represents the
intrinsic value of the discount applicable through June 30, 1998. As long as any
Series B Preferred Stock is outstanding, additional non-cash imputed dividend
charges will be incurred in future periods as the conversion discount increases
until the discount tops out at 25%.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity, Capital Expenditures and Capital Resources
At June 30, 1998, the Company's cash balance was $1,970,837 with a positive
working capital position of $1,458,443, compared to a cash balance of $6,547,804
and a positive working capital position of $5,295,474 at December 31, 1997. The
change in the Company's cash balance is summarized as follows:
Cash balance at December 31, 1997 ........................ $ 6,547,804
Sources of Cash:
Cash provided by operating activities ................. 74,021
Proceeds from the sale of property and equipment ...... 987,150
Proceeds from the exercise of common warrants ......... 939
-----------
Total Sources of Cash ........................... 1,062,110
-----------
Uses of Cash:
Exploration Activities - Gulf Coast ................... (5,398,813)
Offering Costs associated with Series B Preferred Stock (146,765)
Dividends Paid on Series B Preferred Stock ............ (70,833)
Other Capital Expenditures ............................ (18,878)
Payments on long term debt ............................ (3,788)
-----------
Total uses of cash .............................. (5,639,077)
Cash balance at June 30, 1998 ............................ $ 1,970,837
As noted, most of the Company's uses of cash were deployed in exploration
activities in the Gulf Coast. The costs incurred in 1998 are summarized as
follows (the difference between the total incurred, as illustrated in the
following table, and the total amount paid in 1998, relates to the changes in
accounts payable at December 31, 1997 and June 30, 1998 as well as amounts
capitalized for interest and the loss on sale of oil and gas properties in the
full cost pool):
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<PAGE>
<TABLE>
<CAPTION>
PROGRAM OPERATOR
Category ............ NEGX Parallel AHC Other Total %
- ----------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Successful Efforts .............. $ 27,916 $ -- $ 435,640 $ -- $ 463,556 9%
Exploratory Dry Holes ........... 1,049,933 165,522 -- -- 1,215,455 24%
Land, G&G-Seismic Programs ...... 1,228,510 1,284,149 81,565 570,541 3,164,765 63%
Other Exploration Costs ......... 128,785 -- -- 84,786 213,571 4%
---------- ---------- ---------- ----------
Total Exploration Costs .. $2,435,144 $1,449,671 $ 517,205 $ 655,327 $5,057,347 100%
========== ========== ========== ========== ========== ==========
Percent .................. 48% 29% 10% 13% 100%
========== ========== ========== ========== ==========
</TABLE>
The anticipated capital requirements for 1998 related to the Company's Gulf
Coast exploration program are more thoroughly discussed in the Company's 1997
Annual Report on Form 10-KSB. The only significant change in the Company's
capital requirements as discussed in the 10-KSB relate to the termination of the
Exploration Agreement with National Energy Group, Inc. ("NEGX") in May 1998.
That agreement established a commitment up to $5 million on what the Company
believes are higher risk wildcat projects. The Company negotiated out of this
agreement in order to reduce this year's capital budget and focus on lower risk
projects. The Company did, however, retain its interest in the E. Bayou Sorrel
prospect. Therefore, under the existing commitments, the Company's anticipated
capital requirements to meet expected drilling and development costs will be
approximately $2.65 million for the remainder of 1998 and approximately $4.2
million for 1999.
As previously discussed in the Company's 1997 10-KSB, the Company's current and
anticipated cash position will be insufficient to cover the future working
capital and exploration obligations. The Company's current working capital
position should meet its exploration obligations through at least October 1998.
The Company has vigorously explored various alternatives for additional sources
of capital including additional debt or equity financings and the sale of
certain existing assets. However, with the hyper-dilutive potential of the
outstanding Series B Preferred Stock (should the holders elect to convert into
common stock), the Company has been unable to attract any additional equity
capital during 1998. For example, using the Company's common stock price on
August 14, 1998 of $0.375, and applying the applicable discount of 18%, should
all the holders of the Series B Preferred Stock elect to convert into common
stock, approximately 18.3 million shares would be issued in the conversion. This
would represent approximately 54% of the then outstanding common shares. In
addition, the continuing collapse of the oil and gas commodities markets have
significantly impaired the marketability and value of the Company's existing
assets. Therefore, it cannot be determined at this time, what alternatives for
future working capital may be available, nor to what extent the potential
dilution to the existing shareholders may be. If additional sources of financing
are not ultimately available, the Company may have to consider other
alternatives, including a merger, cancellation of existing exploration
agreements, farmouts, joint ventures, restructuring under the protection of the
Federal Bankruptcy Laws and/or liquidation.
As also discussed in the 1997 10-KSB, the Company has been attempting to sell or
otherwise monitize its Rocky Mountain assets since the fourth quarter of 1997.
In May, 1998, the Company sold all of its Utah properties for $230,000 to a
former officer of the Company. These properties represented approximately 16% of
the Company's proved Rocky Mountain oil and gas reserves at December 31, 1997.
In addition, the Company is currently under contract to sell its gas plant,
service and supply assets as well as all of the oil and gas properties in
Larimer and Weld Counties, Colorado (which constituted approximately 60% of all
of the Company's Rocky Mountain proved oil and gas reserves at December 31,
1997) for a total price of $2.1 million. Should the sale close, the effective
date will be August 1, 1998. However, the Company's obligations under its
outstanding 10% Collateralized Convertible Debentures (the "Convertible
Debentures") in the principal amount of $3.975 million, together with interest
thereon, is secured by a first priority security interest in all of the oil and
gas reserves currently under contract. Therefore, to complete the sale, the
Company must receive written approval of at least two-thirds of the outstanding
Convertible Debentures to release the collateralized oil and gas properties.
Although the approval process is underway, the Company cannot determine if the
security interest will ultimately be released by the debenture holders. If the
collateral release cannot be obtained in a timely manner, it is likely the
contemplated sale will fall through and the Company may remove the oil and gas
assets from the market. Under this scenario, the gas plant, service and supply
assets would probably continue to be marketed and held for sale since they are
not subject to the security interest. No amounts from the Rocky Mountain assets
have been included as a current asset since the timing of any sale and the
proceeds thereof are uncertain at this time.
The Company's common stock is traded on the Nasdaq SmallCap electronic market
system under the symbol "WPOG". Nasdaq requires that a company listed on the
SmallCap market must maintain an average bid price of at least $1.00 per share
to keep its listing. The Company's stock does not presently trade for $1.00 per
share or above, and on July 2, 1998, the Nasdaq notified the Company that the
stock will be delisted October 2, 1998 unless the market price is $1.00 per
share or greater prior to that date. Should the Company's shares no longer be
traded on the Nasdaq SmallCap Electronic Market System, the Company's common
stock would be traded in the over-the-counter market on the NASD Bulletin Board
or on the "pink sheets". Should the Company lose its listing on the Nasdaq
SmallCap electronic market system, it will have a material negative impact on
the Company's ability to raise additional equity capital. In addition, it may
impair the ability for a stockholder to liquidate any holdings. It has not been
determined at this time whether or not the Company will affect a reverse stock
split (by a Board of Directors resolution) in order to attempt to meet Nasdaq's
SmallCap listing requirements.
The Company has also been notified by Nasdaq that its publicly traded warrants,
which expire August 13, 1999 and are traded on the SmallCap market under the
symbol WPOGW, will be delisted as of October 30, 1998 because fewer than two
market makers presently make a market in the warrants.
In July 1998, the Company initiated several steps to improve the corporate
governance and direction of the Company. First, the Board of Directors
established an Executive Committee whose purpose is to formulate and implement
recommendations, strategies and actions which are intended to support and
protect shareholder value. Essentially, the Executive Committee will
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<PAGE>
manage the day-to-day activities of the Company and has broad power and
authority to act in the absence of the full Board of Directors.
Secondly, Mr. William F. Warnick replaced Willard H. Pease, Jr. as Chairman of
the Board. Mr. Warnick is an outside Director, a practicing attorney in Lubbock,
Texas, and also serves as the Texas Attorney General's appointee to the Texas
School Board Land Commission. Mr. Warnick has also served in numerous management
positions of private oil and gas companies. Mr. Warnick received both a B.A. in
finance in 1968 and a J.D. degree in 1971.
Thirdly, the Company announced the addition of Mr. F.A. (Allan) Wise to the
Board of Directors. Mr. Wise has been professionally engaged in the oil and gas
business for 30 years, having worked 7 years for Shell Oil Company as a
petroleum engineer and 9 years for Petro-Lewis Corporation where he served in
various capacities, including Vice President of Drilling and Production, Vice
President of the Gulf Coast Region and Vice President of Acquisitions. Since
1987, Mr. Wise has been co-owner of Wise and Treece Petroleum Management, inc.,
a petroleum engineering, land and management consulting firm. Mr. Wise, through
the consulting firm, serves the oil and gas industry by providing a wide range
of technical and management economic analysis and modeling of exploration plays
and the resulting development drilling; acquisition and financing of oil and gas
plays and properties; financial modeling of oil and gas investment structures;
supervision of oil and gas field development, drilling and petroleum engineering
and management consulting.
The Executive Committee is comprised of four voting members: Patrick J. Duncan,
the Company's CFO, Steve Antry, a Director and consultant to the Company,
William F. Warnick and F. A. Wise, and one non-voting member, Willard H. Pease,
Jr., the Company's president. The Board of Directors implemented these changes
to enhance the decision making processes in all aspects of the Company's
business. The Executive Committee is diligently working on a resolution to the
Company's financing needs. However, the outcome is unknown at this time.
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. Accordingly, 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.
Change In Accounting Principle
As more thoroughly discussed in the Company's Annual Report on Form 10-KSB, the
Company changed its method of accounting for oil and gas producing activities
from the successful efforts method to the full cost method. The 1997 financial
statements presented herein have been restated to reflect the change. As a
result of the change in accounting method, the net loss applicable to common
shareholders increased in 1997 as follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, 1997 Ended June 30, 1997
Description ........................................ Amount Per Share Amount Per Share
<S> <C> <C> <C> <C>
As Previously Reported Under Successful Efforts .... $(764,248) $ (0.06) $(1,419,633) $ (0.13)
As Reported under Full Cost ........................ (1,599,349) (0.13) (3,704,837) (0.34)
---------- ----- ----------- -----
Increase in Net Loss under Full Cost ......... $(835,101) $ (0.07) $(2,285,204) $ (0.21)
========== ===== =========== =====
</TABLE>
The majority of the increased loss in 1997 is recognized in the financial
statements under the caption "Impairment Expense" which is discussed later in
this section.
Management believes the full cost method of accounting is preferable because it
will most accurately reflect the results of the Company's future operations. In
connection with the Company's change in strategy from primarily an acquisition
and production company to an exploration and production company, it is now
focusing its efforts in the Gulf Coast region of the United States. The Company
seeks to allocate its capital resources over a diversified portfolio of
exploration and development projects within that area. It seeks to achieve a
balance between the risks of exploratory drilling and the return on investment
-9-
<PAGE>
by investing in projects with large potential. Dry holes, abandoned properties
and seismic projects are an inherent part of the exploration process. However,
management believes that it is through disciplined, consistent application of
this balanced portfolio strategy that the desired return on its entire
investment will be achieved. Management believes that the full cost method of
accounting is the method used by many independent oil and gas companies of
comparable size to the Company and allows investors to better measure the
performance of the Company. Management further believes that advanced three
dimensional seismic and computer-aided exploration technology has become a much
more significant factor in the success of an exploration program than in the
past. Management believes that expensing these costs when incurred, as is
required under successful efforts, is inconsistent with the value they add to
the exploration process.
Assets Held For Sale
During the fourth quarter of 1997, the Company's Board of Directors determined
that the Company's long-term strategy has shifted to exploration and development
activities in the Gulf Coast region and that the Rocky Mountain assets should
ultimately be divested. If and when these assets are sold, the revenue, costs,
operating margins and cash flows currently generated and discussed under the
captions "Gas Plant Processing", "Oil Field Services and Supply", "Well
Administration and Other Income" would no longer be part of the Company's
operations. Since these assets include a significant portion of the Company's
current operations, the sale of these assets, when and if it occurs, will have
an immediate and material negative impact on the Company's future cash flows and
results of operations.
Total Revenue
Total Revenue from all operations was as follows:
For the Three Months Ended June 30,
1998 1997
-------- --------
Amount % Amount %
Oil and gas sales ..................... $655,660 81% $670,373 67%
Gas plant processing .................. 88,408 11% 162,346 16%
Oil field services and supply ......... 63,687 7% 145,893 15%
Well administration and other income .. 2,870 1% 17,099 2%
-------- ------ -------- ------
Total revenue .................... $810,625 100% $995,711 100%
======== ====== ======== ======
For the Six Months Ended June 30,
1998 1997
---------- ---------------
Amount % Amount %
Oil and gas sales .................... $1,247,268 75% $1,459,579 66%
Gas plant processing ................. 179,527 11% 371,856 17%
Oil field services and supply ........ 217,836 13% 344,212 15%
Well administration and other income . 18,524 1% 38,904 2%
--------- ----- ---------- -----
Total revenue ................... $1,663,155 100% $2,214,551 100%
========== ===== ========== =====
The decrease in total revenue, 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.
-10-
<PAGE>
Oil and Gas
Operating statistics for oil and gas production for the periods presented are as
follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------- -----------------------
1998 1997 1998 1997
----------- ---------- ---------- -------
Production:
Oil (Bbls)
<S> <C> <C> <C> <C>
Rocky Mtns ........... 16,186 20,092 34,981 40,070
Gulf Coast ........... 13,778 8,308 23,674 16,137
----------- ----------- ----------- -----------
Combined Total .. 29,964 28,400 58,655 56,207
=========== =========== =========== ===========
Gas (Mcf)
Rocky Mtns ........... 72,450 100,725 157,417 192,937
Gulf Coast ........... 76,357 11,375 107,312 18,238
----------- ----------- ----------- -----------
Combined Total . 148,807 112,100 264,729 211,175
=========== =========== =========== ===========
BOE (6:1)
Rocky Mtns ........... 28,261 36,880 61,217 72,226
Gulf Coast ........... 26,504 10,204 41,559 19,177
----------- ----------- ----------- -----------
Combined Total . 54,765 47,084 102,776 91,403
=========== =========== =========== ===========
Average Collected Price:
Oil (per Bbl)
Rocky Mtns ........... $ 11.92 $ 18.43 $ 12.73 $ 19.88
Gulf Coast ........... $ 13.47 $ 19.20 $ 14.02 20.01
----------- ----------- ----------- -----------
Combined Average $ 12.63 $ 18.66 $ 13.25 $ 19.92
=========== =========== =========== ===========
Gas (per Mcf)
Rocky Mtns .......... $ 1.45 $ 1.12 $ 1.44 $ 1.51
Gulf Coast .......... $ 2.26 $ 2.44 $ 2.26 2.71
----------- ----------- ----------- -----------
Combined Average $ 1.86 $ 1.25 $ 1.78 $ 1.61
=========== =========== =========== ===========
Per BOE (6:1)
Rocky Mtns .......... $ 10.54 $ 13.10 $ 10.99 $ 15.05
Gulf Coast .......... $ 13.50 $ 18.35 $ 13.82 19.42
----------- ----------- ----------- -----------
Combined Average $ 11.97 $ 14.24 $ 12.14 $ 15.97
=========== =========== =========== ===========
Operating Margins:
Rocky Mtns:
Revenue -
Rocky Mtns. - Oil $ 192,983 $ 370,392 $ 445,403 $ 796,731
Rocky Mtns. - Gas 104,823 112,779 227.461 290,496
----------- ----------- ----------- -----------
297,806 483,171 672,864 1,087,227
Cost ................. (287,993) (380,757) (580,698) (684,677)
----------- ----------- ----------- -----------
Operating Margin . $ 9,813 $ 102,414 $ 92,166 $ 402,550
=========== =========== =========== ===========
Operating Margin % 3% 21% 14% 37%
Gulf Coast:
Revenue -
Gulf Coast - Oil . $ 185,535 $ 159,492 $ 331,852 $ 322,910
Gulf Coast - Gas . 172,320 27,710 242,552 49,442
----------- ----------- ----------- -----------
357,855 187,202 574,404 372,352
Costs ................ (101,474) (24,920) (129,409) (49,819)
----------- ----------- ----------- -----------
Operating Margin . $ 256,381 $ 162,282 $ 444,995 $ 322,533
=========== =========== =========== ===========
Operating Margin % 72% 87% 77% 87%
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- -----------------------
1998 1997 1998 1997
----------- ---------- ---------- -------
Combined Totals:
<S> <C> <C> <C> <C>
Revenue .............. $ 655,660 $ 670,373 $ 1,247,268 $ 1,459,579
Costs ................ (389,467) (405,677) (710,107) (734,496)
----------- ----------- ----------- -----------
Operating Margin . $ 266,193 $ 264,696 $ 537,161 $ 725,083
=========== =========== =========== ===========
Operating Margin % 41% 39% 43% 50%
Production Costs per
BOE before DD&A:
Rocky Mtn Region ..... $ 10.19 $ 10.32 $ 9.49 $ 9.57
Gulf Coast Region .... 3.83 2.44 3.11 2.60
----------- ----------- ----------- -----------
Combined Average . $ 7.11 $ 8.62 $ 6.91 $ 8.03
=========== =========== =========== ===========
Change in Revenue
Attributable to:
Production ................. $ 48,622 $ 105,276
Price ...................... (63,334) (317,587)
----------- -----------
Total Decrease in Revenue ... $ (14,712) $ (212,311)
=========== ===========
</TABLE>
Even though the Company's total BOE production increased by 12.5%, the 15%
decrease in oil and gas revenue during the first half of 1998 when compared to
the first half of 1997 can be attributed to a substantial decrease in commodity
prices between the two periods. Approximately 50% of the decrease in oil and gas
production for the Rocky Mountain region can be attributed to the natural
decline in production that is inherent in oil and gas wells and the other 50%
can be attributed to the sale of the Company's Utah properties in May 1998 (that
sale had an effective date of April 1, 1998). The increase in oil and gas
production for the Gulf Coast region can be attributed to the 1997 discoveries.
Gas Plant Processing
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:
<TABLE>
For the Three Months For the Six Months
<CAPTION>
Ended June 30, Ended June 30,
------------------------ -------------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
Production:
<S> <C> <C> <C> <C>
Natural Gas Processed (Inlet Mcf) .......... 82,594 85,312 155,240 164,242
Liquids Produced -
B-G Mix (gallons) ................. 183,726 204,100 337,806 396,200
Propane (gallons) ................. 140,681 162,300 274,691 321,400
--------- --------- --------- ---------
Total liquids produced .... 324,407 366,400 612,497 717,600
========= ========= ========= =========
Total Liquids produced per Inlet Mcf ("GPM") 3.93 4.29 3.95 4.37
========= ========= ========= =========
Average Sales Price of Liquids (per gallon) $ 0.28 $ 0.44 $ 0.30 $ 0.52
========= ========= ========= =========
Gross Margin: ................................ Amount Amount Amount Amount
--------- --------- --------- ---------
Revenue .................................... $ 88,408 $ 162,346 $ 179,527 $ 371,856
Costs ...................................... (93,335) (99,461) (175,148) (204,299)
--------- --------- --------- ---------
Gross Margin ........................ $ (4,927) $ 62,885 $ 4,379 $ 167,557
========= ========= ========= =========
Gross Margin Percent ................ (6%) 39% 2% 45%
</TABLE>
-12-
<PAGE>
The decrease in natural gas processing volumes (per Mcf) during 1998 when
compared to 1997, can be substantially attributed to the normal decline in
production from the two fields owned and operated by the Company that supply the
gas plant with natural gas. The decrease in revenue in 1998 when compared to
1997 is a direct result of: 1.) the volume of natural gas processed; 2.) the
substantial decrease in liquid prices; and 3.) the gas plant encountered several
operational problems during 1998 that forced the plant to flare a significant
amount of unprocessed gas (thus lowering the GPM).
Costs associated with the Gas Plant operations consist of both semi-fixed and
variable costs. The semi-fixed costs consist of direct payroll, utilities,
operating supplies, general and administrative costs, and other items necessary
in the day-to-day operations. The semi-fixed costs are not expected to change
significantly regardless of the volume processed by the Gas Plant. The variable
costs consist primarily of purchased gas, plant fuel and shrink, lubricants,
repair and maintenance. 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.
In response to the decreasing margins and operational problems encountered at
the gas plant, the Company negotiated and entered into a third-party processing
agreement in August 1998. Accordingly, it is expected that by the end of
September 1998, the Company's gas plant facility will be shut down and the gas
currently processed will be sold to a third party. The Company believes it will
generate better cash flows under a third-party processing arrangement than it
has in the past using its own facility. At this time the Company does not
believe there is any significant liability for dismantlement or environmental
restoration of the existing gas plant facility (net of salvage) and the costs of
implementing the third-party processing agreement are expected to be less than
$30,000 (which will be paid out of existing working capital).
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:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------- ------------------------
1998 1997 1998 1997
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue $ 63,687 $ 145,893 $ 217,836 $ 344,212
Costs (83,939) (139,475) (223,865) (293,133)
----------- ------------ ----------- ------------
Net Operating Income $ (20,252) $ 6,418 $ (6,029) $ 51,079
=========== ============ ============ ===========
</TABLE>
Total revenue, and the net operating income decreased in 1998, when compared to
1997 as a result of less work generated from the Company's supply store and hot
oil services. This is a result of the Company's supply store manager and hot oil
truck pusher resigning in light of the anticipated sale of the Rocky Mountain
assets and taking a portion of the Company's business with them.
Well Administration and Other Income
The decrease in well administration and other income is a direct result of the
Company selling its Utah oil and gas properties effective April 1, 1998. These
properties generated most of this revenue.
Consulting Arrangement - Related Party
In March 1996 the Company entered into a three-year consulting agreement with
Beta Capital Group, Inc. ("Beta"). Beta, located in Newport Beach, California,
specializes in emerging companies with both capital needs and market support
requirements. Beta's chairman, 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.
General and Administrative
The decrease in general and administrative ("G&A") expenses of approximately
$179,000 (or 25%) during the first half of 1998 when compared to the same period
in 1997 is summarized as follows:
$ 58,000 - Net reduction of payroll costs substantially attributed to the
elimination of two administrative positions(these positions
eliminated as a result of the anticipated sale of the Rocky
Mountain assets).
45,000 - Consulting services - related to Gulf Coast exploration.
32,000 - Travel and entertainment costs.
44,000 - All other, net.
$ 179,000
-13-
<PAGE>
Although the Company has and will take steps to reduce and monitor G&A costs,
there can be no assurance future G&A costs will be further reduced. Even if the
Rocky Mountain assets are ultimately sold, the Company does not expect any other
significant reductions in future G&A expenses, at least in the near term. This
is primarily due to any reductions that may be made due to the divestment will
likely be offset by additional administrative costs associated with the Gulf
Coast exploration activities.
Depreciation, Depletion and Amortization
Depreciation, Depletion and Amortization ("DD&A") for the periods presented by
cost center consisted of the following:
For the Three Months For the Six Months
Ended June 30 Ended June 30
--------------------- ------------------
1998 1997 1998 1997
--------- --------- -------- --------
Oil and Gas Properties - Rocky Mtns $ 83,162 $330,209 $186,081 $624,142
Oil and Gas Properties - Gulf Coast 205,469 60,020 339,636 111,333
Gas Plant Operations ............... 61,256 60,929 117,398 121,858
Service and Supply Operations ...... 35,880 33,465 83,697 70,027
Furniture and Fixtures ............. 13,227 12,384 25,319 24,754
Non-Compete Agreements ............. -- 11,499 -- 22,998
-------- -------- --------
Total .......................... $398,994 $508,506 $752,131 $975,112
======== ======== ======== ========
DD&A for the oil and gas properties, per BOE, for the periods presented is as
follows:
Rocky Mountains 2.94 8.95 3.04 8.30
Gulf Coast 7.75 5.88 8.17 5.81
Combined Total 5.27 8.29 5.12 8.05
DD&A for the oil and gas properties is computed based on one full cost pool
using the total estimated reserves at the end of each period presented and prior
to applying the ceiling test discussed later in this section under "Impairment
Expense". The estimated portion of DD&A for the Rocky Mountains and the Gulf
Coast are illustrated here for analysis purposes only. Therefore, the variances
in the DD&A rates for oil and gas properties (per BOE) for the periods presented
are a function of the estimated reserves (which are significantly affected by
the price of oil and gas) and the net costs being amortized at the end of the
respective reporting periods.
Interest Expense
Total interest incurred, and its allocation, for the periods presented is as
follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------- ---------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Interest paid or accrued .......... $ 99,372 $ 103,144 $ 197,633 $ 241,444
Amortization of debt discount ..... 80,946 61,942 161,892 119,106
Amortization of debt issuance costs 51,102 98,186 102,203 188,738
--------- --------- --------- ---------
Total interest incurred .. 231,420 263,272 461,728 549,288
Interest capitalized .............. (231,151) (76,733) (461,212) (147,276)
--------- --------- --------- ---------
Interest expense .... $ 269 $ 186,539 $ 516 $ 402,012
========= ========= ========= =========
</TABLE>
The lower interest incurred in 1998 is attributed to the face value of the
convertible debentures issued in 1996 decreased from an average balance of $4.83
million during the first half of 1997 to an average balance of $3.98 million
during 1998. The decrease in the average balance during the periods presented is
attributed to a portion of the convertible debentures converted into common
stock during 1997. More interest was capitalized in 1998 when compared to 1997
since the average amounts invested in unevaluated oil and gas properties was
substantially higher in 1998.
Impairment Expense - Oil and Gas Properties
As previously discussed, the Company changed its accounting method for oil and
gas activities from successful efforts to full cost during the fourth quarter of
1997. The full cost method regards all costs of acquisition, exploration, and
development activities as being necessary for the ultimate production of
reserves. All of those costs are incurred with the knowledge that
-14-
<PAGE>
many of them relate to activities that do not result directly in finding and
developing reserves. However, the Company expects that the benefits obtained
from the prospects that do prove successful, together with benefits from past
discoveries, will ultimately recover the costs of all activities, both
successful and unsuccessful. Thus, all costs incurred in those activities are
regarded as integral to the acquisition, discovery, and development of reserves
that ultimately result from the efforts as a whole and are thereby associated
with the Company's proved reserves. Establishing a direct cause-and-effect
relationship between costs incurred and specific reserves discovered, which is
the premise under successful efforts, is not relevant to the full cost concept.
In light of the transformation from Rocky Mountain acquisition and development
to Gulf Coast exploration, the Company believes this method will be a preferable
method of accounting. However, the costs accumulated in the Company's full cost
pool are subject to a "ceiling", as defined by Regulation SX Rule 4-10(e)(4). As
prescribed by the corresponding accounting standards for full cost, all the
accumulated costs in excess of the ceiling, are to be expensed by a charge to
impairment.
Accordingly, the impairment recognized in 1998 can be substantially attributed
to the costs incurred in connection with dry holes and a continuing
deterioration of commodity prices since December 31, 1997. The impairment
recognized during the first half of 1997 is associated with approximately
$370,000 in dry holes and $2.02 million associated with the cumulative effect of
the change in accounting methods from successful efforts to full cost. As
thoroughly discussed in the Company's 1997 10- KSB, the cumulative effect of the
accounting change retroactively increased the carrying value of the oil and gas
properties (which at the time consisted principally of the Rocky Mountain
properties). A significant drop in oil and gas prices between December 31, 1996
and June 30, 1997 substantially lowered the "ceiling" on the full cost pool and
the Company incurred the additional impairment charge.
Dividends and Net Loss Per Common Share
Net loss per common share is computed by dividing the net loss applicable to
common stockholders 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 antidilutive.
The net loss applicable to common stockholders is determined by adding any
dividends accruing to the benefit of the preferred stockholders to the net loss.
The dividends included for this calculation include: 1) paid dividends; 2)
accrued but unpaid dividends; and 3) any imputed dividends attributable to the
beneficial conversion feature. During 1997, the net loss applicable to common
stockholders includes $89,969 for the six months ended and $44,984 for the three
months ended, respectively, of accrued but unpaid dividends related to the
Series A Preferred Stock. The Series A Preferred Stock automatically converted
into common on June 11, 1997. During 1998, the net loss applicable to common
stockholders includes the following charges associated with the Series B
Preferred Stock that was issued on December 31, 1997:
For the Period Ended June 30, 1998
Three Months Six Months
Dividends declared $ 70,523 $ 141,356
Non-cash imputed dividend charge 310,51 1,093,024
-------- -----------
Total $ 381,041 $ 1,234,380
========= ===========
The Series B Preferred Stock became convertible into common stock on April 1,
1998 at a conversion price equal to a 12% discount to the average trading price
of the common stock prior to conversion. This discount increases monthly through
March 1999 when the discount tops out at 25% (this discount is considered a
"beneficial conversion feature"). The additional non-cash imputed dividend
charge included in the net loss applicable to common stockholders represents the
intrinsic value of the discount applicable through June 30, 1998. As long as any
Series B Preferred Stock is outstanding, additional non-cash imputed dividend
charges will be incurred in future periods as the conversion discount increases
until the discount tops out at 25%.
OTHER MATTERS
Recently Issued Financial Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards
for reporting and display of comprehensive income and its components. The
components of comprehensive income refer to revenues, expenses, gains and losses
that are excluded from net income under current accounting standards, including
foreign currency translation items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity
securities. SFAS 130 requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement
-15-
<PAGE>
displayed in equal prominence with the other financial statements; the total of
other comprehensive income for a period is required to be transferred to a
component of equity that is separately displayed in a statement of financial
position at the end of an accounting period. SFAS 130 is effective for both
interim and annual periods beginning after December 15, 1997. The Company does
not believe that this SFAS will have any significant impact on its financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way public enterprises are
to report information about operating segments in annual financial statements
and requires the reporting of selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for periods beginning after December 15, 1997.
The Company does not believe that this SFAS will currently result in any
significant new disclosures in its financial statements.
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 be
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 to
complete its planned drilling and exploration activities; 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 beyond the Company's control. In
addition, since all of the prospects in the Gulf Coast are currently operated by
another party, the Company may not be in a position to control costs, safety and
timeliness of work as well as other critical factors affecting a producing well
or exploration and development activities. 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.
Year 2000 Issue
The Company has begun to address possible remedial efforts in connection with
computer software that could be affected by the Year 2000 problem. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations. The
Company utilizes a number of computer programs across its entire operation. The
Company has not completed its assessment, but currently believes that the costs
of addressing this issue should not have a material adverse impact on the
Company's financial position. However, if the Company and third parties upon
which it relies are unable to satisfactorily address this issue in a timely
manner, it could result in a material financial risk to the Company. There can
be no assurances that Year 2000 problems will not occur with respect to the
Company's computer systems or business affiliations. The Year 2000 problem may
impact other entities with which the Company transacts business, and the Company
cannot predict the effect of the Year 2000 problem on such entities or the
Company.
-16-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract incidental to the operation of its business. The Company is
not currently involved in any such incidental litigation which it believes could
have a materially adverse effect on its financial condition or results of
operations.
Item 2. Changes in Securities
(a) and (b): not applicable
(c) Recent sales of unregistered securities. The Company issued and sold
the following securities without registration under the Securities Act
of 1933, as amended ("Securities Act"), during the first half of 1998
and through the date of this Report.
1. On February 2, 1998, the Company issued 1,250 shares of its
common stock upon exercise of outstanding stock purchase
warrants at $0.75 per share for total proceeds of $938 to the
Company. The Certificates representing the shares issued upon
exercise bear a restrictive legend prohibiting transfer
without registration under the Securities Act or the
availability of an exemption from registration and "stop
transfer" instructions have been issued to the transfer agent.
These warrants were issued in February 1996 in connection with
the Consulting Agreement entered into with Beta Capital Group,
Inc. The shares of common stock issued upon exercise of the
warrants were registered for resale by the holder in
Registration No. 333-19589.
2. On May 20, 1998 the Company issued 30,027 shares of its common
stock upon conversion of 497 shares of Series B Preferred
Stock. The Certificates representing the shares issued upon
conversion bear a restrictive legend prohibiting transfer
without registration under the Securities Act or the
availability of an exemption from registration. The shares
issued upon conversion were registered by the Company for
resale by the holders in Registration No. 333-44305. The
Company relied upon Section 3(a)(9) of the Securities Act of
1933, as amended, in claiming exemption from the registration
requirements of the Securities Act for issuance of the
securities upon conversion.
3. On July 17, 1998 the Company issued 63,544 shares of its
common stock upon conversion of 500 shares of Series B
Preferred Stock. The Certificates representing the shares
issued upon conversion bear a restrictive legend prohibiting
transfer without registration under the Securities Act or the
availability of an exemption from registration. The shares
issued upon conversion were registered by the Company for
resale by the holders in Registration No. 333-44305. The
Company relied upon Section 3(a)(9) of the Securities Act of
1933, as amended, in claiming exemption from the registration
requirements of the Securities Act for issuance of the
securities upon conversion.
In connection with the issuance of the above noted securities, the
Company also relied upon Section 4(2) of the Securities Act in claiming
exemption for the registration requirement of the Securities Act. All
of 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 law.
Item 3. Defaults Upon Senior Securities
(a) There has been no material default in the payment of principal,
interest, or any other material default, with respect to any
indebtedness of the small business issuer during the period covered by
this report.
(b) There has been no material default in the payment of dividends for any
class of preferred stock during the period covered by this report.
-17-
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held at the Grand Junction
Hilton Hotel. 743 Horizon Drive, Grand Junction, Colorado, on Saturday, June 13,
1998, at 10:00 A.M. Mountain Daylight Time. The matters submitted to a vote of
the Company's security holders as well as the results of the votes cast are as
follows:
I. Matters Voted Upon by Holders of Common Stock The
election of three Class B directors to serve on the
Company's Board of Directors totaling nine directors.
A summary of the votes cast are as follows:
Votes Received
In Favor of Votes Withheld
% of % of
outstanding outstanding
Number shares Number shares
James C. Ruane 11,218,411 71.0% 570,048 3.6%
Homer C. Osborne 11,242,486 71.2% 545,973 3.5%
Stephen L. Fischer 11,246,161 71.2% 542,298 3.4%
Steve A. Antry 11,433,461 72.4% 354,998 2.2%
As a result of the voting, James C. Ruane, Homer C. Osborne, Stephen L. Fischer
and Steve A. Antry were elected as Class B Directors to serve in that capacity
until the Annual Meeting of Stockholders in 2001.
Item 5. Other Information
Discretionary Voting by Management
Unless the Company receives notice from a stockholder that the stockholder plans
to present a matter for consideration at the next annual meeting of
stockholders, including information about the matter to be presented, by March
14, 1999 (45 days before the date the Company mailed its proxy materials to
stockholders in 1998), management will have discretionary authority to vote all
shares for which it holds proxies in opposition to the matter if presented. This
procedure is intended to be in response to amendments to Rule 14a-4 under the
Securities Exchange Act of 1934, recently adopted by the Securities and Exchange
Commission.
Change in Corporate Governance
In July 1998, the Company initiated several steps to improve the corporate
governance and direction of the Company. First, the Board of Directors
established an Executive Committee whose purpose is to formulate and implement
recommendations, strategies and actions which are intended to support and
protect shareholder value. Essentially, the Executive Committee will manage the
day-to-day activities of the Company and has broad power and authority to act in
the absence of the full Board of Directors.
Secondly, Mr. William F. Warnick replaced Willard H. Pease, Jr. as Chairman of
the Board. Mr. Warnick is an outside Director, a practicing attorney in Lubbock,
Texas, and also serves as the Texas Attorney General's appointee to the Texas
School Board Land Commission. Mr. Warnick has also served in numerous management
positions of private oil and gas companies. Mr. Warnick received both a B.A. in
finance in 1968 and a J.D. degree in 1971.
Thirdly, the Company announced the addition of Mr. F.A. (Allan) Wise to the
Board of Directors. Mr. Wise has been professionally engaged in the oil and gas
business for 30 years, having worked 7 years for Shell Oil Company as a
petroleum engineer and 9 years for Petro-Lewis Corporation where he served in
various capacities, including Vice President of Drilling and Production, Vice
President of the Gulf Coast Region and Vice President of Acquisitions. Since
1987, Mr. Wise has been co-owner of Wise and Treece Petroleum Management, Inc.,
a petroleum engineering, land and management consulting firm. Mr. Wise, through
the consulting firm, serves the oil and gas industry by providing a wide range
of technical and management economic analysis and modeling of exploration plays
and the resulting development drilling; acquisition and financing of oil and gas
plays and properties; financial modeling of oil and gas investment structures;
supervision of oil and gas field development, drilling and petroleum engineering
and management consulting.
-18-
<PAGE>
The Executive Committee is comprised of four voting members: Patrick J. Duncan,
the Company's CFO, Steve Antry, a Director and consultant to the Company,
William F. Warnick and F. A. Wise, and one non-voting member, Willard H. Pease,
Jr., the Company's president. The Board of Directors implemented these changes
to enhance the decision making processes in all aspects of the Company's
business.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
(1) Exhibit 27-1, "Financial Data Schedule" - for the quarter
ended June 30, 1998. (2) Exhibit 27-2, "Financial Data
Schedule" - for the quarter ended June 30, 1997 as restated
for accounting change from successful efforts to full cost for
oil and gas activities.
(b) The following report on Form 8-K was filed during the quarter ended June 30,
1998:
Item Reported Date Financial Statement
------------- ------------- ---------------------
(1) 5, 7 ........ June 15, 1998 None - Not Applicable
There were no financial statements filed during the quarter ended June 30, 1998
other than the Company's Quarterly Report on Form 10-QSB for the first quarter
ended March 31, 1998.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PEASE OIL AND GAS COMPANY
Date: August 25, 1998 By: /s/ Willard H. Pease, Jr.
Willard H. Pease, Jr.
President and Chief Executive Officer
Date: August 25, 1998 By: /s/ Patrick J. Duncan
Patrick J. Duncan
Chief Financial Officer, Treasurer,
and Principal Accounting Officer
-19-
<PAGE>
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