SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) May 27, 1999
PEASE OIL AND GAS COMPANY
(Exact name of registrant as specified in its charter)
Nevada 0-6580 87-0285520
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation) Identification No.)
751 Horizon Court, Suite 203 Grand Junction Colorado 81506-8718
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (970) 245-5917
pease\34act\carpatsky.merger 5-27-99.wpd
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Item 5. OTHER MATERIAL EVENTS.
On May 27, 1999 the Registrant entered into a nonbinding letter of
intent with Carpatsky Petroleum, Inc. ("Carpatsky"), a publicly-held company
traded on the Alberta Stock Exchange under the symbol "KPY.AL." Under the terms
of the proposed transaction, Carpatsky would be merged into a subsidiary
corporation of the Registrant in exchange for approximately 40.0 million shares
of common stock of the Registrant to be issued to the Carpatsky shareholders.
The Registrant would also assume approximately $7.5 million of Carpatsky debt.
In addition, effective upon completion of the merger transaction, all of the
Registrant's currently outstanding Series B Convertible Preferred Stock would be
exchanged for approximately 8.0 million shares of common stock. The transaction
is conditioned upon, among other things, the completion of a reserve report for
the Carpatsky oil and natural gas assets showing at least $45 million in
discounted future net revenue, preparation and approval of a definitive merger
agreement, regulatory and shareholder approvals, including authorization of
additional common stock under Registrant's corporate charter.
The holders of Registrant's Series B Convertible Preferred Stock have
agreed not to convert outstanding Series B Preferred into common stock or to
purchase or sell common stock or preferred stock of the Registrant pending
completion of the proposed transaction or until November 15, 1999.
RISK FACTORS
The transaction may not close.
The proposed merger transaction with Carpatsky is subject to a number
of conditions, including preparation and signing of a definitive merger
agreement and obtaining approval of our stockholders. Registrant or Carpatsky
may be unable to meet the applicable conditions or the transaction could be
abandoned for other reasons. In any event, the transaction will not be completed
until the fall of 1999.
Carpatsky shareholders would control Registrant
If the proposed merger transaction is completed, the former Carpatsky
shareholders would own approximately 40 million shares of stock, the former
Series B Preferred holders would hold approximately 8 million shares of common
stock and the common stockholders of the Registrant would own approximately 1.7
million shares. As a result, the present holders of Registrant's common stock
would not be in a position to effect any control of the Registrant after the
transaction.
There are risks in producing oil and gas in Ukraine.
All of the reserves of oil and natural gas owned by Carpatsky are in
Ukraine. To date, Carpatsky has not sold its oil or natural gas produced from
its properties outside Ukraine. Carpatsky believes that it has established
relationships which will entitle it to transport natural gas
pease\34act\carpatsky.merger 5-27-99.wpd
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produced from its properties into Western Europe for sale on the international
market, but no such sales have been made. Following the transaction the
Registrant faces a risk that it may be unable to successfully commercialize and
monetize in U.S. dollars production of the Carpatsky oil and natural gas
reserves. These risks are based on the number of factors, including the
following:
o The political climate;
o The relationships between countries in eastern Europe;
o The political and other regulations applicable to the oil and
gas business in the Ukraine and to foreign companies such as
Registrant
o Competitors in the Ukraine;
o The limited access to transport petroleum products outside the
Ukraine for sale;
o The possibility that oil and natural gas prices in the Ukraine
are substantially different from prevailing world prices for
the commodities;
o Development of oil and natural gas reserves in Ukraine will
require special expertise and use of local resources;
o Expropriation by the host country (although this would be in
contravention of Ukraine's Law on Foreign Investment);
o Currency devaluation;
o Restriction on repatriation of capital and profits;
o Changes in the host country's tax regime; and
o Non-payment for gas delivered and lack of availability to seek
redress.
The combined companies will require additional financing.
It is anticipated that Carpatsky will be a wholly-owned subsidiary
corporation of Registrant following the merger transaction. Carpatsky will
require substantial additional capital resources in order to fully develop its
reserves of oil and natural gas and to pay amounts it presently owes to the
Ukrainian joint venture through which it holds its oil and gas properties.
Registrant and Carpatsky will seek additional financing, the terms of which are
presently unknown and which may be disadvantageous to Registrant's shareholders,
including the former shareholders of Carpatsky.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
Exhibit 10.1 Letter of Intent With Carpatsky
Petroleum, Inc., dated May 20, 1999 (signed
by the Registrant on May 27, 1999)
Exhibit 10.2 Press Release Dated May 27, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: June 4, 1999
PEASE OIL AND GAS COMPANY
By: /s/ Patrick J. Duncan
Patrick J. Duncan, President
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EXHIBIT INDEX
Exhibit No. Description Page No.
Exhibit 10.1 Letter of Intent With Carpatsky Petroleum, Inc.,
dated May 20, 1999 signed by the Registrant on
May 27, 1999) 6
Exhibit 10.2 Press Release Dated May 27, 1999. 11
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CARPATSKY PETROLEUM, INC.
6671 SOUTHWEST FREEWAY, SUITE 303
HOUSTON, TEXAS 77074
(713) 981-9595 - FAX (713) 981-8670
- --------------------------------------------------------------------------------
May 20, 1999
Mr. Patrick J. Duncan, President
Pease Oil & Gas Company
751 Horizon Court, Suite 203
P.O. Box 60219
Grand Junction, Colorado 81506-8758
Dear Mr. Duncan:
Based upon information exchanged and continued discussions addressing
business philosophy, corporate goals and relative asset valuations, this letter
is intended to set forth the principal terms of a merger of Carpatsky Petroleum,
Inc. ("Carpatsky") with and into Pease Oil & Gas Co. ("Pease").
1. Pursuant to the merger transaction (the "Transaction") Carpatsky
will become a wholly-owned subsidiary of Pease in a transaction in which
all of the issued and outstanding Carpatsky common stock shall be converted
in that number of shares representing 78.67% of the total issued and
outstanding shares of Pease after completion of the Transaction (the
"Shares"), issuable pro rata in proportion to the number of shares of
Carpatsky stock held by each of the shareholders of Carpatsky. Upon
consummation of the Transaction, the holders of the Series B 5% PIK
Cumulative Convertible Preferred Stock of Pease (the "Preferred Stock")
shall exchange their shares into common stock representing 18% of enlarged
company. All outstanding options and warrants of both companies will remain
exercisable, however the exercise price and number of shares of the
enlarged company to be received upon such exercise shall be adjusted to
reflect the effect of the Transaction. The Transaction is intended to
qualify as a "tax-free" reorganization under the Internal Revenue Code of
1986, as amended. Upon consummation of the transaction Pease shall change
its name as mutually agreed by both parties. The combined entities will
hereinafter be referred to as "Newco".
2. The Transaction shall be conditioned upon:
(i) Delivery to Pease of a reserve valuation report of Carpatsky's
interest in oil and gas assets in the Republic of Ukraine
prepared by Ryder Scott Co. disclosing a value of such
reserves of not less than $45 million, determined in
accordance with U.S. Securities and Exchange Commission
regulation, and
(ii) Inclusion in the merger agreement of a provision granting to
the Pease common
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stockholders limited rights to protect against excessive
dilution in the initial capital raising endeavor post closing
of the transaction.
3. Pease shall use its best efforts to cause the terms of its outstanding
Convertible Debentures to be modified to: (i) extend the maturity by an
additional twenty-four (24) months and (ii) reduce the strike price for
conversion of such debt into common stock.
4. Each party shall commence due diligence as soon as practical after
execution of this letter of intent with the objective of completing the
same within thirty (30) days.
5. Upon consummation of the Transaction, the board of directors of Newco
shall be reorganized to consist of not more than five (5) directors.
One of the directors shall, with the consent of Carpatsky, be appointed
by Pease. The director shall serve until the year 2000 annual meeting
of shareholders of Newco, unless sooner removed for cause by the
shareholders of Newco. As used in the preceding sentence "cause" shall
mean any act or omission which constitutes gross negligence or wilful
misconduct. The board of directors of Newco, as so reconstituted, shall
select all members of management of Newco.
6. Whether or not the Transaction is consummated, each of the parties
hereto will pay its respective costs and expenses associated with the
negotiation, preparation, execution and delivery of the definitive
agreement respecting the subject matter hereof and the consummation of
the Transaction.
7. Subject to the terms of confidentiality as set forth in Paragraph 8,
the parties agree to afford each other's management, auditors, legal
counsel, and other authorized representatives reasonable access to
their properties, records, and personnel in order to inspect,
investigate, and audit the business records and operations of the
other, each at their own respective cost and expense. The parties agree
to conduct any such inspection, investigation, and audit in a
reasonable manner, during regular hours so as not to disrupt the normal
function of the parties' business.
8. During the course of the due diligence review, both Carpatsky and
Pease will receive confidential and proprietary information about the
other. Each of them shall at all times take all reasonable and
necessary steps to safeguard the confidentiality and proprietary
information of the other party disclosed by or on behalf of that party
in connection with the proposed Transaction, that such information
will be used solely for the purpose of evaluating the proposed
Transaction, and that such information will not be disclosed to any
third party without the prior written consent of the other party to
the proposed Transaction; provided, however, that the parties may
disclose information which at the time of disclosure is part of the
public knowledge and readily accessible to third parties or
information which is required by law to be disclosed. In the event the
Transaction contemplated hereby is not consummated, both parties agree
to return all documents (and copies thereof) containing such
confidential information to each other (or certify to each other as to
the destruction of such documents and copies) and to continue to
maintain the confidentiality for all disclosed information. The
undersigned acknowledge, however, that both are public companies and
therefor subject to disclosure requirements and both agree that they
can make such
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announcements as are required; provided, however, that both shall
consult with each other as to content and form of any such disclosure
prior to making any such announcements.
9. During the pendency of the Transaction neither Carpatsky nor Pease nor
any of their respective officers, directors, or affiliates shall,
directly or indirectly, purchase or sell or acquire or dispose of
rights to purchase or sell either party's common stock in the public
trading market for such stock, or from any shareholder.
10. In consideration of each party's expenditure of funds towards the
investigation of the other party and the negotiation of a definitive
agreement respecting the Transaction, neither party, nor its
directors, officers, shareholders nor their respective affiliates,
shall discuss the Transaction or seek or negotiate any alternative
transaction nor enter into any negotiation, arrangement, or
understanding with any third party with respect to the sale of the
party's business or assets or any joint venture or similar transaction
involving its business or assets. Each party hereby represents to the
other that it has not entered into any agreement or understanding
regarding a sale or other transfer of its business or assets or any
joint venture or similar transaction involving its business or assets
with any third party, which agreement or understanding is in effect on
the date hereof, other than in the ordinary course of business, and
each party hereby specifically agrees that it will not pursue any such
transaction other than the Transaction described in this letter, until
or unless the proposed Transaction has been abandoned by the mutual
agreement of the parties.
11. Except as otherwise contemplated hereby, pending the execution and
delivery of definitive agreements respecting the subject hereof, the
parties agree (A) to conduct their respective businesses in the
ordinary course and (B) without the prior written consent of the
other, neither shall (i) change its capital structure, including,
without limitation, by reclassifying its outstanding securities or by
issuing additional shares of capital stock, securities convertible
into shares of capital stock or other agreements, rights or options
exercisable for or convertible into shares of capital, (ii) change the
nature or rates of compensation of its management personnel, (iii)
enter into new or amend prior employment contracts or severance
agreements or arrangements with management personnel, (iv) declare or
issue any dividends (in chase or securities) on any shares of capital
stock, not arising in the ordinary course of the party's business
without the prior written consent of the other party, (v) incur any
bank indebtedness, other than pursuant to bank lines of credit
previously established, provided that any such permitted indebtedness
shall be incurred only in connection with the conduct of its business
in the ordinary course, or (vi) sell or otherwise dispose of any
material assets.
12. The foregoing sets forth the principal terms of the proposed
merger of the parties hereto. The completion of the Transaction shall
be subject to a number of customary conditions, including, without
limitation, the satisfactory completion of an investigation and review
of each party by the other; the negotiation and execution of
definitive documents containing, among other matters, customary
representations and warranties of each of the parties; the approval of
all governmental and regulatory authorities; the filing and
effectiveness of a prospectus/proxy statements for use in connection
with the shareholders' meeting and the issuance of the Shares; the
completion of audits, if required; the approval of the foregoing
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transaction by the respective boards of directors and shareholders;
securing all requisite third party consents; and the absence of any
litigation or other governmental proceeding which could result in a
material adverse effect on either of the parties or which seeks to
enjoin the consummation of the Transaction. However, the parties agree
to use their respective best efforts to proceed as quickly as possible
with the preparation, execution and delivery of a definitive agreement
and the consummation of the Transaction. The understandings and
agreement set forth in this letter shall be replaced by the provisions
of definitive documents when approved by our respective Boards of
Directors which shall be formally signed on behalf of the parties.
If the foregoing accurately sets forth the understanding we have with
respect to the proposed Transaction, please sign the letter in the space
provided below and return it to the undersigned so that we can commence the
preparation of the definitive agreement.
Pease Oil and Gas Company Carpatsky Petroleum, Inc.
Executed on behalf of the Executed on behalf of the
Board of Directors Board of Directors
By: /s/ William F. Warnick By: /s/ Fred Hofheinz
Name and Title: Chairman Fred Hofheinz, Chairman
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[GRAPHIC OMITTED]
PEASE OIL AND GAS COMMITS TO MERGER
FOR IMMEDIATE RELEASE - May 27, 1999
Grand Junction, Colorado - May 27, 1999 - Pease Oil and Gas Company (OTC BB:
WPOG) today announced that it has signed a letter of intent with Carpatsky
Petroleum, Inc. ("Carpatsky"), a publicly held company traded on the Alberta
Stock Exchange under the symbol "KPY.AL". Carpatsky is engaged in production and
development of oil, gas and condensate in the Republic of Ukraine with proven
reserves estimated by Carpatsky to be in excess of $45 million. The letter of
intent has been approved by both companies' Boards of Directors. The transaction
is still conditioned upon, among other things, the completion of a reserve
report for the Carpatsky assets being prepared by Ryder Scott - Independent
Petroleum Consultants, the preparation and approval of a definitive merger
agreement and regulatory and shareholder approvals.
The Carpatsky assets consist of interests in two separate fields: 1.) the
Rudovsko- Chervonozavodskoye field (a/k/a the "RC" field) located in the Poltava
District of Eastern Ukraine; and 2.) the Bitkov field located in southwest
Ukraine. In both areas, Carpatsky's planned operations will primarily focus on
exploitation activities -- drilling development wells and performing workovers
on existing wellbores -- in order to monetize proven reserves. Carpatsky has
reported that the 8/8's daily production from the RC field is currently in
excess of 14 million cubic feet of gas and 116 bbls of condensate from two
wells. A third well was completed last week and, during initial testing, flowed
59.3 million cubic feet per day on a 14mm (0.5 inch) choke. This producing sand,
known as the "T-3" horizon, is the deepest in the field. Two other wells are in
the final stages of completion and should be on production during the third
quarter of the year. In addition, one other well is currently drilling at
14,500' and is expected to reach its proposed target depth of 18,000' during the
third quarter of this year. Carpatsky expects four to eight additional
development wells will be drilled in the RC field between now and the end of
2000. The company's net revenue interest ("NRI") in the RC field is
approximately 20%. However, pursuant to the terms of the joint venture
agreement, Carpatsky has the right to increase its NRI to 45% by repaying $6.4
million advanced on its behalf by its joint venture partner. Since this
additional contribution would essentially be purchasing proved producing
reserves, the company intends making payment to increase its NRI later this
year. At the Bitkov field, the Carpatsky-Ukrainian joint venture is producing in
excess of 100 Bbls per day and 500-600 Mcf per day. A Ukrainian oil and gas
agency estimates this field may have gross reserves in excess of 700 million
barrels of oil, of which only 60 million have been produced to date. A study is
now underway to determine how much of the field's reserves can be economically
produced and the most efficient way to do so.
Pursuant to the terms of the proposed merger transaction, Pease will issue
approximately 40 million shares of common stock to acquire all the outstanding
stock of Carpatsky and will assume approximately $7.5 million in debt. The $7.5
million in debt includes the $6.4 million owed to their joint venture partners
to increase their NRI from approximately 20% to 45% in the RC field. In
addition, all of Pease's currently outstanding Series B Preferred Stock will be
exchanged for approximately 8 million shares of common stock at the close of the
transaction. The proposed terms were based on Carpatsky's discounted (PV-10)
proved reserves, prepared on an SEC basis,
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FOR IMMEDIATE RELEASE - May 27, 1999 (Page 2 of 2):
of at least $45 million. For purposes of setting the share exchange rate between
Pease and Carpatsky, neither the previously untested T-3 horizon at the RC field
nor any reserves at the Bitkov field were given value. Therefore, it is
reasonable to assume that the total reserve potential of Carpatsky's assets may
be significantly greater than the $45 million. Accordingly, it is expected that
the combined entities will have at least $50 million in proved reserves and
liquid assets with only $11 million in debt or other liabilities.
Carpatsky was privately held until 1995 at which time it obtained its listing
through a reverse merger into a Canadian public corporation. Carpatsky currently
employs nine people in Kiev, all of whom are experienced oil and gas
professionals. Les Texas, President and founder, is a Hungarian born and
educated geologist-geophysicist with extensive operational experience in the US
and abroad. In the early 1990's he returned to Eastern Europe and initiated a
dialogue with ranking officials in the Ukrainian energy sector resulting in the
conclusion of two joint venture arrangements and associated licenses, which now
comprise the Carpatsky assets. The relationships developed by Les Texas within
Ukraine's energy industry, combined with Carpatsky's performance to date, have
led the company's Ukrainian partner to indicate that additional properties may
be available sometime in the future.
Carpatsky's other executive personnel include Fred Hofheinz and David Melman.
Fred Hofheinz, a Houston attorney and prominent businessman, has been involved
in the oil and gas industry for more than thirty years. He is a former Mayor of
Houston. David Melman has become affiliated with the company to assist with
corporate finance, re-capitalization and investment banking initiatives and will
be joining the company as a senior executive. Mr. Melman, an attorney, has held
several senior management positions in and served on several Boards of Directors
of publicly traded oil and gas companies. Upon closing of the transaction, the
corporate offices will be consolidated in Houston, Texas and the reconstituted
Board of Directors will consist of four members from Carpatsky and one member
from Pease.
Patrick J. Duncan, President and CFO of Pease, commented, "We are very pleased
to enter into this agreement with a company that has such substantial proven
reserves and is comprised of such fine oil and gas professionals. The marriage
of our Company with one that has such strong proven reserves and qualified
management, accomplishes our goal of providing managerial, operational,
geophysical and geological disciplines for the benefit of our shareholders."
Pease Oil and Gas Company is an independent energy company engaged in the
exploration for and the acquisition and development of oil and gas properties
using 3-D seismic technology. For more information please contact Patrick J.
Duncan, CFO at (970) 245-5917.
Forward-Looking Statements: The statements in this report regarding estimated
proven reserves, expected values, issuance of shares, terms of the merger
transaction, planned operations, exploration, projected production performance
and expected drilling and development activities are "forward-looking
statements" within the meaning of the federal security laws. Such statements are
inherently uncertain, and actual results and activities may differ materially
from those estimated or projected. Certain factors that can affect the Company's
ability to achieve projected results are described in the Company's Annual
Report and other reports filed with the Securities and Exchange Commission. Such
factors include, among others: material unknown factors discovered during
further due diligence; the final negotiated terms while preparing a formal
purchase and sale agreement; the uncertainty of shareholder and regulatory
approvals; uncertainties inherent in reserve estimations and production rates,
especially for estimates of undeveloped reserves; operational risks inherent in
the oil and gas industry with corresponding exposure to delays; significant cost
overruns; mechanical problems; the highly competitive nature of the oil and gas
industry with corresponding shortages of equipment and personnel; the uncertain
cost and pricing environment in the oil and gas industry; and the commercial and
country risks associated with doing business in the Republic of Ukraine. The
Company has no obligation to update the statements contained in this report or
to take action that is described herein or otherwise presently planned.
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