SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
Commission File Number 0-6580
[GRAPHIC OMITTED]
PEASE OIL AND GAS COMPANY
(Name of small business issuer as specified in its charter)
Nevada 87-0285520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
751 Horizon Court, Suite 203
Grand Junction, Colorado 81506
(Address of principal executive offices)
(970) 245-5917
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act: None Securities registered pursuant to
Section 12(g) of the Act:
Common Stock (Par Value $.10 Per Share)
Common Stock Purchase Warrants (Expire August 13, 1998)
Title of Class
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No____
As of November 11, 1997 the issuer had 15,741,769 shares of its $0.10
par value Common Stock issued and outstanding.
Transitional Small Business Issuer Disclosure Format Yes ____ No X
---
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<PAGE>
TABLE OF CONTENTS
PAGE
NUMBER
PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . 3-4
September 30, 1997 (unaudited)
and December 31, 1996
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . 5
For the Three Months Ended September 30, 1997
(unaudited) and 1996 (unaudited)
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . 5
For the Nine Months Ended September 30, 1997
(unaudited) and 1996 (unaudited)
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . .6-7
For the Nine Months Ended September 30, 1997
(unaudited) and 1996 (unaudited)
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 8-9
Item 2. Management's Discussion and Analysis . . . . . . . . . . . . . . 10
Disclosure Regarding Forward-Looking Statements . . . . . . . . . . . . .10
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . 10
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Exploration Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Natural Gas Marketing and Trading . . . . . . . . . . . . . . . . . . . .18
Gas Plant Processing Revenues . . . . . . . . . . . . . . . . . . . . . .19
Oil Field Services and Oil Field Supply . . . . . . . . . . . . . . . . .20
Well Administration and Other Income . . . . . . . . . . . . . . . . . . 20
General and Administrative . . . . . . . . . . . . . . . . . . . . . . . 20
Consulting Agreement - Related Party . . . . . . . . . . . . . . . . . . 21
Depreciation, Depletion and Amortization . . . . . . . . . . . . . . . . 21
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.
Part II - Other Information . . . . . . . . . . . . . . . . . . . . . . . 23
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . 23
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 27
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . .27
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 28
Part III - Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 28
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<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
---------------- ------------
(unaudited)
CURRENT ASSETS:
Cash and equivalents $ 3,939,355 $ 1,995,860
Trade receivables 769,297 599,648
Inventory 393,899 408,787
Prepaid expenses and other 64,585 56,327
------------- ---------------
Total current assets 5,167,136 3,060,622
----------- -------------
OIL AND GAS PROPERTIES, at cost
(successful efforts method):
Undeveloped properties 2,163,341 351,727
Exploration in progress 3,764,767 181,312
Developed properties 13,891,773 9,505,408
---------- -------------
Total oil and gas properties 19,819,881 10,038,447
Less accumulated depreciation, and
depletion (4,462,831) (3,946,974)
------------ --------------
Net oil and gas properties 15,357,050 6,091,473
---------- -------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Gas plant 4,099,285 4,099,285
Service equipment and vehicles 888,744 879,313
Land, buildings and office equipment 462,597 459,228
------------ -------------
Total property, plant and equipment 5,450,626 5,437,826
Less accumulated depreciation (1,647,747) (1,376,154)
------------ --------------
Net property, plant and equipment 3,802,879 4,061,672
----------- -------------
OTHER ASSETS:
Deferred debt issuance costs (Note 7) 731,617 1,093,479
Non-compete agreements 272,181 306,678
Other 272,493 274,830
------------ -------------
Total other assets 1,276,291 1,674,987
----------- -------------
TOTAL ASSETS $ 25,603,356 $ 14,888,754
========== ============
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
September 30, December 31,
1997 1996
---------------- ------------
(unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt:
Related parties - 285,895
Other 31,210 45,944
Accounts payable, exploration costs 455,503 -
Accounts payable, trade 250,197 267,540
Accrued production taxes 252,910 288,122
Other accrued expenses 219,452 265,427
------------- --------------
Total current liabilities 1,209,272 1,152,928
------------ -------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities:
Convertible Debentures, net of discount of
$1,158,901 and $1,732,170, respectively
(Note 7) 2,906,099 3,267,830
Other 39,518 19,945
Accrued production taxes 204,941 256,088
------------ --------------
Total long-term liabilities 3,150,558 3,543,863
------------ -------------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.01 per share,
2,000,000 shares authorized, none
and 179,938 shares of Series A Cumulative
Convertible Preferred Stock issued and
outstanding, respectively. - 1,799
Common Stock, par value $0.10 per share,
40,000,000 shares authorized, 15,688,475 and
7,526,817 shares issued and outstanding,
respectively. 1,568,848 752,682
Additional paid-in capital (Note 7) 31,815,201 19,112,104
Accumulated deficit (Note 7) (12,140,523) (9,674,622)
------------ --------------
Total stockholders' equity 21,243,526 10,191,963
----------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 25,603,356 $ 14,888,754
=========== ============
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
----------- -----------
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUE:
<S> <C> <C> <C> <C>
Oil and gas sales ......................... $ 868,749 $ 594,730 $ 2,328,328 $ 1,846,708
Natural gas marketing and trading ......... -- -- -- 2,048,565
Gas plant processing ...................... 153,848 175,389 525,704 531,069
Oil field services and supply ............. 181,373 163,477 525,585 469,612
Well administration and other income ...... 28,666 28,196 67,570 84,684
----------- ----------- ----------- -----------
Total revenue ........................ 1,232,636 961,792 3,447,187 4,980,638
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Oil and gas production .................... 407,038 308,959 1,145,141 956,822
Exploration costs ......................... 813,174 75,000 1,178,890 75,000
Natural gas marketing and trading ......... -- -- -- 1,745,446
Gas plant processing ...................... 79,346 108,618 283,645 360,626
Oil field services and supply ............. 176,090 175,748 469,223 416,425
General and administrative ................ 339,079 258,941 1,045,258 746,883
Consulting agreement-related party ........ 159,292 86,985 340,470 166,811
Depreciation, depletion and amortization .. 340,714 259,264 903,955 807,583
----------- ----------- ----------- -----------
Total operating costs and expenses 2,314,733 1,273,515 5,366,582 5,275,596
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS ......................... (1,082,097) (311,723) (1,919,395) (294,958)
OTHER INCOME (EXPENSES):
Interest income ........................... 70,029 8,700 133,142 17,784
Interest expense (Note 7) ................. (120,314) (137,128) (669,602) (266,383)
Gain (Loss) on sale of assets ............. (3,855) (24,362) (10,046) (7,713)
----------- ----------- ----------- -----------
Total other income (expenses), net ... (54,140) (152,790) (546,506) (256,312)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES ..................... (1,136,237) (464,513) (2,465,901) (551,270)
INCOME TAXES ................................. -- -- -- 41,409
----------- ----------- ----------- -----------
NET LOSS ..................................... (1,136,237) (464,513) (2,465,901) (509,861)
PREFERRED STOCK DIVIDENDS:
In arrears ................................ -- (50,672) -- (152,016)
Converted into common stock ............... -- -- (89,969) --
---------- ----------- ----------- -----------
Total preferred stock dividends ..... -- (50,672) (89,969) (152,016)
---------- ----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ................................. $(1,136,237) $ (515,185) $(2,555,870) $ (661,877)
========== =========== =========== ===========
NET LOSS PER COMMON SHARE
As previously reported ................... $ (0.07) $ (0.07) $ (0.19) $ (0.09)
Prior period adjustments (Note 7) ........ (0.01) -- (0.02) --
----------- ----------- ----------- -----------
As restated ............................. $ (0.08) $ (0.07) $ (0.21) $ (0.09)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING .................... 14,976,000 7,310,000 12,191,000 7,254,000
=========== =========== =========== ===========
</TABLE>
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For The Nine Months
Ended September 30,
1997 1996
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,465,901) $ (509,861)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for depreciation and depletion 869,458 773,086
Amortization of intangible assets and discount
on convertible debt 478,762 113,936
Exploration costs 1,178,890 75,000
Stock-based compensation 60,000 -
Loss on sale of property and equipment 10,045 7,713
Issuance of common stock for services 10,155 61,027
Provision for bad debt - 21,491
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade receivables (169,649) 554,857
Inventory 34,164 98,437
Prepaid expenses and other assets (23,421) (32,367)
Increase (decrease) in:
Accounts payable (17,343) (964,444)
Accrued expenses (132,334) (190,600)
-------------- ----------
Net cash provided by (used in) operating
activities (167,174) 8,275
-------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (9,566,126) (1,147,942)
Proceeds from sale of property and equipment 52,867 145,740
Proceeds from redemption of certificate of
deposit 17,500 40,000
-------------- ----------
Net cash provided by (used in) investing
activities (9,495,759) (962,202)
-------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 3,415,000
Repayment of long-term debt (331,747) (1,827,848)
Proceeds from sale of common stock 9,480,000 68,750
Proceeds from exercise of common stock
options and warrants 3,866,353 -
Offering and other costs associated with long-
term debt, stock and warrants (1,408,178) (524,101)
------------- -----------
Net cash provided by (used in) financing
activities 11,606,428 1,131,801
------------ ------------
INCREASE IN CASH AND EQUIVALENTS 1,943,495 177,874
CASH & EQUIVALENTS, beginning of period 1,995,860 677,275
------------- -----------
CASH & EQUIVALENTS, end of period 3,939,355 855,149
------------- -----------
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
For The Nine Months
Ended September 30,
1997 1996
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest:
Related parties $ 42,417 $ -
Other 357,801 134,123
------------ -----------
Total $ 400,218 $ 134,123
============== ===========
Cash paid for income taxes $ - $ -
============== -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Long-term debt incurred for purchase of vehicles $ 50,691 $ -
=============== ===========
Conversion of debentures, net of discount, into
common stock $ 605,437 $ -
============== ===========
Acquisition of oil and gas properties for common
stock $ 885,000 $ -
============== ===========
Estimated fair value of warrants granted for debt
issuance costs $ - $ 475,000
============== ===========
Debt Issuance Costs associated with converted
debentures $ 181,470 $ -
============== ===========
Oil and gas equipment transferred to inventory $ 19,276 $ -
============== ===========
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. They do not include all information and notes required by
generally accepted accounting principles for interim financial information. They
do not include all information and notes required by generally accepted
accounting principles for complete financial statements. However, except as
disclosed herein, there has been no material change in the information disclosed
in the notes to consolidated financial statements included in the Annual Report
on Form 10-KSB of Pease Oil and Gas Company and Subsidiaries (the Company) for
the year ended December 31, 1996. In the opinion of Management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the periods presented are
not necessarily indicative of the results that may be expected for the full
year.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's financial statements in Form 10-KSB for the year ended December 31,
1996. It is suggested that these financial statements be read in conjunction
with the financial statements and notes included in the Form 10-KSB.
Note 2 - Preferred Stock:
Pursuant to the terms of the Articles of Incorporation, on June 11, 1997 all of
the outstanding Preferred Stock automatically converted into the Company's
Common Stock and Common Stock Purchase Warrants. On June 11, 1997 there were
96,847 shares of Preferred Stock outstanding that converted into 308,692 shares
of Common Stock and 308,692 Common Stock Purchase Warrants. Accordingly, as of
September 30, 1997 there are no shares of Preferred Stock issued or outstanding.
Note 3 - Stock-Based Compensation
The Company has entered into consulting agreements with a director and an
unrelated individual to assist the Company in its acquisition, exploration and
exploitation activities in the Gulf Coast region of the United States. The
agreements are in effect until May and December 1998 and provide for cash
compensation, reimbursement of expenses, and a fee of .5% of the direct cost of
consummated acquisitions which are identified by the consultant. Additionally,
the Company agreed to pay the consultants' fees equal to 2% and 5% of net cash
flow after payout from certain identified exploration and exploitation projects.
The agreements also provided that the consultants would receive options and
warrants for an aggregate of 150,000 shares. These options and warrants are
exercisable for five years at exercise prices ranging from $3.00 to $3.44 per
share. The Company has determined the value of these options using the Black
Scholes model and has recognized the fair value of approximately $180,000 as an
exploration cost in the accompanying statements of operations for the three and
nine months ended September 30, 1997.
The Company has also granted warrants for an additional 100,000 shares of common
stock to Beta Capital Group, Inc. These warrants are exercisable for a period of
five years at an exercise price of $3.75 per share. The Company has determined
the value of these options using the Black Scholes model and has recognized the
fair value of approximately $60,000 as consulting expense in the
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<PAGE>
accompanying statements of operations for the three and nine months ended
September 30, 1997. A shareholder of Beta is a member of the Company's Board of
Directors.
Note 4 - Exploration Agreements:
During the quarter ended September 30, 1997, the Company entered into three
exploration agreements with certain unrelated entities. The Company acquired a
12.5% interest in certain seismic and lease options, oil and gas leases, and
seismic permits for an aggregate of approximately 130,000 gross acres located in
three counties in Texas. At September 30, 1997, the Company has approximately
$1.6 million included in exploration in progress in the accompanying balance
sheet representing funds advanced for its share of lease options and cash calls
on future seismic operations. As the costs are incurred, the Company will
expense, as exploration costs, those amounts related to seismic or other
geological or geophysical costs. Through September 30, 1997, the Company had
incurred approximately $158,000 for surveying and seismic costs which have been
charged to exploration costs. Upon evaluation of the seismic results, the
Company is required to pay its 12.5% share of the cost to exercise the options
to enter into lease agreements for the properties.
Note 5 - Income Taxes:
The total income tax expense or benefit differs from the amount that would be
provided by applying the statutory U.S. Federal income tax rate to income or
loss before taxes primarily due to the utilization of net operating loss carry
forwards, tax credit carry forwards, and percentage depletion carry forwards.
The income tax refund of $41,409 recorded in 1996 is related to a net operating
loss carry back.
Note 6 - Reclassifications:
Certain reclassifications have been made to the 1996 financial statements to
conform to the presentation in 1997. The reclassifications had no effect on the
1996 net loss.
Note 7 - Prior Period Adjustments:
The carrying amount of the convertible debentures, debt issuance costs,
additional paid-in capital, the accumulated deficit and interest expense have
been restated to change the valuation assigned to the warrants attached to the
convertible debentures issued in 1996. The effect of the adjustments to the
September 30, 1997 financial statements is summarized as follows:
<TABLE>
<CAPTION>
Net Loss Applicable to
Common Stockholders
Three Nine
Debt Additional Months Months
Convertible Issuance Paid-In Accumulated Ended Ended
Debentures Costs Capital Deficit 9/30/97 9/30/97
As
previously
<S> <C> <C> <C> <C> <C> <C>
reported ....... $ 4,065,000 $ 743,466 $ 30,404,822 $(11,877,196) $ (1,053,153) $ (2,292,543)
Prior period
adjustments .... (1,158,901) (11,849) 1,410,379 (263,327) (83,084) (263,327)
----------- --------- ------------ ------------ ------------ ------------
As restated ..... $ 2,906,099 $ 731,617 $ 31,815,201 $(12,140,523) $ (1,136,237) $ (2,555,870)
=========== ========= ============ ============ ============ ============
</TABLE>
The prior period adjustments had no effect on the September 30, 1996 financial
statements as previously reported.
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<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Disclosure Regarding Forward-Looking Statements
This report on Form 10-QSB includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
facts included in this report, including, without limitation, those regarding
the Company's financial position, reserve quantities and net present values,
business strategy, plans and objectives of management of the Company for future
operations and capital expenditures, and the future results from oil and gas
drilling operations, are forward-looking statements and the assumptions upon
which such forward-looking statements are based are believed to be reasonable.
The Company can give no assurance that such expectations and assumptions will
prove to have been correct. Reserve estimates of oil and gas properties are
generally different from the quantities of oil and natural gas that are
ultimately recovered or found. This is particularly true for estimates applied
to exploratory prospects. Additionally, any statements contained in this report
regarding forward-looking statements are subject to various known and unknown
risks, uncertainties and contingencies, many of which are beyond the control of
the Company. Such things may cause actual results, performance, achievements or
expectations to differ materially from the anticipated results, performance,
achievements or expectations. Factors that may affect such forward-looking
statements include, but are not limited to, the Company's ability to generate
additional capital, risks inherent in oil and gas acquisitions, exploration,
drilling, development and production, price volatility of oil and gas,
competition, shortages of equipment, services and supplies, government
regulation, environmental matters, financial condition of the other companies
participating in the exploration, development and production of oil and gas
programs and other matters. All written and oral forward-looking statements
attributable to the Company or persons acting on its behalf subsequent to the
date of this report are expressly qualified in their entirety by this
disclosure.
Liquidity and Capital Resources
At September 30, 1997, the Company's cash balance was $3,939,355 with a positive
working capital position of $3,957,864, compared to a cash balance of $1,995,860
and a positive working capital position of $1,907,694 at December 31, 1996. The
change in the Company's cash balance for the first nine months of 1997 is
summarized as follows:
Cash Balance at December 31, 1996 $1,995,860
Sources of Cash:
Proceeds from the sale of common stock 9,480,000
Proceeds from the exercise of common stock options
and warrants 3,866,353
Proceeds from the sale of property and equipment 52,867
Proceeds from the redemption of a certificate of deposit 17,500
----------
Total Sources of Cash 15,412,580
Uses of Cash:
Acquisition of oil and gas interest in
East Bayou Sorrel (3,415,000)
Exploration Activities (5,464,200)
Other Capital Expenditures (686,926)
Costs associated with the sale of common stock and
exercise of common stock warrants (1,408,178)
Payments on long term debt (331,747)
Cash used in operating activities (167,174)
------------
Total uses of cash (11,473,225)
-------------
Cash balance at September 30, 1997 $3,939,355
==========
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<PAGE>
Although most of the Company's sources of cash during the first nine months of
1997 were derived from capital raising equity transactions (which are discussed
more thoroughly later in this report under Item 2(c) in Part II below), it is
important to note that a portion of the funds were used to acquire a significant
interest in the East Bayou Sorrel Field, located in Iberville Parish, Louisiana.
This field includes two discovery wells, the Schwing #1 and #2 that accounted
for 26% of the Company's oil and gas production (on a BOE basis), 31% of the
Company's oil and gas revenue, and 54% of the Company's operating income from
oil and gas activities during the nine months of 1997. The operating statistics
for these wells, along with all the other oil and gas properties, are more fully
illustrated later in this report under the Results of Operations section under
the caption "Oil and Gas". An additional exploratory offset to the C.E. Schwing
#1 and #2, known as the C.E. Schwing #3, is currently being drilled to test an
additional fault block in this field. The proposed total depth of 13,500 feet is
expected to be reached by the end of November 1997.
The Company's primary focus is to expand its operations by continuing to
implement an aggressive exploration program in the Gulf Coast region of
Louisiana, Alabama and Texas. As part of this plan, on February 4, 1997, the
Company signed a definitive agreement with National Energy Group, Inc. ("NEGX"),
a publicly held Company, headquartered in Dallas, Texas. The agreement provides
the Company the right and obligation to participate with NEGX in various Gulf
Coast oil and gas exploration projects over the course of next two years.
Essentially, the agreement consists of three main elements. First, the Company
has the right and obligation to participate as a 12.5% working interest owner in
NEGX's outlined program which consists of 10 identified projects in Alabama,
Southern Louisiana, and Texas. The working interest percentage may vary on a
prospect by prospect basis, as negotiated, and has ranged from 10% to 20% to
date. Second, subject to certain conditions defined in the agreement, the
Company has the right and obligation to participate in any future projects
generated under NEGX's exclusive arrangement with Sandefer Oil and Gas Company,
Inc. ("Sandefer"). Sandefer is a private corporation owned and operated by a
group of geologists and geophysicists who generate Gulf Coast, Southern
Louisiana and other wildcat prospects. Third, the Company is entitled to
participate in any other third party generated prospects that NEGX participates
in subject to certain conditions as defined in the agreement.
The agreement with NEGX specifies that the Company's minimum obligation is at
least $5.0 million per year in dry hole, or drilling, costs. Additional costs
will be incurred for completion and development of successful projects.
Accordingly, the Company anticipates the actual obligation will be higher
assuming that a reasonable amount of success is achieved with the underlying
prospects. Through September 30, 1997, the Company had incurred total costs of
approximately $3,861,000 in connection with this agreement.
In addition to the agreement with NEGX, the Company is pursuing other
exploration opportunities with various industry partners. For instance, during
the third quarter of 1997, the Company signed various exploration agreements
regarding a joint venture with Parallel Petroleum Corporation ("Parallel"), a
publicly held entity headquartered in Midland, Texas. The agreements contemplate
the Company will own a 12.5% working interest in three separate 3-D seismic
exploratory projects covering 130,000 acres in and around Jackson County, Texas
within the Yegua/Frio/Wilcox geological trend. The Company decided to pursue the
joint venture with Parallel based on Parallel's history of success in the
Yegua/Frio/Wilcox Trend. For example, between October 1994 and April 1997,
utilizing 3-D seismic imaging and other new technologies, Parallel participated
in drilling 54 exploratory wells, of which 43 have been producers -- an 80%
success rate. Beginning with seismic operations which commenced in August 1997,
the projects contemplated in the agreements with Parallel will span the course
of the next two to three years. Contingent on the result of the seismic surveys,
up to 75 wells may be drilled. Total cash commitments associated with this joint
venture are approximately $2.5 million in 1997 for land and seismic costs (of
which approximately $1.7 had
-11-
<PAGE>
been incurred through September 30, 1997) and an additional $2.5 million to $7.5
million over the term of the projects for drilling costs that are subject to the
results of the seismic surveys.
If even a modest percentage of the contemplated exploratory prospects with NEGX,
Parallel and other industry partners are successful and those properties are
eventually fully developed, the net reserves of recoverable oil and gas
attributable to the Company's interest would be several times the Company's
present reserves. The Company's current Rocky Mountain reserves are
approximately 2 million barrels of oil (or equivalent). With the addition of
East Bayou Sorrel and other discoveries in the Gulf Coast region, the Company
believes its reserves have at least doubled in 1997. This, combined with the
agreements with NEGX and Parallel provide the Company with an exploration
program that has the potential to significantly increase its existing reserves
and future cash flow.
The Company expects to spend $3.0 to $6.0 million during the remainder of 1997
for exploration and development activities including the anticipated exploration
costs associated with the agreements with NEGX and Parallel. 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.
The Company is currently exploring the possibility of selling its Rocky Mountain
oil and gas assets -- including the gas plant, oil and gas properties and the
service and supply operations. On a best efforts basis, the Company has
contracted with a divestment firm, with offices in Houston, Texas and Denver,
Colorado, to prepare and distribute a divestment package and solicit potential
offers. The divestment packages will be distributed to potential buyers in
November 1997. However, it cannot be determined at this time whether or not any
acceptable offer(s) to purchase the assets will be received, nor if any offer
would ultimately be accepted by the Company.
Capital Expenditures
During the first nine months of 1997 the Company paid $9,566,126 for investment
in capital assets which is summarized as follows:
For the Nine Months Ending
September 30, 1997
Acquisitions of oil and gas interest
in East Bayou Sorrel $ 3,415,000
Exploration Activities -
Successful Efforts 1,313,677
Exploratory Wells in Progress 1,667,101
Exploratory Dry Holes 841,259
Lease Options and Cash Calls on Future
Seismic Operations 1,642,163
-----------
Total Exploration Activities 5,464,200
Workovers or Recompletions of Rocky Mountain
properties 597,632
Total Oil and Gas properties 9,476,832
Service and Other Field Equipment 85,464
Office Equipment 3,830
--------------
Total Capital Expenditures $ 9,566,126
==========
-12-
<PAGE>
The acquisitions of the oil and gas interest in East Bayou Sorrel consisted of
purchasing a 10% working interest, an additional 7.8125% after prospect payout
working interest, and a .001% overriding royalty interest. NEGX, the operator of
the property, is initiating a 50-square mile 3-D seismic program covering the
East Bayou Sorrel field and surrounding areas that began in November 1997 and
should ultimately complement an already extensive database of reprocessed 2-D
seismic and a number of existing well logs. It is anticipated that East Bayou
Sorrel and the surrounding area will ultimately become one of the Company's core
production areas.
EXPLORATION ACTIVITY:
As of the date of this report, the following is a summary of exploratory
prospects currently in process or which are expected to commence drilling in the
fourth quarter of 1997:
AMERADA HESS CORPORATION: OPERATOR
Maurice Field Prospect
Company's working interest 8.4375%
Well name: Trahan #1, Lafayette, Louisiana
Status: Completion of 16,300 ft. well underway. Production test will be
performed upon completion
of pipeline. Testing awaiting.
Maurice Field Prospect
Company's working interest 8.4375%
Well name: S. Broussard, et al No.1 (offset to Trahan #1)
Status: Depending on rig availability, drilling is expected to commence
in December 1997.
NATIONAL ENERGY GROUP, INC. : OPERATOR
Southeast Gueydan Prospect
Company's working interest 9.375%
Well name: Hardee #1, Vermillion Parish, Louisiana
Status: Drilling at approximately 9,900 ft.; Proposed Target Depth 16,750
ft. (Miogyp Test)
East Bayou Sorrel Prospect
Company's working interest 10% with additional 6.7% After Prospect Payout
Well name: Schwing #3, Iberville Parish, Louisiana
Status: Drilling at approximately 12,000 ft.; Proposed Target Depth 13,500
ft. (Marg Vag and Cib
Haz Test)
Robertsdale Alabama Prospect
Company's working interest 10%
Well name: McDaniel 9-10 #1, Baldwin County, Alabama
Status: Drilling at approximately 19,100 ft.; Proposed Target Depth
20,000 ft.
West Grand Bayou Prospect
Company's working interest 9.375%
Well name: Ramos #1, Assumption Parish, Louisiana
Status: Original objective was dry. Based on an evaluation of the dip log
and re-evaluation of 2-D seismic data, the operator is considering
an attempt at a secondary objective.
-13-
<PAGE>
South Tiger Bayou Prospect
Company's working interest 9.375%
Well name: NEG Donner #1, Terrebonne Parish, Louisiana
Status: Depending on rig availability, drilling is expected to commence in
late November 1997.
Bayou Sorrel Area
Project: 3-D Seismic Shoot covering 50 square miles
Status: Survey and drilling shot holes during November 1997.
PARALLEL PETROLEUM CORPORATION: OPERATOR
Southwest Segno Prospect, Liberty County, Texas
Company's working interest 30%
Well name: No. 1 Cain Well
Status: Depending on rig availability, drilling is expected to commence in
late December 1997.
PARALLEL 3-D SEISMIC PROGRAM:
Texana Prospect: 25,000 acres 12.5% working interest
Status: Surveying is approximately 90% complete. Shot hole drilling is
approximately 40% complete.
Ganado Prospect: 25,000 acres 12.5% working interest
Status: Surveying is approximately 70% complete. Ready to start shot hole
drilling.
Formosa Grande Prospect: 80,000 acres 12.5% working interest
Status: Recording is approximately 21% complete. Shot hole drilling is
approximately 50% complete.
TRANSTEXAS GAS CORPORATION: OPERATOR
Company has a 2.129% carried working interest in both wells
Well name: Bennett #4, Brazoria, Texas
Status: Drilling at approximately 9,400 ft.; Proposed Target Depth 13,000 ft
Well name: Zinn Unit #1, Brazoria, Texas
Status: Drilling at approximately 9,000 ft.; Proposed Target Depth 14,153 ft
RESULTS OF OPERATIONS
Overview
The Company's largest source of operating revenue is from the sale of produced
oil, natural gas, and natural gas liquids. Therefore, the level of the Company's
revenues and earnings are affected by prices at which natural gas, oil and
natural gas liquids are sold. As a result, the Company's operating results for
any prior period are not necessarily indicative of future operating results
because of the fluctuations in natural gas, oil and natural gas liquid prices
and the lack of predictability of those fluctuations as well as changes in
production levels.
Total Revenue
Total Revenue from all operations was as follows:
-14-
<PAGE>
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
1997 1996
---------- ---------
<S> <C> <C> <C> <C>
Oil and gas sales .................... $ 868,749 70% $ 594,730 61%
Natural gas marketing and trading .... -- -- -- --
Gas plant processing ................. 153,848 13% 175,389 18%
Oil field services and supply ........ 181,373 15% 163,477 17%
Well administration and other income . 28,666 2% 28,196 4%
---------- ---------- ---------- ---------
Total revenue ................... $1,232,636 100% $ 961,792 100%
========== ========== ========== =========
For the Nine Months
Ended September 30,
1997 1996
---------- ----------
Oil and gas sales .................... $2,328,328 68% $ 1,846,708 37%
Natural gas marketing and trading .... -- 2,048,565 41%
Gas plant processing ................. 525,704 15% 531,069 11%
Oil field services and supply ........ 525,585 15% 469,612 9%
Well administration and other ........ 67,570 2% 84,684 2%
---------- ---------- ---------- ----------
Total revenue ................... $3,447,187 100% $ 4,980,638 100%
========== ========== ========== ==========
</TABLE>
The decrease in total revenue for the first nine months of 1997 when compared to
the same period in 1996 is primarily a result of the expiration of the Company's
natural gas marketing and trading contract with Public Service Company of
Colorado effective July 1, 1996. As illustrated, revenues generated from that
contract were $2,048,565, or 41% of the total revenue for the first nine months
of 1996. This circumstance, along with any known trends or changes that effect
revenue on a line- by-line basis, are discussed in the following paragraphs
under their respective captions.
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 Nine Months
Ended September 30, Ended September 30,
--------------------- -------------------
1997 1996 1997 1996
------- -------- -------- -------
Production:
Oil (Bbls)
<S> <C> <C> <C> <C>
Rocky Mtns ......... 20,200 23,600 60,500 76,500
Gulf Coast ......... 15,500 -- 31,200 --
------- ------- ------- -------
Combined Total 35,700 23,600 91,700 76,500
------- ======= ======= =======
Gas (Mcf)
Rocky Mtns ......... 103,000 98,700 296,500 316,500
Gulf Coast ......... 41,000 -- 57,900 --
------- ------- ------- -------
Combined Total 144,000 98,700 354,400 316,500
======= ======= ======= =======
BOE (6:1)
Rocky Mtns ......... 37,400 40,000 109,900 129,300
Gulf Coast ......... 22,300 -- 40,900 --
------- ------- ------- -------
Combined Total 59,700 40,000 150,800 129,300
======= ======= ======= =======
</TABLE>
-15-
<PAGE>
<TABLE>
Average Collected Price:
Oil (per Bbl)
<S> <C> <C> <C> <C>
Rocky Mtns ........... $ 17.26 $ 21.10 $ 19.12 $ 19.48
Gulf Coast ........... $ 18.54 $ -- $ 19.25 $ --
--------- --------- ------------- -------------
Combined Average $ 17.82 $ 21.10 $ 19.16 $ 19.48
========= ========= ============= =============
Gas (per Mcf)
Rocky Mtns .......... $ 1.17 $ 0.98 $ 1.39 $ 1.12
Gulf Coast .......... $ 2.72 $ -- $ 2.75 $ --
--------- --------- ------------- -------------
Combined Average $ 1.61 $ 0.98 $ 1.61 $ 1.12
========= ========= ============= =============
Per BOE (6:1)
Rocky Mtns .......... $ 12.56 $ 14.85 $ 14.27 $ 14.28
Gulf Coast .......... $ 17.87 $ -- $ 18.60 $ --
--------- --------- ------------- -------------
Combined Average $ 14.55 $ 14.85 $ 15.45 $ 14.28
========= ========= ============= =============
Operating Margins:
Rocky Mtns:
Revenue ............... $ 469,759 $ 594,730 $ 1,567,999 $ 1,846,708
Costs ................. (389,814) (308,959) (1,113,176) (956,822)
--------- --------- ------------- -------------
Operating Margin .... $ 79,945 $ 285,771 $ 454,823 $ 889,886
========= ========= ============= =============
Operating Margin Percent .. 17% 48% 29% 48%
Gulf Coast:
Revenue .............. $ 399,000 $ -- $ 760,329 $ --
Costs ................ (17,224 -- (31,965) --
--------- --------- ------------- -------------
Operating Margin ... $ 381,776 $ -- $ 728,364 $ --
========= ========= ============= =============
Operating Margin Percent .. 96% -- 96% --
Combined Totals:
Revenue ............... $ 868,749 $ 594,730 $ 2,328,328 $ 1,846,708
Costs ................. (407,038) $(308,959) (1,145,141) $ (956,822)
--------- --------- ------------- -------------
Operating Margin .... $ 461,720 $ 285,771 $ 1,183,187 $ 889,886
========= ========= ============= =============
Operating Margin Percent .. 53% 48% 51% 48%
Production Costs per
BOE before DD&A:
Rocky Mtn Region ... $ 10.43 $ 7.60 $ 10.13 $ 7.36
Gulf Coast Region .. $ 0.77 $ -- $ 0.78 $ --
--------- --------- ------------- -------------
Combined Average $ 6.82 $ 7.60 $ 7.60 $ 7.36
========= ========= ============= =============
Change in Revenue
Attributable to:
Production ............... $ 300,752 $ 338,547
Price .................... (26,733) 143,073
------------- -------------
Total Increase in Revenue .. $ 274,019 $ 481,620
============= =============
</TABLE>
Most of the decrease in oil and gas production for the Rocky Mountain region can
be attributed to the following: 1) the sale of several marginal, uneconomic, or
nonstrategic oil and gas properties in the second quarter 1996 that accounted
for 3,900 bbls. of oil and 4,500 Mcf of gas in the prior year; and 2) the
natural decline in production that is inherent in oil and gas wells. Both these
circumstances were largely offset by an increase in commodity prices and new
production from the Gulf Coast Region.
The operating costs of the Rocky Mountain properties increased considerably in
1997 (both as a percentage of revenue and per BOE) when compared to the same
periods in 1996, primarily as a result of an extensive amount of maintenance and
stimulation procedures that were needed to maintain production. Most of the
wells in the Rocky Mountain region are between 10 and 30 years
-16-
<PAGE>
old and the Company expects to incur higher costs from time to time since the
equipment is aging and the reservoirs are on the latter part of the decline
curve. Although the Company does not expect future costs of the Rocky Mountain
properties to increase, and anticipates that they may even be lower, it cannot
be determined when, if, or how much the costs of the Rocky Mountain properties
will be in the future based on the age of the wells and corresponding equipment.
Natural Gas Marketing and Trading
The Company had a "take-or-pay" contract with Public Service Company of Colorado
("PSCo") which called for PSCo to purchase from the Company a minimum of 2.92
billion cubic feet ("BCF") of natural gas annually. The price paid the Company
by PSCo was based on the Colorado Interstate Gas Commission's "spot" price, plus
a fixed price bonus. The natural gas marketing and trading activities represent
natural gas that was purchased from third parties and sold to PSCo under the
terms of the contract. The contract with PSCo expired on June 30, 1996.
Historically, the price paid by PSCo under that contract was at a premium above
the market and therefore allowed for the marketing and trading activities. With
the increasing competition fostering within all phases of the natural gas
industry, it is unlikely that the Company will be able to negotiate another
contract that pays at an above market premium. Accordingly, the Company is
unlikely to resume marketing and trading activities. The operating results for
this operation for the first nine months of 1996 and 1997 are as follows (no
information is shown for the quarters ending September 30 since the contract
expired on June 30, 1996):
For the Nine Months
Ended September 30
1997 1996
---------------- -------------
Total Volume Sold (Mcf) - 1,223,855
Average Price - 1.67
---------------- -------------
Total Revenue - $ 2,048,565
Costs - (1,745,446)
---------------- -------------
Gross Margin - $ 303,119
================ =============
Gross Margin Percent 15%
Since the gross margin represents the net cash flow and income generated from
this activity, the loss of this premium contract price has and will have a
material and negative impact on the Company's current and future operations.
Gas Plant Processing Revenues
This category accounts for the natural gas processed and the natural gas liquids
extracted and sold by the Gas Plant facility. Operating statistics for the
periods presented are as follows:
For the Three Months
Ended September 30,
1997 1996
------------- ------------
Volumes Volumes
Production:
Natural Gas Processed (Mcf) 86,000 89,200
============= ============
Liquids Produced :
B-G Mix (gallons) 192,100 224,000
Propane (gallons 163,600 166,600
------------- ------------
Total 355,700 390,600
============= ============
Average Sales Price of Liquids (per gallon) $ 0.40 $ 0.40
-17-
<PAGE>
Gross Margin: Amount Amount
---------------- ------------
Revenue $ 153,848 $ 175,389
Costs (79,346) (108,618)
----------------- ------------
Gross Margin $ 74,502 $ 66,771
================= ============
Gross Margin Percent 48% 38%
For the Nine Months
Ended September 30,
1997 1996
----------------- ------------
Volumes Volumes
Production:
Natural Gas Processed (Mcf) 250,200 274,700
================== =============
Liquids Produced:
B-G Mix (gallons) 588,300 685,300
Propane (gallons) 485,000 515,700
------------------- -------------
Total 1,073,300 1,201,000
================== =============
Average Sales Price of Liquids (per gallon) $ 0.41 $ 0.45
Gross Margin: Amount Amount
---------------- ------------
Revenue $ 525,704 $ 531,069
Costs (283,645) (360,626)
---------------- ------------
Gross Margin $ 242,059 $ 170,443
================ ============
Gross Margin Percent 46% 32%
The decrease in natural gas processing volumes (per Mcf) during 1997 when
compared to the same periods in 1996, can be substantially attributed to the
normal decline in production from the two fields owned and operated by the
Company that supply the gas plant with the natural gas. The change in revenue in
1997 when compared to the same period in 1996 is a direct result of the volume
of natural gas processed and the corresponding changes in liquid prices.
Costs associated with the Gas Plant operations consist of both semi-fixed and
variable costs. The semi-fixed costs consist of direct payroll, utilities,
operating supplies, general and administrative costs, and other items necessary
in the day-to-day operations. The semi-fixed costs are not expected to change
significantly regardless of the volume processed by the Gas Plant. The variable
costs consist primarily of purchased gas, plant fuel and shrink, lubricants,
repair and maintenance, and costs of gas marketing and buying. These costs are
generally a direct function of the volume processed by the Gas Plant and are
expected to either increase or decrease proportionately with the corresponding
plant production. The costs associated with the gas plant decreased in 1997 when
compared to the same periods in 1996 primarily because of reductions in plant
personnel and because less gas was processed.
Oil Field Services and Oil Field Supply
Operating statistics for the Company's oil field service and supply operations
for the periods presented are as follows:
-18-
<PAGE>
For the Three Months
Ended September 30,
1997 1996
------------ --------
Revenue $ 181,373 $ 163,477
Costs (176,090) (175,748)
---------- ------------
Net Operating Income $ 5,283 $ (12,271)
=========== =============
Net Operating Margin Percent 11% (8%)
For the Nine Months
Ended September 30,
1997 1996
----------- --------
Revenue $ 525,585 $ 469,612
Costs (469,223) (416,425)
----------- -----------
Net Operating Income $ 56,362 $ 53,187
=========== ============
Net Operating Margin Percent 11% 11%
As expected, there has been no material change in the results of operations for
the periods presented and the Company does not expect any significant changes in
the future.
Well Administration and Other Income
This revenue primarily represents the revenue generated by the Company for
operating oil and gas properties. There has been no significant change in the
average monthly revenue between 1997 and 1996 and the Company does not expect
any significant change in the future.
General and Administrative
General and administrative ("G&A") expenses increased approximately $80,000
during the third quarter of 1997 and approximately $298,000 during the first
nine months of 1997 when compared to the same periods in 1996. The increases for
the first nine months of 1997 are summarized below:
$ 110,000 - For consulting services (geological, geophysical, legal,
accounting, land and other)associated with the Company's
expansion into the Gulf Coast.
56,000 - Travel and entertainment costs associated with the Company's
expansion into the Gulf Coast.
47,000 - Payroll costs associated with an increase in base pay and
insurance benefits for virtually all the Company's officers and
employees.
36,000 - Recovery of Bad Debt in 1996 (this reduced G&A expense in 1996
- no such amounts were recovered in 1997)
25,000 - A Directors and Officers Liability Insurance Policy purchased
on July 1, 1996.
19,000 - Directors compensation
5,000 - All other, net.
$ 298,000
The Company expects future G&A costs to be at least at those levels incurred in
the third quarter of 1997, or approximately $120,000 to $130,000 per month.
Consulting Agreement - Related Party
In March 1996 the Company entered into a three-year consulting agreement with
Beta Capital Group, Inc. ("Beta"). Beta, located in Newport Beach, California,
specializes in emerging companies with both capital needs and market support
requirements. Beta's president, Steve Antry, has been a
-19-
<PAGE>
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.
During 1997, the Company has also granted Beta warrants for an additional
100,000 shares of common stock. These warrants are exercisable for a period of
five years at an exercise price of $3.75 per share. The Company has determined
the value of these options using the Black Scholes model and has recognized the
fair value of approximately $60,000 as consulting expense in the accompanying
statements of operations for the three and nine months ended September 30, 1997.
A shareholder of Beta is a member of the Company's Board of Directors.
Depreciation, Depletion and Amortization
Depreciation, Depletion and Amortization ("DD&A") for the periods presented,
excluding the amortization of debt issuance costs, consisted of the following:
For the Three Months
Ended September 30,
1997 1996
-------------- ----------------
Oil and Gas Properties $ 221,414 $ 143,691
Gas Plant and Other Buildings 60,932 60,938
Rolling Stock 24,728 25,000
Other Field Equipment 9,615 8,671
Furniture and Fixtures 12,526 9,465
Non-Compete Agreement 11,499 11,499
---------- ----------
Total $ 340,714 $ 259,264
========= =========
For the Nine Months
Ended September 30,
1997 1996
--------------- ----------------
Oil and Gas Properties $ 545,018 $ 458,060
Gas Plant and Other Buildings 182,790 183,878
Rolling Stock 75,619 73,618
Other Field Equipment 28,749 24,553
Furniture and Fixtures 37,280 32,977
Non-Compete Agreement 34,497 34,497
---------- ---------
Total $ 903,953 $ 807,583
========= =========
The increase in DD&A for the periods presented is primarily related to the oil
and gas properties which is a result of increased production. Based on
production, DD&A for the oil and gas properties has remained relatively constant
ranging from $3.54 to $3.71 per BOE during the periods presented.
-20-
<PAGE>
Interest
Total Interest incurred, and its allocation, for the periods presented is as
follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Interest paid or accrued .......... $ 105,296 $ 76,775 $ 346,740 $ 186,944
Amortization of debt issuance costs 53,337 60,353 444,265 79,439
--------- --------- --------- ---------
Total interest incurred ........... 158,633 137,128 791,005 266,383
Interest capitalized .............. (121,403) -- (121,403) --
--------- --------- --------- ---------
Interest expense .................. $ 37,230 $ 137,128 $ 669,602 $ 266,383
========= ========= ========= =========
</TABLE>
The higher interest incurred in 1997 is reflective of the increase in the
average long-term debt outstanding, and the amortization of the corresponding
debt issuance costs and discount. All of these circumstances are directly
related to the convertible debentures sold by the Company pursuant to a private
placement of convertible debentures completed in November 1996.
-21-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract incidental to the operation of its business. The Company is
not currently involved in any such incidental litigation which it believes could
have a materially adverse effect on its financial condition or results of
operations.
Item 2. Changes in Securities
(a) Effective June 11, 1997, in accordance with provisions of the Company's
Articles of Incorporation, all outstanding $0.01 par value Series A Cumulative
Convertible Preferred Stock were automatically converted into Common Stock and
Common Stock Purchase Warrants. Other than the foregoing, there have been no
modifications to any instruments defining the rights of the holders of any class
of registered securities during the period covered by this report.
(b) No rights evidenced by any class of registered securities have been
materially limited or qualified by the issuance or modification of any other
class of securities.
(c) Recent sales of unregistered securities. The Company issued and sold the
following securities without registration under the Securities Act of 1933, as
amended ("Securities Act"), during the nine months ended September 30, 1997.
1. Effective January 10, 1997 the Company issued 315,000 shares of its common
stock to three unrelated entities, Atocha Exploration, Inc., Potosky Oil and
Gas, Inc., and Browning Oil Company, Inc., in exchange for an undivided interest
in a producing oil and gas prospect designated as the East Bayou Sorrel Prospect
in Iberville Parish, Louisiana.
2. On January 31, 1997 the Company issued 250,000 shares of its common stock
upon exercise of outstanding purchase warrants of $1.25 per share for a total
proceeds of $312,500. The holders of the warrants received them as part of a
"unit" sold in a private placement in 1995 that consisted of common stock and
warrants. The Company relied upon Section 4(2) of the Securities Act and Rule
506 of Regulation D in claiming exemption from registration requirements of the
Securities Act for securities sold. The shares of common stock issued upon
exercise of the warrants were registered for resale by the holders in
Registration No. 33-94536.
3. Between February 1, 1997 and March 10, 1997, the Company issued 1,500,000
shares of its common stock for $3,750,000 to a group of private investors each
of whom qualified as an accredited investor as such term is defined in
Regulation D adopted by the Securities and Exchange Commission. The Company paid
a selling commission of $300,000. The Company relied upon Section 4(2) of the
Securities Act and Rule 506 of Regulation D in claiming exemption from the
registration requirements of the Securities Act for the securities sold.
-22-
<PAGE>
4. Between March 14, 1997 and April 15, 1997, the Company sold 52,000 shares of
its common stock for $130,000 to a group of private investors each of whom
qualified as an accredited investor as such term is defined in Regulation D
adopted by the Securities and Exchange Commission. The Company paid a selling
commission of $10,400. The Company relied upon Section 4(2) of the Securities
Act and Rule 506 of Regulation D in claiming exemption from the registration
requirements of the Securities Act for the securities sold.
5. Through September 30, 1997 holders of $935,000 of the Company's outstanding
collateralized convertible 10% debentures ("Debentures") surrendered such
Debentures to the Company for conversion into 311,665 shares of the Company's
common stock in accordance with conversion provisions of the Debentures. The
Certificates representing the shares issued upon conversion bear a restrictive
legend prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer" instructions
have been issued to the transfer agent. The shares of common stock issued upon
conversion have been registered for resale by the holders on Registration No.
333-19589. The Company relied upon Section 3(a)9 of the Securities Act for
issuance of the securities.
6. On February 14, 1997, the Company issued 4,000 shares of its common stock to
two consultants of the Company in lieu of cash for consulting services rendered
to the Company valued at $8,000 for financial reporting purposes. The
Certificates representing the shares issued bear a restrictive legend
prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer" instructions
have been issued to the transfer agent.
7. Between March 1, 1997 and April 15, 1997 the Company issued 2,482,500 shares
of its common stock upon exercise of a like number of warrants at $1.25 per
warrant for a total proceeds of $3,103,125. Holders of such warrants acquired
the warrants in the Company's 1996 private placement of Debentures and Warrants.
The warrants would have expired if not previously exercised on April 15, 1997.
The Certificates representing the shares issued upon exercise bear a restrictive
legend prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer" instructions
have been issued to the transfer agent. The shares issued upon exercise of
warrants were registered by the Company for resale by the holders in
Registration No. 333-19589. The Company relied upon Rule 506 of Regulation D in
claiming exemption for the registration requirements of the Securities Act for
issuance of the securities upon exercise of the warrants.
8. Between March 1, 1997 and June 3, 1997, the Company issued 135,000 shares of
its common stock upon exercise of outstanding stock purchase warrants at $0.75
per share for total proceeds of $101,250 to the Company. The Certificates
representing the shares issued upon exercise bear a restrictive legend
prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer" instructions
have been issued to the transfer agent. The holder of the warrants is an
affiliate of Beta Capital Group, Inc. with whom the Company has a consulting
agreement and to whom the warrants were issued in February 1996. The shares of
common stock issued upon exercise of the warrants were registered for resale by
the holder in Registration No. 333-19589.
-23-
<PAGE>
9. Between June 23, 1997 and September 30, 1997 the Company issued 116,250
shares of its common stock upon exercise of outstanding stock purchase warrants
at $0.75 per share for total proceeds of $87,188 to the Company. The warrants
were originally issued to Beta Capital Group, Inc. with whom the Company has a
consulting agreement and to whom the warrants were issued in February 1996.
Subsequent to their issuance, Beta re-assigned the warrants to another holder.
The Certificates representing the shares issued upon exercise bear a restrictive
legend prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer" instructions
have been issued to the transfer agent. The shares of common stock issued upon
exercise of the warrants were registered for resale by the holder in
Registration No. 333-19589.
10. Between January 1997 and September 29, 1997, the Company issued 138,850
shares of its common stock upon exercise of outstanding stock purchase warrants
issued by the Company between 1994 and 1996 to certain broker/dealers in
connection with private placements of Company securities during such time. The
Company received $216,900 of proceeds upon exercise of the warrants. The
Certificates representing the shares issued upon exercise bear a restrictive
legend prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer" instructions
have been issued to the transfer agent. The shares of common stock issued upon
exercise were registered by the Company for resale by the holders under
Registration Nos. 333-19589 and 33-94536.
11. On June 25, 1997 the Company issued 670 shares of its common stock to one
retiring director in lieu of cash for services to the Company valued at $2,155
for financial reporting purposes. The Certificates representing the shares
issued bear a restrictive legend prohibiting transfer without registration under
the Securities Act or the availability of an exemption from registration and
"stop transfer" instructions have been issued to the transfer agent.
12. On July 14, 1997 the Company issued 3,150 shares of its common stock to one
director in exchange for an overriding royalty interest in the producing oil and
gas prospect designated as the East Bayou Sorrel Prospect, Iberville Parish,
Louisiana. The shares were valued at $10,000 for financial reporting purposes.
The Certificates representing the shares issued bear a restrictive legend
prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer" instructions
have been issued to the transfer agent.
13. On July 18, 1997, the Company issued 2,240,000 shares of its common stock
for $5,600,000 to a group of private investors each of whom qualified as an
accredited investor as such term is defined in Regulation D adopted by the
Securities and Exchange Commission. The principal underwriter was San Jacinto
Securities, inc. and the Company paid selling commissions of $560,000. The
Company relied upon Section 4(2) of the Securities Act and Rule 506 of
Regulation D in claiming exemption from the registration requirements of the
Securities Act for the securities sold. The Certificates representing the shares
issued a restrictive legend prohibiting transfer without registration under the
Securities Act or the availability of an exemption from registration and "stop
transfer" instructions have been issued to the transfer agent.
-24-
<PAGE>
14. Between August 29, 1997 and September 9, 1997 the Company issued 42,675
shares of common stock to two former directors upon exercise of outstanding
options. The Company received $45,390 of proceeds upon exercise of the warrants.
The Certificates representing the shares issued a restrictive legend prohibiting
transfer without registration under the Securities Act or the availability of an
exemption from registration and "stop transfer" instructions have been issued to
the transfer agent.
The Company relied on section 4(2) of The Securities Act in issuing the
securities described in paragraphs 1, 6, 8, 12 and 14 without registration. Each
of the persons who acquired the securities had full information concerning the
business of the officers of the Company, certificates representing the
securities bear a restrictive legend as described above and the securities were
acquired for investment.
Item 3. Defaults Upon Senior Securities
(a) There has been no material default in the payment of principal, interest, or
any other material default, with respect to any indebtedness of the small
business issuer during the period covered by this report.
(b) In December 1994, the Board of Directors elected to forgo the declaration of
the regular quarterly dividend for the Company's Series A Cumulative Convertible
Preferred Stock for the fourth quarter of 1994. In March 1995, the Board of
Directors elected to suspend the Preferred Stock dividend indefinitely. The
dividends continued to accrue on a monthly basis and were cumulative. Pursuant
to the terms of the Articles of Incorporation, on June 11, 1997 all the
outstanding Preferred Stock (96,847 shares on that date) plus all the dividends
in arrears, automatically converted into Common Stock and Common Stock Purchase
Warrants at a ratio of 3.1875 to 1. Accordingly, as of September 30, 1997, there
were no shares of Preferred Stock outstanding and no dividends in arrears.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of shareholders.
Item 5. Other Information
In connection with the automatic conversion of all of the Company's outstanding
Preferred Stock into Common Stock and Common Stock Purchase Warrants on June 11,
1997, the terms of office of two directors who were elected to represent the
Preferred Stockholders, Mr. LeRoy Smith and Mr. Steve Antry, automatically
terminated and they were no longer directors pursuant to the terms of the
Articles of Incorporation. In July 1997, Mr. Antry was elected as a director to
fill one of the vacancies to serve in that capacity until the Annual Meeting of
Stockholders in 1998.
On October 1, 1997, Mr. Richard A. Houlihan resigned his position as a director.
Mr. Houlihan tendered his resignation to pursue other interests and allow
someone more active with the Company to be added on the Board of Directors. The
Board appointed Mr. Stephen L. Fischer to fill the vacancy. Mr. Fischer is
associated with Beta Capital Group, Inc. as an independent contractor and has
been active in the Company's marketing efforts since March 1996.
-25-
<PAGE>
On November 7, 1997, Mr. J. N. "Newt" Burkhalter resigned his position as a
director. Mr. Burkhalter is currently the Company's Vice President of Production
and Engineering. However, Mr. Burkhalter intends to retire from this position
sometime in the near future and work for the Company from time to time as a
consultant, on an as needed basis. Since Mr. Burkhalter intends to serve the
Company as a consultant in the future, he tendered his resignation as a director
to establish independence between himself and the Company. The Company's current
Board, as established by Board Resolution in accordance with the By-Laws,
consists of ten (10) seats. Mr. Burkhalter's resignation created a vacancy on
the Board, with a term expiring at the Annual Meeting of Stockholders in 2000.
The Company will either appoint a qualified candidate to fill this vacancy in
the near future or reduce the number of directors to nine (9).
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
(1) Exhibit 27, "Financial Data Schedule".
(b) There were no reports on Form 8-K filed during the quarter ended
September 30, 1997.
-26-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PEASE OIL AND GAS COMPANY
Date: March 27, 1998 By: /s/ Willard H. Pease, Jr.
Willard H. Pease, Jr.
President and Chief Executive Officer
Date: March 27, 1998 By: /s/ Patrick J. Duncan
Patrick J. Duncan
Chief Financial Officer and
Principal Accounting Officer
-27-
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