- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 May 14, 1998 the registrant had 15,791,205 shares of its $0.10
par value Common Stock issued and outstanding.
Transitional Small Business Issuer Disclosure Format (check one):Yes ____ No X
- --------------------------------------------------------------------------------
-1-
<PAGE>
TABLE OF CONTENTS
PAGE
NUMBER
<TABLE>
<CAPTION>
PART I - Financial Information
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets.. . . . . . . . . . .. . . . . . . . . . . . . 3
March 31, 1998 (unaudited) and December 31, 1997
Consolidated Statements of Operations . . . . . . . . . . . . . . . . .
For the Three Months Ended March 31, 1998 (unaudited) and 1997 4
(unaudited)
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . .
For the Three Months Ended March 31, 1998 (unaudited) and 1997 5-6
(unaudited)
Notes to Consolidated Financial Statements . . . . . . . . . . . . . .. . 7
Item 2. Management's Discussion and Analysis . . . . . . . . . . . . . . . 8
Liquidity, Capital Expenditures and Capital Resources . . . .. . 8
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . .. . 9
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Change in Accounting Principle . . . . . . . . . . . . . . . . . .9
Assets Held For Sale. . . . . . . . . . . . . . . . . . . . . .. . 9
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .. .10
Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .10
Gas Plant Processing . . . . . . . . . . . . . . . . . . . . . . .. .11
Oil Field Services and Oil Field Supply . . . . . . . . . . . . . .. .12
Well Administration and Other Income . . . . . . . . . . . . . . .. . 12
Depreciation, Depletion and Amortization . . . . . . . . . . . . .. .13
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . 14
Impairment Expense - Oil and Gas Properties. . . . . . . . . . . 14
Dividends and Net Loss Per Common Share. . . . . . . . . . . . . 14
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Recently Issued Financial Accounting Standards. . . . . . . . .. .15
Disclosure Regarding Forward-Looking Statements. . . . . . . . 15
Year 2000 Issue . . . . . . . . . . . . . . . . . . . . . . . .. .15
PART II - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . ... .16
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . 16.
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 17
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .. .17
PART III - Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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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>
March 31, December 31,
1998 1997
---------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 3,472,158 $ 6,547,804
Trade receivables 345,366 757,434
Prepaid expenses and other 74,187 43,979
-------------- ---------------
Total current assets 3,891,711 7,349,217
------------ -------------
ASSETS HELD FOR SALE 3,832,376 4,048,000
------------ -------------
OIL AND GAS PROPERTIES, at cost (full cost method):
Unevaluated properties 6,724,538 4,522,917
Costs being amortized 10,707,341 9,424,932
----------- -------------
Total oil and gas properties 17,431,879 13,947,849
Less accumulated amortization and impairment (5,577,442) (4,965,232)
------------- --------------
Net oil and gas properties 11,854,437 8,982,617
----------- -------------
OTHER ASSETS:
Debt issuance costs, net 613,217 664,318
Deposits and other 174,528 167,493
Office equipment and vehicles, net 96,122 82,498
-------------- --------------
Total other assets 883,867 914,309
------------- -------------
TOTAL ASSETS 20,462,391 21,294,143
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: 1,321,321 1,500,239
Accrued production taxes 204,108 204,108
Other accrued expenses 389,178 349,396
------------ -------------
LONG-TERM LIABILITIES:
Convertible debentures, net 3,003,649 2,922,703
Accrued production taxes 297,180 226,019
------------- --------------
Total long-term liabilities 3,300,829 3,148,722
------------ -------------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.01 per share, 2,000,000
shares authorized, 113,333 shares of Series B 5% PIK
Cumulative Convertible Preferred Stock issued
and outstanding (liquidation preference of $5,666,650) 1,133 1,133
Common Stock, par value $0.10 per share, 40,000,000
shares authorized, 15,791,205 and 15,789,955 shares
issued and outstanding, respectively. 1,579,121 1,578,996
Additional paid-in capital 36,805,373 36,875,394
Accumulated deficit (23,138,672) (22,363,845)
------------ -------------
Total stockholders' equity 15,246,955 16,091,678
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,462,391 $ 21,294,143
=========== ============
</TABLE>
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For The Three Months
Ended March 31,
1998 1997
(Note 2)
REVENUE:
<S> <C> <C>
Oil and gas sales $ 591,608 $ 789,206
Gas plant processing 91,119 209,510
Oil field services and supply 154,149 198,319
Well administration and other income 15,654 21,805
------------ ----------------
Total revenue 852,530 1,218,840
----------- -------------
OPERATING COSTS AND EXPENSES:
Oil and gas production costs 320,640 328,819
Gas plant 81,813 104,838
Oilfield services and supply 139,926 153,658
Consulting arrangement-related party 62,912 83,383
General and administrative 257,655 325,449
Depreciation, depletion and amortization 353,137 466,606
Impairment expense - oil and gas properties 478,043 1,621,532
---------- ---------------
Total operating costs and expenses 1,694,126 3,084,285
--------- --------------
LOSS FROM OPERATIONS (841,596) (1,865,445)
OTHER INCOME (EXPENSES):
Interest income 67,014 18,059
Interest expense (246) (215,473)
Gain or (Loss) on sale of assets - 2,356
---------------- -----------------
NET LOSS $ (774,828) $ (2,060,503)
============ =-------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (1,628,167) $ (2,105,487)
=========== ==============
NET LOSS PER COMMON SHARE (Note 3) $ (.10) $ (.24)
================ ===================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 15,791,000 8,923,000
========== ===============
</TABLE>
-4-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For The Three Months
Ended March 31,
1998 1997
(Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss (774,828) (2,060,503)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, depletion and amortization 353,137 466,606
Amortization of debt discount and issuance costs - 120,633
Impairment expense 478,043 1,621,532
Loss on sale of assets - (2,356)
Issuance of common stock for services - 8,000
Other - -
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade receivables 412,068 8,313
Inventory 25,050 (50,517)
Prepaid expenses and other assets (37,243) (29,972)
Increase (decrease) in:
Accounts payable (27,299) 108,769
Accrued expenses 9,098 (12,362)
------------- --------------
Net cash provided by (used in) operating activities 438,026 178,143
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant and equipment (3,373,669) (4,589,521)
Proceeds from sale of property and equipment 7,420 56,559
------------- --------------
Net cash provided by (used in) investing activities (3,366,249) (4,532,962)
----------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants 939 2,264,650
Repayment of long-term debt (1,597) (318,901)
Proceeds from sale of common stock - 3,880,000
Offering costs (146,765) (564,882)
------------- ---------------
Net cash provided by (used in) financing activities (147,423) 5,260,867
------------- -------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (3,075,646) 906,048
CASH AND EQUIVALENTS, beginning of period 6,547,804 1,995,860
----------- -------------
CASH AND EQUIVALENTS, end of period 3,472,158 2,901,908
=========== -------------
</TABLE>
-5-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
<TABLE>
<CAPTION>
For The Three Months
Ended March 31,
1998 1997
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
<S> <C> <C>
Cash paid for interest $ 100,772 $ 161,014
========== ============
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 $ - $ 156,007
Debt incurred for purchase of vehicles 32,609 29,582
Payables for oil and gas exploration activities 1,072,413 229,103
Issuance of common stock for oil and gas properties - 875,000
Capitalized portion of amortized debt discount and issuance
costs 132,046 39,494
</TABLE>
-6-
<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 by $1,450,103 ($.16 per
share) for the first quarter of 1997.
Note 3 - 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 both accrued but unpaid
dividends and any imputed dividends attributable to the beneficial conversion
feature. During the first quarter of 1997, the net loss applicable to common
stockholders includes $44,984 of accrued but unpaid dividends related to the
Series A Preferred Stock that automatically converted into common on June 11,
1997. During the first quarter of 1998, the net loss applicable to common
stockholders includes $70,833 of accrued dividends plus an additional imputed
non-cash dividend charge of $782,506 related to the beneficial conversion
feature attached to the Series B Preferred Stock that was issued on December 31,
1997.
The Series B Preferred Stock became convertible into common stock on March 31,
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 of $782,506 included in the net loss applicable to common stockholders
during the first quarter of 1998 represents the intrinsic value of the 12%
discount applicable at March 31, 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.
-7-
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity, Capital Expenditures and Capital Resources
At March 31, 1998, the Company's cash balance was $3,472,158 with a positive
working capital position of $1,977,104, 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:
<TABLE>
<S> <C> <C> <C>
Cash balance at December 31, 1997 $ 6,547,804
Sources of Cash:
Cash provided by operating activities 438,026
Proceeds from the sale of property and equipment 7,420
Proceeds from the exercise of common warrants 939
-----------------
Total Sources of Cash 446,385
Uses of Cash:
Exploration Activities - Gulf Coast (3,351,991)
Offering Costs associated with Series B Preferred Stock (146,765)
Other Capital Expenditures (21,678)
Payments on long term debt (1,597)
---------------
Total uses of cash (3,543,709)
Cash balance at March 31, 1998 $ 3,472,158
</TABLE>
As noted, most of the Company's uses of cash were deployed in exploration
activities in the Gulf Coast which are summarized as follows:
<TABLE>
<CAPTION>
PROGRAM OPERATOR
NEGX Parallel AHC Other Total %
Category:
<S> <C> <C> <C> <C> <C>
Discovery and Wells in Process 362,517 - 207,414 11,549 581,480 17%
Exploratory Dry Holes 490,125 148,826 - - 638,951 19%
Land, G&G Costs on Seismic
Programs 1,228,510 768,789 - 75,262 2,072,561 62%
Other Exploration Costs - - - 58,999 58,999 2%
--------- ---------- ---------- ------------- ----------- -------
Total Exploration Costs 2,081,152 917,615 207,414 145,810 3,351,991 100%
========= ========= ========== ========== ========= ======
Percent 62% 27% 6% 5% 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. There have been no significant changes in the
expected capital requirements as of the date of this report and under the
existing commitments, will be at least $4.0 million for the remainder of 1998.
The Company's current and anticipated cash position will be insufficient to
cover the future working capital and exploration obligations and the Company
will need to seek additional financing. The Company is exploring various
alternatives and future sources of capital may include additional debt or equity
financings, the sale of certain existing assets, or a combination thereof.
However, it cannot be determined at this time, what alternatives may be
available, nor to what extent the potential dilution to the existing
shareholders may be. In addition, if additional sources of financing are not
ultimately available, the Company may have to consider other alternatives,
including cancellation of existing exploration agreements, farmouts, joint
ventures, a merger, and/or liquidation.
The Company is currently attempting to sell or otherwise monitize its Rocky
Mountain assets. Although no formal agreements have been reached as of the date
of this report, the Company has been conducting on-going negotiations with
several parties interested in the assets. The depressed and volatile commodity
prices experienced since November 1997 (and continuing through the date of this
report) have hindered the negotiations. However, the Company is committed to
selling the Rocky Mountain Assets and anticipates most, if not all, of the
related assets
-8-
<PAGE>
will be sold sometime in 1998 assuming that acceptable terms can be negotiated
with a willing purchaser. 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 substantially all of the oil and gas
reserves in Larimer and Weld Counties, Colorado, which constituted approximately
60% of all of the Company's Rocky Mountain proved reserves of oil and gas at
December 31, 1997. A portion of any proceeds received from the Company upon the
sale of its Rocky Mountain oil and gas properties attributable to the properties
which secure the Convertible Debentures will not be available to the Company, as
such proceeds must be set aside and reserved as security for the Company's
obligations under the Convertible Debentures. The Company intends to substitute
other oil and gas assets as collateral for the Convertible Debentures, but such
substitution requires the written approval of the holders of at least two-thirds
of the oustanding Convertible Debentures. The Company intends to seek such
approval for substitution at such time, if ever, as an acceptable sale of its
Rocky Mountain oil and gas properties is negotiated and placed under contract.
However, it cannot be determined at this time the amount of capital, if any,
that would be available for future exploration and development activities should
the Rocky Mountain assets be sold.
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. Therefore, 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
stockholders increased by $1,450,103 ($0.16 per share) during the first quarter
of 1997. 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
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
-9-
<PAGE>
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:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1998 1997
-------------------- ------------------
Amount % Amount %
<S> <C> <C> <C> <C>
Oil and gas sales $ 591,608 69% $ 789,206 65%
Gas plant processing 91,119 11% 209,510 17%
Oil field services and supply 154,149 18% 198,319 16%
Well administration and other income 15,654 2% 21,805 2%
----------- ------ ----------- ------
Total revenue $ 852,530 100% $1,218,840 100%
========== ---- ========= ====
</TABLE>
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.
Oil and Gas
Operating statistics for oil and gas production for the periods presented are as
follows:
For the Three Months
Ended March 31,
1998 1997
--------------- ----------
Production:
Oil (Bbls)
Rocky Mtns. 18,795 19,969
Gulf Coast 9,896 7,829
--------- ---------
Combined Total 28,691 27,798
======== ========
Gas (Mcf)
Rocky Mtns. 84,967 95,443
Gulf Coast 30,955 6,864
-------- ---------
Combined Total 115,922 102,307
======= =======
BOE (6:1)
Rocky Mtns. 32,956 35,876
Gulf Coast 15,055 8,973
-------- ---------
Combined Total 48,011 44,849
======== ========
Average Collected Price:
Oil (per Bbl)
Rocky Mtns. $ 13.43 $ 21.35
Gulf Coast 14.79 20.87
--------- ---------
Combined Average $ 13.90 $ 21.22
-======= ========
Gas (per Mcf)
Rocky Mtns. $ 1.44 $ 1.86
Gulf Coast 2.27 3.17
---------- ----------
Combined Average $ 1.66 $ 1.95
========= =========
Per BOE (6:1)
Rocky Mtns. $ 11.38 $ 16.84
Gulf Coast 14.38 20.63
--------- ---------
Combined Average $ 12.32 $ 17.60
======== ========
-10-
<PAGE>
For the Three Months
Ended March 31,
1998 1997
------------- -----------
Operating Margins:
Rocky Mtns:
Revenue -
Rocky Mtns. - Oil $ 252,420 $ 426,339
Rocky Mtns. - Gas 122,639 177,717
------------ ------------
375,059 604,056
Costs (292,705) (300,356)
------------- -------------
Operating Margin $ 82,354 $ 303,700
============= ===========
Operating Margin Percent 19% 50%
Gulf Coast:
Revenue -
Gulf Coast - Oil $ 146,317 $ 163,418
Gulf Coast - Gas 70,232 21,732
------------- -------------
216,549 185,150
Costs (27,935) (28,463)
-------------- --------------
Operating Margin $ 188,614 $ 156,687
============ ===========
Operating Margin Percent 87% 85%
Combined Totals:
Revenue $ 591,608 $ 789,206
Costs (320,640) (328,819)
------------- -------------
Operating Margin $ 270,968 $ 460,387
=========== ===========
Operating Margin Percent 46% 58%
Production Costs per BOE before DD&A:
Rocky Mtn Region $ 8.89 $ 8.37
Gulf Coast Region 1.86 3.17
--------------- ---------------
Combined Average $ 6.68 $ 7.33
============== ==============
Change in Revenue Attributable to:
Production $ 38,638
Price (236,236)
------------
Total Decrease in Revenue $ (197,598)
==========
As noted, the 25% decrease in oil and gas revenue during the first quarter of
1998 when compared to the first quarter of 1997 can be attributed to a
substantial decrease in commodity prices between the two periods. Most 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. The increase in oil and gas production for the Gulf Coast region can be
attributed to the 1997 discoveries.
The operating costs per BOE for the Gulf Coast properties decreased in 1998 when
compared to the same period in 1997, primarily as a result of the higher volumes
produced. Since a portion of the lifting costs are fixed, the cost per unit (or
BOE) decreases as more oil and gas are produced.
Gas Plant Processing
This category accounts for the natural gas processed and the natural gas liquids
extracted and sold by the Gas Plant facility.
-11-
<PAGE>
Operating statistics for the periods presented are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1998 1997
--------------- ---------
Production:
<S> <C> <C>
Natural Gas Processed (Inlet Mcf) 72,600 78,900
Liquids Produced -
B-G Mix (gallons) 154,100 192,100
Propane (gallons) 134,000 159,100
---------- -------------
Total liquids produced 288,100 351,200
========== =============
Total Liquids produced per Inlet Mcf ("GPM") 3.97 4.45
Average Sales Price of Liquids (per gallon) $ 0.31 $ 0.48
============ ===============
Gross Margin: Amount Amount
----------- ----------
Revenue $ 91,119 $ 209,510
Costs (81,813) (104,838)
------------ --------------
Gross Margin $ 9,306 $ 104,672
========== ============
Gross Margin Percent 10% 50%
</TABLE>
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 the first quarter that forced the plant to flare
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.
Oil Field Services and Oil Field Supply
Operating statistics for the Company's oil field service and supply operations
for the periods presented are as follows:
For the Three Months
Ended March 31,
1998 1997
------------- ---------
Revenue $ 154,149 $ 198,319
Costs (139,926) (153,658)
----------- ------------
Net Operating Income $ 14,223 $ 44,661
========== =========
Total revenue, and the net operating margin decreased in 1998, when compared to
1997 as a result of less work generated from the Company's hot oil services.
This is a result of the Company's truck pusher resigning in light of the
anticipated sale of the Rocky Mountain assets and taking a portion of the
Company's business with him.
Well Administration and Other Income
As expected, there has been no material change in the well administration and
other income during the periods presented.
-12-
<PAGE>
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
$68,000 during the first quarter of 1998 when compared to the same period in
1997 is summarized as follows:
$ 28,000 - 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).
19,000 - Consulting services.
13,000 - Travel and entertainment costs.
8,000 - All other, net.
$ 68,000
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 not be at those levels
experienced in 1997. 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 Ended March 31
1998 1997
Oil and Gas Properties - Rocky Mountains $ 102,919 295,020
Oil and Gas Properties - Gulf Coast 134,167 50,225
Gas Plant Operations 58,630 60,929
Service and Supply Operations 45,329 36,562
Furniture and Fixtures 12,092 12,370
Non-Compete Agreements - 11,500
----------- -----------
Total $ 353,137 $ 466,606
========= =========
DD&A for the oil and gas properties, per BOE, for the periods presented is as
follows:
Rocky Mountains $ 3.1 $ 8.22
Gulf Coast 8.92 5.59
Combined Total 4.94 7.69
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 and the net costs being amortized at
the end of the respective reporting periods.
-13-
<PAGE>
Interest Expense
Total interest incurred, and its allocation, for the periods presented is as
follows:
For the Three Months Ended March 31,
1998 1997
-------------- ---------
Interest paid or accrued $ 98,261 $125,889
Amortization of debt discount 80,946 98,186
Amortization of debt issuance costs 51,101 61,941
---------- ---------
Total interest incurred 230,308 286,016
Interest capitalized (230,061) (70,543)
--------- ---------
Interest expense $ 247 $215,473
========== =======
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 $4.85
million during the first quarter of 1997 to an average balance of $3.98 million
during the first quarter of 1998. The decrease in the average balance during the
periods presented is attributed to a portion of the convertible debentures
converted into common stock. 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 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 during the first quarter. The
impairment recognized in the first quarter of 1997 can be attributed to
approximately $307,000 in dry holes and $1.3 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 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 March 31, 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 both accrued but unpaid
dividends and any imputed dividends attributable to the beneficial conversion
feature. During the first quarter of 1997, the net loss applicable to common
stockholders includes $44,984 of accrued but unpaid dividends related to the
Series A Preferred Stock that automatically converted into common on June 11,
1997. During the first quarter
-14-
<PAGE>
of 1998, the net loss applicable to common stockholders includes $70,833 of
accrued dividends plus an additional imputed non-cash dividend charge of
$782,506 related to the beneficial conversion feature attached to the Series B
Preferred Stock that was issued on December 31, 1997.
The Series B Preferred Stock became convertible into common stock on March 31,
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 of $782,506 included in the net loss applicable to common stockholders
during the first quarter of 1998 represents the intrinsic value of the 12%
discount applicable at March 31, 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.
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 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
-15-
<PAGE>
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 has been informed by the suppliers of substantially all of the Company's
software that all of those suppliers' software that is used by the Company is
Year 2000 compliant. The Company has no internally generated software. After
reasonable investigation, the Company has not yet identified any Year 2000
problems but will continue to monitor the issue. However, there can be no
assurances that Year 2000 problems will not occur with respect to the company's
computer systems. 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.
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 quarter ended March
31, 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 shares for total proceeds of $938 to the
Company. These warrants were issued in February 1996 in
connection with the consulting agreement entered into with
Beta Capital Group, Inc. Shares of common stock issued upon
exercise of the warrants were registered for resale by the
holder in Registration No. 333-19589.
In connection with the issuance of the above noted securities, the
Company 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.
-16-
<PAGE>
(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.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of Company's security holders during the
period covered by this report.
Item 5. Other Information
There is no information reportable under this item for the period covered by
this report.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
(1) Exhibit 27-1, "Financial Data Schedule" - for the quarter
ended March 31, 1998. (2) Exhibit 27-2, "Financial Data
Schedule" - for the quarter ended March 31, 1997 as restated
for accounting change from successful efforts to full cost for
oil and gas activities.
(b) The following reports on Form 8-K were filed during the quarter ended March
31, 1998:
<TABLE>
<CAPTION>
Item Reported Date Financial Statement
------------- ------------------------ --------------------
<S> <C> <C> <C> <C>
(1) 5, 7 January 13, 1998 None - Not Applicable
(2) 5, 7 March 9, 1998 None - Not Applicable
</TABLE>
There were no financial statements filed during the quarter ended March 31, 1998
other than the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PEASE OIL AND GAS COMPANY
Date: May 19, 1998 By: /s/ Willard H. Pease, Jr.
Willard H. Pease, Jr.
President and Chief Executive Officer
Date: May 19, 1998 By: /s/ Patrick J. Duncan
Patrick J. Duncan
Chief Financial Officer, Treasurer,
and Principal Accounting Officer
-17-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,472,158
<SECURITIES> 0
<RECEIVABLES> 369,761
<ALLOWANCES> 24,395
<INVENTORY> 268,276
<CURRENT-ASSETS> 3,832,376
<PP&E> 20,995,979
<DEPRECIATION> 5,577,442
<TOTAL-ASSETS> 20,462,391
<CURRENT-LIABILITIES> 1,914,607
<BONDS> 3,003,649
0
1,133
<COMMON> 1,579,121
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,246,955
<SALES> 836,876
<TOTAL-REVENUES> 852,530
<CGS> 542,379
<TOTAL-COSTS> 1,216,083
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 478,043
<INTEREST-EXPENSE> 246
<INCOME-PRETAX> (774,828)
<INCOME-TAX> 0
<INCOME-CONTINUING> (774,828)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,628,167)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,901,908
<SECURITIES> 0
<RECEIVABLES> 615,730
<ALLOWANCES> 24,395
<INVENTORY> 459,304
<CURRENT-ASSETS> 4,041,183
<PP&E> 26,248,231
<DEPRECIATION> 9,257,386
<TOTAL-ASSETS> 22,556,165
<CURRENT-LIABILITIES> 1,126,013
<BONDS> 3,134,936
0
1,229
<COMMON> 1,151,083
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,556,165
<SALES> 1,197,035
<TOTAL-REVENUES> 1,218,840
<CGS> 587,315
<TOTAL-COSTS> 1,462,753
<OTHER-EXPENSES> 2,356
<LOSS-PROVISION> 1,621,532
<INTEREST-EXPENSE> 215,473
<INCOME-PRETAX> (2,060,503)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,060,503)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,105,487)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
