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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
Commission File Number 0-6580
[GRAPHIC OMITTED]
PEASE OIL AND GAS COMPANY
(Exact name of small business issuer as specified in its charter)
Nevada 87-0285520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
751 Horizon Court, Suite 203
Grand Junction, Colorado 81506
(Address of principal executive offices)
(970) 245-5917
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
As of May 5, 1999 the registrant had 1,688,698 shares of its $0.10 par
value Common Stock issued and outstanding.
Transitional Small Business Issuer Disclosure Format (check one): Yes ____
No X
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<PAGE>
TABLE OF CONTENTS
PAGE
NUMBER
PART I - Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations For the Three Months Ended
March 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows For the Three Months Ended
March 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . . . . . . .6
Item 2. Management's Discussion and Analysis . . . . . . . . . . . . . .7
Liquidity, Capital Expenditures and Capital Resources . . . . . .7
Results of Operations . . . . . . . . . . . . . . . . . . . . . . .9
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Divestment of Rocky Mountain Assets. . . . . . . . . . . . . . . . 9
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Well Administration and Other Income . . . . . . . . . . . . . . .11
Consulting Arrangement - Related Party . . . . . . . . . . . . . . 11
General and Administrative . . . . . . . . . . . . . . . . . . .12
Depreciation, Depletion and Amortization . . . . . . . . . . . . .12
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . .12
Impairment Expense - Oil and Gas Properties. . . . . . . . . . . . 13
Dividends and Net Loss Per Common Share. . . . . . . . . . . . . . 13
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Disclosure Regarding Forward-Looking Statements . . . . . . . . . .13
Year 2000 Issue . . . . . . . . . . . . . . . . . . . . . . . . . .14
PART II - Other Information . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . .15
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . .15
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . .16
Item 4. Submission of Matters to a Vote of Security Holders. . . . . .16
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . .16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 16
PART III - Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . .16
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<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents ........................ $ 960,339 $ 1,049,582
Trade receivables ........................... 261,241 420,460
Prepaid expenses and other .................. 178,918 170,687
Assets held for sale ........................ 27,750 100,000
Total current assets ................... 1,428,248 1,740,729
OIL AND GAS PROPERTIES, at cost
(full cost method):
Unevaluated properties ...................... 2,932,158 2,816,475
Costs being amortized ....................... 16,970,677 16,834,274
Total oil and gas properties ........... 19,902,835 19,650,749
Less accumulated amortization ............... (14,140,265) (13,883,174)
Net oil and gas properties ............. 5,762,570 5,767,575
OTHER ASSETS:
Debt issuance costs, net .................... 287,992 322,551
Office equipment and vehicles, net .......... 70,352 74,623
Deposits and other .......................... 7,493 7,493
Total other assets ................... 365,837 404,667
TOTAL ASSETS ................................... $ 7,556,655 $ 7,912,971
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ..........$ 5,908 $ 5,825
Accounts payable, trade ........................ 276,886 310,447
Accrued expenses ............................... 275,795 322,569
Total current liabilities ................ 558,589 638,841
LONG-TERM DEBT, less current maturities: .......... 2,346,542 2,293,261
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.01 per share,
2,000,000 shares authorized, 106,078 and
107,336 shares of Series B 5% PIK Cumulative
Convertible Preferred Stock issued and
outstanding, respectively (liquidation
preference of $5,303,900 at 3/31/99) 1,061 1,073
Common Stock, par value $0.10 per share,
4,000,000 shares authorized, 1,688,698
and 1,601,062 shares issued and
outstanding, respectively ................. 168,870 160,106
Additional paid-in capital ..................... 37,704,909 37,811,006
Accumulated deficit ............................(33,223,316) (32,991,316)
Total stockholders' equity ............... 4,651,524 4,980,869
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......$ 7,556,655 $ 7,912,971
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For The Three Months
Ended March 31,
1999 1998
REVENUE:
Oil and gas sales ............................. $ 411,794 $ 591,608
Gas plant, service and supply ................. -- 245,268
Well administration and other income .......... 106 15,654
Total revenue ............................ 411,900 852,530
OPERATING COSTS AND EXPENSES:
Oil and gas production costs .................. 84,476 320,640
Gas plant, service and supply ................. -- 221,739
Consulting arrangement-related party .......... 37,750 62,912
General and administrative .................... 179,660 257,655
Depreciation, depletion and amortization ...... 263,375 353,137
Impairment expense - oil and gas properties ... -- 478,043
Total operating costs and expenses 565,261 1,694,126
LOSS FROM OPERATIONS ............................. (153,361) (841,596)
OTHER INCOME (EXPENSES):
Interest income ............................... 11,291 67,014
Interest expense .............................. (89,930) (246)
NET LOSS ......................................... $ (232,000) $ (774.828)
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ....... $ (298,346) $(1,628,167)
NET LOSS PER COMMON SHARE ........................ $ (0.18) $ (1.03)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING ...................................... 1,626,100 1,579,100
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For The Three Months
Ended March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ...................................................... $ (232,000) $ (774,828)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation, depletion and amortization ............. 263,375 353,137
Impairment expense ................................... -- 478,043
Amortization of debt discount and issuance costs ..... 89,393 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade receivables ........................ 159,219 412,068
Inventory ................................ -- 25,050
Prepaid expenses and other assets ........ (8,231) (37,243)
Increase (decrease) in:
Accounts payable ......................... 6,794 (27,299)
Accrued expenses ......................... (46,034) 9,098
Net cash provided by (used in) operating activities .. 232,516 438,026
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant and equipment ........ (294,455) (3,373,669)
Proceeds from sale of property and equipment .................. 72,250 7,420
Net cash provided by (used in) investing activities ........ (222,205) (3,366,249)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants ............................ -- 939
Repayment of long-term debt ................................... (1,469) (1,597)
Payment of Series B Preferred Stock Dividends ................. (67,085) --
Purchase and retirement of Series B Preferred Stock ........... (31,000) --
Offering costs ................................................ -- (146,765)
Net cash provided by (used in) financing activities ........ (99,554) (147,423)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS ..................... (89,243) (3,075,646)
CASH AND EQUIVALENTS, beginning of period ....................... 1,049,582 6,547,804
CASH AND EQUIVALENTS, end of period ............................. $ 960,339 $ 3,472,158
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest ........................................ $ 70,672 $ 100,772
Cash paid for income taxes .................................... $ -- $ --
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Debt incurred for purchase of vehicles ........................ $ -- $ 32,609
(Increase) Decrease in payables for oil & gas exploration
activities .............................................. (40,359) 1,072,413
Capitalized portion of amortized debt discount & issuance costs -- 132,046
</TABLE>
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. They do not include all information and notes required by
generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there has been no material change in the
information disclosed in the notes to consolidated financial statements included
in the Annual Report on Form 10-KSB of Pease Oil and Gas Company (the Company)
for the year ended December 31, 1998. 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,
1998. 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 - Dividends and Net Loss Per Common Share:
Net loss per common share is computed by dividing the net loss applicable to
common stockholders by the weighted average number of common shares outstanding
during the year. All common stock equivalents have been excluded from the
computations because their effect would be antidilutive.
The net loss applicable to common stockholders is determined by adding any
dividends accruing to the benefit of the preferred stockholders to the net loss.
The dividends included for this calculation include: 1) paid dividends; 2)
accrued but unpaid dividends; and 3) any imputed dividends attributable to the
beneficial conversion feature. Accordingly, the net loss applicable to common
stockholders includes the following charges associated with the Series B
Preferred Stock that was issued on December 31, 1997:
For the Three Months Ended March 31,
1999 1998
Dividends declared $ 66,346 $ 70,833
Imputed non-cash dividend - 782,506
Total $ 66,346 $ 853,339
The Series B Preferred Stock became convertible into common stock on April 1,
1998 at a conversion price equal to a 12% discount to the average trading price
of the common stock prior to conversion. This discount increased monthly through
March 1999 when the discount topped out at 25% (this discount is considered a
"beneficial conversion feature"). This additional non-cash imputed dividend
charge included in the net loss applicable to common stockholders represents the
intrinsic value of the discount applicable through the period presented. No
additional non-cash imputed dividend charges will be incurred in future periods
since the conversion discount topped out at 25% during the first quarter of
1999. The holders of the Series B Preferred Stock are entitled to dividends
equal to $2.50 per annum, payable quarterly in cash or additional shares of
Series B Preferred Stock at the option of the Company.
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<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity, Capital Expenditures and Capital Resources At March 31, 1999, the
Company's cash balance was $960,339 with a positive working capital position of
$869,659, compared to a cash balance of $1,049,582 and a positive working
capital position of $1,101,888 at December 31, 1998. The change in the Company's
cash balance is summarized as follows:
Cash balance at December 31, 1998 $ 1,049,582
Sources of Cash:
Cash provided by operating activities 232,516
Proceeds from the sale of property and equipment 72,250
Total Sources of Cash 304,766
Uses of Cash:
Capital expenditures for exploration activities (292,439)
Series B Preferred Stock dividends (67,085)
Purchase and retirement of Series B Preferred Stock (31,000)
Capital expenditures for office equipment (2,016)
Repayment of long term debt (1,469)
Total uses of cash (394,009)
Cash balance at March 31, 1999 $ 960,339
As noted, most of the Company's uses of cash were deployed in exploration
activities in the Gulf Coast which are summarized as follows (the difference
between the total cash paid for exploration activities in the above table and
the amount illustrated below, relates to the changes in accounts payable at
December 31, 1998 and March 31, 1999):
<TABLE>
<CAPTION>
PROGRAM OPERATOR
NEGX Parallel AHC Other Total %
Category:
<S> <C> <C> <C> <C> <C> <C>
Successful Wells ............. $ -- $ -- $ 94,537 $ -- $ 94,537 38%
Exploratory Dry Holes ........ -- 15,545 -- -- 15,545 6%
Land, G&G Costs on Seismic
Programs .................. 13,283 54,191 -- -- 67,474 27%
Capitalized Interest ......... -- -- -- 68,610 68,610 27%
Other Exploration Costs ...... -- -- -- 5,914 5,914 2%
Total Exploration Costs $ 13,283 $ 69,736 $ 94,537 $ 74,524 $252,080 100%
Percent ............... 5% 28% 37% 30% 100%
</TABLE>
The anticipated capital requirements for 1999 related to the Company's Gulf
Coast exploration program are more thoroughly discussed in the Company's 1998
Annual Report on Form 10-KSB. There have been no significant changes in the
expected capital requirements as of the date of this report and under the
existing commitments, will be at least $380,000 for the remainder of 1999.
In 1999 the Company will focus its activities on cultivating its existing
exploration program in the Gulf Coast region, principally in Louisiana and
Texas. This activity will focus on what the Company considers its three core
areas in the Gulf Coast, which are:
1. The East Bayou Sorrel Area in Iberville Parish, Louisiana, operated by
National Energy Group, Inc. ("NEGX");
2. The Maurice Prospect in Fayetteville Parish, Louisiana, operated by Amerada
Hess Corporation ("AHC"); and
3. The Formosa, Texana and Ganado 3-D prospects encompassing 130,000 acres in
and around Jackson County, Texas, operated by Parallel Petroleum ("Parallel").
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<PAGE>
In December 1998 National Energy Group, Inc. filed an Involuntary Petition for
an Order and Relief under Chapter 11 of Title 11 of the United States Bankruptcy
Code in United States Bankruptcy Court for the Northern District of Texas,
Dallas Division. As operator of the East Bayou Sorrel field, which yields
approximately 50% of the Company's current production, the bankruptcy petition
might adversely affect future development or operation of the field; however,
the Company does not expect that its interest in the field or production from
currently existing wells will be affected.
The Company does have an unsecured claim in the bankruptcy proceeding for
various amounts which the Company believes were paid to National Energy Group,
Inc. as operator in connection with the drilling of existing wells. Collection
of these amounts may be delayed or may not occur, pending disposition of
National Energy Group, Inc.'s reorganization proceeding. The total claim is
approximately $80,000. However, no amount has been recorded in the financial
statements as of March 31, 1999.
Under the existing commitments related to these three areas, the following table
summarizes the range of expected capital requirements for the remainder of 1999
by program: Estimated Investment Operator Minimum Maximum
East Bayou Sorrel Area $ - $ 400,000
Formosa, Texana, and Ganado Prospects 130,000 430,000
Maurice Prospect 250,000 500,000
Total $ 380,000 $ 1,330,000
Given the range of potential capital requirements for the remainder of 1999, the
Company's current and anticipated cash position may not be sufficient to cover
the future working capital and exploration obligations. The Company has
vigorously explored various alternatives for additional sources of capital.
However, with the hyper-dilutive potential of the outstanding Series B Preferred
Stock (should the holders elect to convert into common stock), the Company has
been unable to attract additional equity capital. For example, using the
Company's recent common stock price of $0.40, and applying the applicable
discount of 25%, should all the holders of the Series B Preferred Stock elect to
convert into common stock, the Company would be required to issue approximately
17.7 million shares in the conversion. This would represent approximately 90% of
the then outstanding common shares. Presently, the Company has only 4.0 million
shares of common stock authorized and is obligated under the terms of the
Preferred Stock Agreement to seek approval of additional authorized shares at
its next meeting of stockholders to allow for conversion should the Preferred
stockholders choose to do so. However, it cannot be determined at this time
whether or not additional common shares will be authorized by the common
shareholders and if not, what the consequences may be.
In September 1998, the Company engaged San Jacinto Securities, Inc. ("SJS"), an
investment banking firm located in Dallas, Texas, to assist the Company in
pursuing various strategic alternatives. Their efforts have focused primarily on
seeking a potential merger candidate for the Company. Although no formal
agreement has been reached, the Company is engaged in an ongoing dialogue with
several potential candidates. However, no assurance can be given at this time
whether or not a merger transaction will eventually occur, what consideration
may be offered to the Company in such a transaction, or whether an offer to
merge will be accepted by the Company or its shareholders. In exchange for their
services, SJS has been paid a $150,000 non-refundable cash fee and will receive
an additional 3% of the merger value in excess of $5.0 million should it occur.
In addition, should a merger occur, the Company will be obligated to pay out of
its existing working capital approximately $225,000 to the Company's
President/CFO in connection with the severance terms included in his employment
agreement.
The collapse of the oil market has significantly impaired the marketability and
value of the Company's existing assets, hindered negotiations for a potential
merger and limited the ability to raise additional capital. Therefore, it cannot
be determined at this time what courses of action will ultimately be taken by
the Company. If a merger cannot be
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<PAGE>
consummated within a reasonable period of time and under reasonable terms, then
the Company may have to seek additional financing. However, the Company's common
stock was delisted from the Nasdaq SmallCap electronic market system on January
14, 1999 for failure to maintain an average bid price of at least $1.00 per
share. The stock is now listed on the over-the-counter market on the NASD
Bulletin Board (OTC BB). It is believed that this delisting will have a material
negative impact on the Company's ability to raise additional equity capital.
Therefore, it is unclear at this time what alternatives for future working
capital will be available, or to what extent the potential dilution to the
existing shareholders may be. If additional sources of financing are not
ultimately available, the company may have to consider other alternatives,
including the sale of existing assets, cancellation of existing exploration
agreements, farmouts, joint ventures, restructuring under the protection of the
Federal Bankruptcy Laws and/or liquidation.
RESULTS OF OPERATIONS
Overview
The Company's largest source of operating revenue is from the sale of produced
oil, natural gas, and natural gas liquids. Therefore, the level of the Company's
revenues and earnings are affected by prices at which natural gas, oil and
natural gas liquids are sold. Therefore, the Company's operating results for any
prior period are not necessarily indicative of future operating results because
of the fluctuations in natural gas, oil and natural gas liquid prices and the
lack of predictability of those fluctuations as well as changes in production
levels.
Divestment of Rocky Mountain Assets
During the fourth quarter of 1997, the Company's Board of Directors determined
that the Company's long-term strategy had shifted to exploration and development
activities in the Gulf Coast region and that the Rocky Mountain assets should
ultimately be divested. This divestment was substantially completed in 1998.
Accordingly, the Rocky Mountain revenues, costs, operating margins and cash
flows historically generated and discussed under the captions "Oil and Gas",
"Gas Plant, Service and Supply", and "Well Administration and Other Income" will
no longer be part of the Company's future operations. Since these assets
included a significant portion of the Company's historical operations, the sale
of these assets has and will have an immediate and material negative impact on
the Company's future cash flows and results of operations.
Total Revenue
Total Revenue from all operations was as follows:
For the Three Months Ended March 31,
1999 1998
Amount % Amount %
Oil and gas sales $ 411,794 100% $ 591,608 69%
Gas plant, service and supply - 245,268 29%
Well administration and other income 106 Nil 15,654 2%
Total revenue $ 411,900 100% $ 852,530 100%
The decrease in total revenue, along with any known trends or changes that
effect revenue on a line-by-line basis, are discussed in the following
paragraphs under their respective captions.
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<PAGE>
Oil and Gas Operating statistics for oil and gas production for the periods
presented are as follows:
For the Three Months
Ended March 31,
1999 1998
Production:
Oil (Bbls)
Rocky Mtns ........................... -- 18,795
Gulf Coast ........................... 18,171 9,896
Combined Total .................. 18,171 28,691
Gas (Mcf)
Rocky Mtns ........................... -- 84,967
Gulf Coast ........................... 107,356 30,955
Combined Total ................. 107,356 115,922
BOE (6:1)
Rocky Mtns ........................... -- 32,956
Gulf Coast ........................... 36,064 15,055
Combined Total ................. 36,064 48,011
Average Collected Price:
Oil (per Bbl)
Rocky Mtns ........................... -- $ 13.43
Gulf Coast ........................... 10.87 14.79
Combined Average ............... 10.87 $ 13.90
Gas (per Mcf)
Rocky Mtns .......................... -- $ 1.44
Gulf Coast .......................... 2.00 2.27
Combined Average ............... 2.00 $ 1.66
Per BOE (6:1)
Rocky Mtns .......................... -- $ 11.38
Gulf Coast .......................... 11.42 14.38
Combined Average ............... 11.42 $ 12.32
Operating Margins:
Rocky Mtns:
Revenue -
Rocky Mtns. - Oil ........... -- $ 252,420
Rocky Mtns. - Gas ........... -- 122,639
-- 375,059
Costs ................................ -- (292,705)
Operating Margin ............ -- $ 82,354
Operating Margin Percent .... -- 22%
Gulf Coast:
Revenue -
Gulf Coast - Oil ............ 197,534 $ 146,317
Gulf Coast - Gas ............ 214,260 70,232
411,794 216,549
Costs ................................ (84,476) (27,935)
Operating Margin ............ 327,318 $ 188,614
Operating Margin Percent .... 79% 87%
-9-
Oil and Gas continued:
For the Three Months
Ended March 31,
1999 1998
Combined Totals:
Revenue .............................. $ 411,794 $ 591,608
Costs ................................ (84,476) (320,640)
Operating Margin ............ $ 327,318 $ 270,968
Operating Margin Percent .... 79% 46%
Production Costs per BOE before DD&A:
Rocky Mtn Region ..................... $ -- $ 8.88
Gulf Coast Region .................... 2.34 1.86
Combined Average ............ $ 2.34 $ 6.68
Change in Revenue Attributable to:
Production ........................... $(160,455)
Price ................................ (19,359)
Total Decrease in Revenue .................... $(179,814)
The operating costs per BOE for the Gulf Coast properties increased in 1999 when
compared to the same period in 1998, primarily because certain state production
tax relief initiatives for the wells in E. Bayou Sorrel expired. These tax
relief measures allowed for no production taxes to be paid during the first two
years on a qualified deep or discovery well in Louisiana.
Gas Plant, Service and Supply
As previously discussed, the Company sold these assets in 1998. However, the
historical operating results are as follows:
For the Three Months
Ended March 31,
1999 1998
Revenue $ - $ 245,268
Cost - (221,739)
Operating Margin $ - $ 23,529
Operating % - 10%
Well Administration and Other Income
This revenue primarily represents the revenue generated by the Company for
operating oil and gas properties. The decrease in 1999 when compared to 1998 is
primarily attributed to the sale of the Rocky Mountain oil and gas properties in
1998. The Company is currently a non-operator and expects very little other
income in future periods.
Consulting Arrangement - Related Party
In March 1996 the Company entered into a three-year consulting agreement with
Beta Capital Group, Inc. ("Beta"). Beta, located in Newport Beach, California,
specializes in emerging companies with both capital needs and market support
requirements. Beta's chairman, Steve Antry, has been a director of the Company
since August 1996. The consulting agreement with Beta provided for minimum
monthly cash payments of $17,500 plus reimbursement for out-of-pocket expenses.
The contract ended in February 1999.
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<PAGE>
General and Administrative
The decrease in general and administrative ("G&A") expenses of approximately
$78,000 during the first quarter of 1999 when compared to the same period in
1998 is summarized as follows:
$ 45,000 - Net reduction of payroll costs substantially
attributed to the elimination of administrative
positions.
15,000 - Legal and accounting.
10,000 - Travel and entertainment costs.
5,000 - Consulting services.
3,000 - All other, net.
$ 78,000
The Company has and will take steps to significantly reduce future G&A costs,
and expects "core" G&A costs in 1999 to be approximately $60,000 to $80,000 per
month. However, additional amounts may be incurred in connection with the
efforts to find, evaluate and consummate a future merger transaction.
Depreciation, Depletion and Amortization
Depreciation, Depletion and Amortization ("DD&A") for the periods presented by
cost center consisted of the following:
For the Three Months Ended March 31
1999 1998
Oil and Gas Properties - Gulf Coast $ 257,091 $ 134,167
Oil and Gas Properties - Rocky Mountains - 102,919
Gas Plant, Service and Supply Operations - 103,959
Furniture and Fixtures 6,284 12,092
----------- --------
Total $ 263,375 $ 353,137
========== ========
DD&A for the oil and gas properties, per BOE, for the periods presented is as
follows:
Gulf Coast $ 7.13 $ 8.92
Rocky Mountains - 3.12
Combined Total 7.13 4.94
DD&A for the oil and gas properties is computed based on one full cost pool
using the total estimated reserves at the end of each period presented and prior
to applying the ceiling test discussed later in this section under "Impairment
Expense". The estimated portion of DD&A for the Gulf Coast is illustrated here
for analysis purposes only.
Interest Expense
Total interest incurred, and its allocation, for the periods presented is as
follows:
For the Three Months Ended March 31,
1999 1998
-------------- -------------
Interest paid or accrued $ 69,147 $ 98,261
Amortization of debt discount 54,834 80,946
Amortization of debt issuance costs 34,559 51,101
-------------- -------------
Total interest incurred 158,540 230,308
Interest capitalized for exploration
activities ( 68,610) (230,062)
-------------- -------------
Interest expense $ 89,930 $ 246
============ ============
The lower interest incurred in 1999 when compared to 1998 is substantially
attributed to the reduction of outstanding debt. In connection with the sale of
the Rocky Mountain assets in 1998, the Company paid down $1.2 million (or 30%)
of the outstanding convertible debentures. This reduced the outstanding
principal from $4.0 million to $2.8 million.
<PAGE>
Impairment - Oil and Gas Properties
The Company uses the full cost method of accounting for oil and gas activities.
The full cost method regards all costs of acquisition, exploration, and
development activities as being necessary for the ultimate production of
reserves. All of those costs are incurred with the knowledge that many of them
relate to activities that do not result directly in finding and developing
reserves. However, the benefits obtained from the prospects that do prove
successful, together with benefits from past discoveries, may ultimately recover
the costs of all activities, both successful and unsuccessful. Thus, all costs
incurred in those activities are regarded as integral to the acquisition,
discovery, and development of reserves that ultimately result from the efforts
as a whole and are thereby associated with the Company's proved reserves.
Establishing a direct cause-and-effect relationship between costs incurred and
specific reserves discovered, which is the premise under successful efforts, is
not relevant to the full cost concept. However, the costs accumulated in the
Company's full cost pool are subject to a "ceiling", as defined by Regulation SX
Rule 4-10(e)(4). As prescribed by the corresponding accounting standards for
full cost, all the accumulated costs in excess of the ceiling, are to be
expensed by a charge to impairment. The Company incurred an impairment charge of
$478,043 during the first quarter of 1998 as a result of dry holes and the
continuing collapse of oil and gas prices between December 31, 1997 and March
31, 1998 that substantially lowered the "ceiling" of the full cost pool. No
impairment charge was recognized during the first quarter of 1999.
Dividends and Net Loss Per Common Share
Net loss per common share is computed by dividing the net loss applicable to
common stockholders by the weighted average number of common shares outstanding
during the year. All common stock equivalents have been excluded from the
computations because their effect would be antidilutive.
The net loss applicable to common stockholders is determined by adding any
dividends accruing to the benefit of the preferred stockholders to the net loss.
The dividends included for this calculation include: 1) paid dividends; 2)
accrued but unpaid dividends; and 3) any imputed dividends attributable to the
beneficial conversion feature. Accordingly, the net loss applicable to common
stockholders includes the following charges associated with the Series B
Preferred Stock that was issued on December 31, 1997:
For the Three Months Ended March 31,
1999 1998
------------- -----------------
Dividends declared $ 66,346 $ 70,833
Imputed non-cash dividend - 782,506
Total $ 66,346 $ 853,339
The Series B Preferred Stock became convertible into common stock on April 1,
1998 at a conversion price equal to a 12% discount to the average trading price
of the common stock prior to conversion. This discount increased monthly through
March 1999 when the discount topped out at 25% (this discount is considered a
"beneficial conversion feature"). This additional non-cash imputed dividend
charge included in the net loss applicable to common stockholders represents the
intrinsic value of the discount applicable through the period presented. No
additional non-cash imputed dividend charges will be incurred in future periods
since the conversion discount topped out at 25% during the first quarter of
1999. The holders of the Series B Preferred Stock are entitled to dividends
equal to $2.50 per annum, payable quarterly in cash or additional shares of
Series B Preferred Stock at the option of the Company.
<PAGE>
OTHER MATTERS
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, statements under
"Business and Properties" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" regarding the Company's financial position,
reserve quantities and net present values, business strategy, plans and
objectives of management of the Company for future operations and capital
expenditures, are forward-looking statements and the assumptions upon which such
forward-looking statements are based are believed to be reasonable. The Company
can give no assurance that such expectations and assumptions will prove to be
correct. Reserve estimates of oil and gas properties are generally different
from the quantities of oil and natural gas that are ultimately recovered or
found. This is particularly true for estimates applied to exploratory prospects.
Additionally, any statements contained in this report regarding forward-looking
statements are subject to various known and unknown risks, uncertainties and
contingencies, many of which are beyond the control of the Company. Such things
may cause actual results, performance, achievements or expectations to differ
materially from the anticipated results, performance, achievements or
expectations. Factors that may affect such forward-looking statements include,
but are not limited to: the Company's ability to generate additional capital to
complete its planned drilling and exploration activities; risks inherent in oil
and gas acquisitions, exploration, drilling, development and production; price
volatility of oil and gas; competition; shortages of equipment, services and
supplies; government regulation; environmental matters; financial condition of
the other companies participating in the exploration, development and production
of oil and gas programs; and other matters beyond the Company's control. In
addition, since all of the prospects in the Gulf Coast are currently operated by
other parties, the Company may not be in a position to control costs, safety and
timeliness of work as well as other critical factors affecting a producing well
or exploration and development activities. All written and oral forward-looking
statements attributable to the Company or persons acting on its behalf
subsequent to the date of this report are expressly qualified in their entirety
by this disclosure.
Year 2000 Issue
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using `00' as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations.
The Company does not believe that the Year 2000 problem will pose a material
operations problem for the Company. The Company's computer software providers
have assured the Company that all of the Company's software is or will be Year
2000 compliant (i.e. will function properly in the year 2000 and beyond). The
Company's accounting software providers have asserted they will provide written
assurance that its products are or will be Year 2000 compliant. To the Company's
knowledge, after investigation, no "imbedded technology" (such as microchips in
an electronic control system) of the Company poses a material Year 2000 problem.
Because the Company believes that it has no material internal Year 2000
problems, the Company has not expended and does not expect to expend a
significant amount of funds to address Year 2000 issues. It is Company policy to
continue to review its suppliers' Year 2000 compliance and require assurance of
Year 2000 compliance from new suppliers; however, such monitoring does not
involve a significant cost to the Company.
The Company is materially dependent on Plains Marketing, L.P. ("Plains"),
National Energy Group, Inc. ("NEG") and Amerada Hess Corporation ("AHC") for the
delivery and payment of the Company's oil and natural gas. These companies in
turn are dependent on various third party vendors for delivery and payment. The
Company has or will request written assurances from Plains, NEG and AHC that
they have examined their Year 2000 issues. However, as of the date of this
report, the Company has not received a response. The Company will continue to
request such assurance but it should be emphasized that no assurance can be
given at this time that Plains, NEG or AHC, or their third party vendors are or
will be Year 2000 compliant.
In the event that one or more of the Company's vendors, including Plains, NEG,
AHC and their respective vendors, were to have a material Year 2000 problem, the
Company believes that the foreseeable consequences would be a temporary delay in
revenue collection caused by an interruption in computerized billing (and not an
interruption in the actual flow of the Company's oil or natural gas), which may
have a substantial impact on the Company's ability to conduct operations.
The Company does not have any contingency plan to address this possibility.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract incidental to the operation of its business. The Company is
not currently involved in any such incidental litigation which it believes could
have a materially adverse effect on its financial condition or results of
operations.
Item 2. Changes in Securities
(a) and (b): not applicable
(c) Recent sales of unregistered securities. The Company issued and sold the
following securities without registration under the Securities Act of
1933, as amended ("Securities Act"), during the quarter ended March 31,
1999 and through the date of this Report.
1. On January 28,1999 the Company issued 16,209 shares of its common
stock upon conversion of 200 shares of Series B Preferred Stock.
The Certificates representing the shares issued upon conversion
bear a restrictive legend prohibiting transfer without
registration under the Securities Act or the availability of an
exemption from registration. The shares issued upon conversion
were registered by the Company for resale by the holders in
Registration No. 333-44305. The Company relied upon Section
3(a)(9) of the Securities Act of 1933, as amended, in claiming
exemption from the registration requirements of the Securities
Act for issuance of the securities upon conversion.
2. On March 1, 1999 the Company issued 30,759 shares of its common
stock upon conversion of 233 shares of Series B Preferred Stock.
The Certificates representing the shares issued upon conversion
bear a restrictive legend prohibiting transfer without
registration under the Securities Act or the availability of an
exemption from registration. The shares issued upon conversion
were registered by the Company for resale by the holders in
Registration No. 333-44305. The Company relied upon Section
3(a)(9) of the Securities Act of 1933, as amended, in claiming
exemption from the registration requirements of the Securities
Act for issuance of the securities upon conversion.
3. On March 23, 1999 the Company issued 40,668 shares of its common
stock upon conversion of 250 shares of Series B Preferred Stock.
The Certificates representing the shares issued upon conversion
bear a restrictive legend prohibiting transfer without
registration under the Securities Act or the availability of an
exemption from registration. The shares issued upon conversion
were registered by the Company for resale by the holders in
Registration No. 333-44305. The Company relied upon Section
3(a)(9) of the Securities Act of 1933, as amended, in claiming
exemption from the registration requirements of the Securities
Act for issuance of the securities upon conversion.
In connection with the issuance of the above noted securities, the Company
relied upon Section 4(2) of the Securities Act in claiming exemption for
the registration requirement of the Securities Act. All of the persons to
whom the securities were issued had full information concerning the
business and affairs of the Company and acquired the shares for investment
purposes. Certificates representing the securities issued bear a
restrictive legend and stop transfer instructions have been entered
prohibiting transfer of the securities except in compliance with
applicable securities law.
<PAGE>
Item 3. Defaults Upon Senior Securities
(a) There has been no material default in the payment of principal, interest,
or any other material default, with respect to any indebtedness of the
small business issuer during the period covered by this report.
(b) There has been no material default in the payment of dividends for any
class of preferred stock during the period covered by this report.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of Company's security holders during the
period covered by this report.
Item 5. Other Information
On April 26, 1999, at the request of Mr. Duncan and Mr. Antry, the Company's
Executive Committee was dissolved by the Board of Directors. The request was
made because Messrs. Duncan and Antry did not feel the Executive Committee was
being utilized and any significant transactions were already being addressed by
the full Board.
There is no other information reportable under this item for the period covered
by this report.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
(1) Exhibit 27, "Financial Data Schedule" - for the quarter ended
March 31, 1999.
(b) There were no reports on Form 8-K filed during the quarter ended March 31,
1999:
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PEASE OIL AND GAS COMPANY
Date: May 10, 1999 By: /s/ Patrick J. Duncan
Patrick J. Duncan
President, Chief Financial Officer
and Principal Accounting Officer
Date: May 10, 1999 By: /s/ William F. Warnick
William F. Warnick
Chairman of the Board
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 960,339
<SECURITIES> 0
<RECEIVABLES> 274,886
<ALLOWANCES> 13,645
<INVENTORY> 0
<CURRENT-ASSETS> 1,428,248
<PP&E> 19,902,835
<DEPRECIATION> 14,140,265
<TOTAL-ASSETS> 7,556,655
<CURRENT-LIABILITIES> 558,589
<BONDS> 2,346,542
0
1,061
<COMMON> 168,870
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,556,655
<SALES> 411,794
<TOTAL-REVENUES> 411,900
<CGS> 84,476
<TOTAL-COSTS> 565,261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,930
<INCOME-PRETAX> (232,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (232,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (232,000)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
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