SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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, 1999) 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____
The issuer's revenues for its most recent fiscal year were $2,916,982.
As of March 23,1999 the issuer had 1,688,718 shares of its $0.10 par value
Common Stock issued and outstanding. Based upon the closing sale price of
$0.4688 per share on March 23, 1999, the aggregate market value of the common
stock, the Registrant's only class of voting stock, held by non-affiliates was
$774,044.
Transitional Small Business Issuer Disclosure Format Yes ____ No X
<PAGE>
TABLE OF CONTENTS
PART I Page
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . 1
History and Overview . . . . . . . . . . . 1
Recent Developments. . . . . . . . . . . . 1
Business Strategy. . . . . . . . . . . . . 1
Operations. . . . . . . . . . . . . . . . . 2
Competition. . . . . . . . . . . . . . . . 2
Markets. . . . . . . . . . . . . . . . . . 3
Regulations. . . . . . . . . . . . . . . . 3
Operational Hazards and Insurance. . . . . 5
Administration. . . . . . . . . . . . . . . 5
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . 5
Principal Oil and Gas Interests. . . . . . 5
Gulf Coast Properties and Prospects. . . . 6
Rocky Mountain Properties. . . . . . . . . 7
Title to Properties. . . . . . . . . . . . 7
Estimated Proved Reserves. . . . . . . . . 7
Net Quantities of Oil and Gas Produced 8
Drilling Activity. . . . . . . . . . . . . 9
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . 9
Market Information. . . . . . . . . . . . . . . 9
Stockholders. . . . . . . . . . . . . . . . . . 10
Dividends. . . . . . . . . . . . . . . . . . . 10
Recent Sales of Unregistered Securities . . 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. . . . . . . . . . 12
Liquidity and Capital Resources . . . . . . . . . .12
Results of Operations. . . . . . . . . 14
Other Matters. . . . . . . . . . . . . 20
ITEM 7. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . 22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . 41
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. . . . . .41
ITEM 10. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . .43
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 45
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . 46
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . 48
<PAGE>
PART I
ITEM 1 - BUSINESS
HISTORY AND OVERVIEW
Pease Oil and Gas Company ("Company"), was incorporated under the laws of the
state of Nevada on September 11, 1968 to principally engage in the oil and gas
acquisition, development and production business. Prior to 1993, the Company was
a relatively small operator conducting business primarily in Western Colorado
and Eastern Utah. However, in August, 1993, the Company acquired Skaer
Enterprises, Inc., a Colorado corporation, its related businesses and related
oil and gas properties (collectively "Skaer"). Skaer was privately owned and
operated, and was considered one of the largest private independent oil and gas
companies in Colorado, operating exclusively in the Denver-Julesburg Basin ("DJ
Basin") of northeastern Colorado. This acquisition substantially expanded the
Company's operations by increasing the number of wells operated and expanding
its services to include oil field services, oil field supplies, natural gas
processing and natural gas marketing. Skaer was acquired for $12,200,000,
including $300,000 of various costs associated with the acquisition. In the
years following the acquisition, the Company invested several million dollars in
an effort to exploit the assets acquired from Skaer and, unfortunately,
experienced marginal success. Recognizing the limited upside potential of these
assets, the Company initiated efforts in 1996 and 1997 to expand its resource
base through the acquisition and exploration of properties located in the Gulf
Coast region of Southern Louisiana and Texas. During 1998, the Company sold
substantially all of its Rocky Mountain oil and gas assets, including those
acquired from Skaer, for approximately $3.2 million. Accordingly, the Company
now maintains only non-operated interests in 3 core areas in Southern Louisiana
and Texas. These assets are discussed more thoroughly later in this section
under the caption "Properties and Prospects".
RECENT DEVELOPMENTS:
Restructuring and Pursuit of Merger Candidate
In response to the historically poor financial results and the depressed oil
commodity markets, the Company initiated several steps to improve the corporate
governance and direction of the Company. These include:
1.) During the fourth quarter of 1998, the Board of Directors accepted
Mr. Willard H. Pease, Jr.'s resignation as President and CEO. Mr.
Pease no longer works for the Company. Mr. Patrick J. Duncan, who
has served the Company as CFO since 1994, was elected President by
the Board as President on an interim basis.
2.) During 1998 the Company's Board of Directors established an
Executive Committee currently consisting of three voting members:
Patrick J. Duncan, the Company's President/CFO, Steve A. Antry, a
Director and consultant to the Company, and William F. Warnick, the
Company's Chairman of the Board of Directors. The Executive
Committee is designed to function as an ad hoc CEO, and manage, on
a committee basis, the significant aspects of the Company's
business. The Executive Committee has broad powers to act in the
absence of the full Board of Directors.
3.) The Company is aggressively pursuing a potential merger candidate.
To assist in this venture, the Company engaged San Jacinto
Securities, Inc. ("SJS"), an investment banking firm located in
Dallas, Texas. Although no formal agreements have 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.
BUSINESS STRATEGY
The Company generally participates as a minority, non-operating interest holder
in oil and natural gas drilling projects with industry partners. Although the
Company does not currently operate properties or originate any of these
exploration prospects, it actively participates in the evaluation of
opportunities presented by its industry
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<PAGE>
partners, both at the time of its initial investment in a prospect and
thereafter during the evaluation and selection of drilling locations. The
Company's current and future business strategy will focus on expanding its
reserve base and future cash flows by cultivating the prior acquisitions,
nurturing the strategic alliances and exploiting the existing exploration
opportunities in the Gulf Coast Region. Specifically, the Company will attempt
to execute this strategy by focusing its immediate exploration efforts and
resources on what the Company considers its three core areas in the Gulf Coast,
which are:
1. The East Bayou Sorrel Field in Iberville Parish,Louisiana,
operated by National Energy Group, Inc.;
2. The Maurice Field in Fayetteville Parish, Louisiana,
operated by Amerada Hess; and
3. The Formosa, Texana and Ganado 3-D prospects, encompassing
130,000 acres in and around Jackson County, Texas,
operated by Parallel Petroleum.
In addition, the Company intends to emphasize the following precepts in
implementing its strategy:
o Make disciplined use of advanced exploration technologies -- such as 3-D
seismic and computer-aided exploration ("CAEX") technology;
o Mitigate exploration risk by spreading investment over a significant number
of prospects to improve the probability of success;
o Developing alliances with experienced and competent technical personnel that
have been trained by major oil companies and can demonstrate a successful
track record;
o Reinvesting future operating cash flows into development drilling
and recompletion activities; o Pursue the acquisition of properties and/or
potential merger candidates that could build upon and enhance the Company's
existing asset base;
The Company recognizes that the ability to implement its business strategies is
largely dependent on the ability to find a suitable merger candidate and/or
raise additional debt or equity capital to fund future acquisition, exploration,
drilling and development activities. The Company's Capital resources are
discussed more thoroughly in Part II, Item 6, in Management's Discussion and
Analysis.
OPERATIONS
As of December 31, 1998, the Company had varying ownership interests in 10 gross
(.76 net) non-operated wells located in Southern Louisiana and Texas.
The following table presents oil and gas reserve information within the
Company's major operating areas as of December 31, 1998:
Net Proved Reserves
REGION Bbls Mcf BOE (6:1)
Gulf Coast -
principally in S. Louisiana 275,00 1,368,000 503,000
At the present time, oil and natural gas prospects pursued in the Gulf Coast
region by the Company will be as a non- operator.
COMPETITION
The oil and gas industry is highly competitive in many respects, including
identification of attractive oil and gas properties for acquisition, drilling
and development, securing financing for such activities and obtaining the
necessary equipment and personnel to conduct such operations and activities. In
seeking suitable opportunities, the Company competes with a number of other
companies, including large oil and gas companies and other independent operators
with greater financial resources and, in some cases, with more experience. Many
other oil and gas companies in the industry have financial resources, personnel,
and facilities substantially greater than those of the Company. There can be no
assurance that the Company will be able to compete effectively with these other
entities.
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<PAGE>
MARKETS
Overview - The three principal products currently produced and marketed for the
Company (through its operating partners) are crude oil, natural gas and natural
gas liquids ("NGL's"). The Company does not currently use commodity futures
contracts and price swaps in the sales or marketing of its natural gas and crude
oil.
Crude Oil - Oil produced from the Company's properties is generally transported
by truck, barge or pipeline to unaffiliated third-party purchasers at the
prevailing field price (the "posted price"). Currently, the primary purchaser of
the Company's proportionate share of crude oil is Plains Marketing, L.P. which
buys approximately 80% of the Company's current crude oil production. The
contracts are month-to-month and subject to change. The market for the Company's
crude oil is competitive and therefore the Company does not believe that the
loss of one of its primary purchasers would have a material adverse effect on
the Company's business because other arrangements could be made to market the
Company's crude oil products. The Company does not anticipate problems in
selling future oil production since purchases are made based on current market
conditions and pricing. Oil prices are subject to volatility due to several
factors beyond the Company's control including: political turmoil; domestic and
foreign production levels; OPEC's ability to adhere to production quotas; and
possible governmental control or regulation.
Natural Gas - The Company sells, through its operating partners, the natural gas
production at the wellhead to various pipeline purchasers or natural gas
marketing companies. The operators sell the natural gas and pass the revenue on
to the Company once it is received. Currently, National Energy Group, Inc. and
Amerada Hess Corporation sell and distribute substantially all of the Company's
natural gas and corresponding revenues. The wellhead contracts have various
terms and conditions, including contract duration. Under each wellhead contract
the purchaser is generally responsible for gathering, transporting, processing
and selling the natural gas and natural gas liquids and the Company receives a
net price at the wellhead.
REGULATIONS
General - All aspects of the oil and gas industry are extensively regulated by
federal, state, and local governments in all areas in which the Company has
operations. The following discussion of regulation of the oil and gas industry
is necessarily brief and is not intended to constitute a complete discussion of
the various statutes, rules, regulations or governmental orders to which the
Company's operations may be subject.
Price Controls on Liquid Hydrocarbons - There are currently no federal price
controls on liquid hydrocarbons (including oil, natural gas and natural gas
liquids). As a result, the Company sells oil produced from its properties at
unregulated market prices which historically have been volatile.
Federal Regulation of Sales and Transportation of Natural Gas - Historically,
the transportation and sale of natural gas in interstate commerce have been
regulated pursuant to the Natural Gas Act ("NGA"), the Natural Gas Policy Act of
1978 ("NGPA") and regulations promulgated thereunder. The Natural Gas Wellhead
Decontrol Act of 1989 eliminated all regulation of wellhead gas sales effective
January 1, 1993. As a result, the Company's gas sales are no longer regulated.
The transportation and resale in interstate commerce of natural gas produced and
sold by the Company continues to be subject to regulation by the Federal Energy
Regulatory Commission ("FERC") under the NGA. The transportation and resale of
natural gas transported and resold within the state of its production is usually
regulated by the state involved. Although federal and state regulation of the
transportation and resale of natural gas produced by the Company currently does
not have any material direct impact on the Company, such regulation does have a
material impact on the market for the Company's natural gas production and the
price the Company receives for its natural gas production. Adverse changes in
the regulation affecting the Company's gas markets could have a material impact
on the Company.
Commencing in the mid-1980's and continuing until the present, the FERC
promulgated several orders designed to correct market distortions and to make
gas markets more flexible and competitive. These orders have had a profound
influence on natural gas markets in the United States and have, among other
things, increased the importance of interstate gas transportation and encouraged
development of a large spot market for gas.
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<PAGE>
In addition to FERC regulation of interstate pipelines under the NGA, various
state commissions also regulate the rates and services of pipelines whose
operations are purely intrastate in nature. To the extent intrastate pipelines
elect to transport gas in interstate commerce under certain provisions of the
NGPA, those transactions are subject to limited FERC regulation under the NGPA
and may ultimately effect the price of natural gas sold by the Company.
There are many legislative proposals pending in Congress and in the legislatures
of various states that, if enacted, might significantly affect the oil and gas
industry. The Company is not able to predict what will be enacted and thus what
effect, if any, such proposals would ultimately have on the Company.
State and Local Regulation of Drilling and Production - State regulatory
authorities have established rules and regulations requiring permits for
drilling, bonds for drilling, reclamation and plugging operations, limitations
on spacing and pooling of wells, and reports concerning operations, among other
matters. The states in which the Company has oil and gas interests also have
statutes and regulations governing a number of environmental and conservation
matters, including the unitization and pooling of oil and gas properties and
establishment of maximum rates of production from oil and gas wells. For
example, each well in the East Bayou Sorrell prospect is currently restricted to
approximately 1,400 Bbls of oil per day because of such state mandated
restriction. A few states also prorate production to the market demand for oil
and gas. These statutes and regulations limit the rate at which oil and gas
could otherwise be produced or the prices obtained from the Company's
properties.
Also in recent years, pressure has increased in states in which the Company has
been active to mandate compensation to surface owners for the effects of oil and
gas operations and to increase regulation of the oil and gas industry at the
local government level. Such local regulation in general is aimed at increasing
the involvement of local governments in the permitting of oil and gas
operations, requiring additional restrictions or conditions on the conduct of
operations to reduce the impact on the surrounding community and increasing
financial assurance requirements. Accordingly, such regulation has the potential
to delay and increase the cost, or even in some cases to prohibit entirely, the
conduct of the Company's drilling activities.
Environmental Regulations - The production, handling, transportation and
disposal of oil and gas and by-products are subject to regulation under federal,
state and local environmental laws. In most instances, the applicable regulatory
requirements relate to water and air pollution control and solid waste
management measures or to restrictions of operations in environmentally
sensitive areas. In connection with its acquisitions, the Company attempts to
perform environmental assessments. However, environmental assessments have not
been performed on all of the Company's properties. To date, expenditures for
environmental control facilities and for remediation have not been significant
in relation to the Company's results of operations. However, it is reasonably
likely that the trend in environmental legislation and regulations will continue
towards stricter standards and may result in significant future costs to the
Company. For instance, efforts have been made in Congress to amend the Resource
Conservation and Recovery Act to reclassify oil and gas production wastes as
"Hazardous Waste," the effect of which would be to further regulate the
handling, transportation and disposal of such waste. If such legislation were to
pass, it could have a significant adverse impact on the operating costs of the
Company, as well as the oil and gas industry in general.
The Company believes that its operations comply with all applicable legislation
and regulations in all material respects, and that the existence of such
regulations has had no more restrictive effect on the Company's method of
operations than other similar companies in the industry. Although the Company
does not believe its business operations presently impair environmental quality,
compliance with federal, state and local regulations which have been enacted or
adopted regulating the discharge of materials into the environment could have an
adverse effect upon the capital expenditures, earnings and competitive position
of the Company, the extent of which the Company now is unable to assess. The
Company is not aware of any environmental degradation which exists, or the
obligation for remediation of which would arise under applicable state or
federal environmental laws. The Company does not maintain a fund for
environmental or other similar costs. Any such costs or expenses would be paid
by the Company out of operating capital.
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<PAGE>
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to the usual hazards incident to the
drilling and production of oil and gas, such as blowouts, cratering, explosions,
uncontrollable flows of oil, gas or well fluids, fires, pollution, releases of
toxic gas and other environmental hazards and risks. These hazards can cause
personal injury and loss of life, severe damage to and destruction of property
and equipment, pollution or environmental damage and suspension of operations.
The Company maintains insurance of various types to cover its operations. The
Company's insurance does not cover every potential risk associated with the
drilling and production of oil and gas. In particular, coverage is not
obtainable for certain types of environmental hazards. The occurrence of a
significant adverse event, the risks of which are not fully covered by
insurance, could have a material adverse effect on the Company's financial
condition and results of operations. Moreover, no assurance can be given that
the Company will be able to maintain adequate insurance in the future at rates
it considers reasonable.
ADMINISTRATION
Office Facilities - The Company currently rents approximately 4,000 square feet
in an office facility in Grand Junction, Colorado owned by an unrelated party.
The rental rate is $32,232 per year through June 30, 2000.
Employees - As of March 23, 1999, the Company had 6 full time and 1 part time
employees, none of whom is covered by a collective bargaining agreement. The
Company considers its relations with its employees satisfactory.
ITEM 2 - PROPERTIES
PRINCIPAL OIL AND GAS INTERESTS
Developed Acreage - The Company's producing properties as of December 31, 1998
are located in the following areas shown in the table below:
<TABLE>
<CAPTION>
OIL GAS
Gross Net(2) Gross Net(2)Developed Acreage
Fields .............. State Wells(1) Wells Wells(1) Wells Gross Net(2)
- --------------------- --------- -------- ------ ----- --- ----- -----
<S> <C> <C> <C> <C> <C> <C>
East Bayou Sorrel ... Louisiana 3 .27 -- -- 368 33
South Lake Arthur ... Louisiana -- -- 1 .21 349 73
Maurice ............. Louisiana -- -- 3 .21 196 14
Austin Bayou ........ Texas -- -- 3 .07 505 11
-------- ------ ----- --- ----- -----
Grand Total ......... 3 .27 7 .49 1,418 131
======== ====== ===== === ===== =====
</TABLE>
Footnotes
(1) Wells which produce both gas and oil in commercial quantities are
classified as "oil" wells for disclosure purposes.
(2) "Net" wells and "net" acres refer to the Company's fractional
working interests multiplied by the number of wells or number of
acres.
Substantially all of the Company's producing oil and gas properties are located
on leases held by the Company for as long as production is maintained.
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Undeveloped Acreage - The Company's gross and net working interests in leased
(or lease options in areas where 3-D seismic is or has been conducted) on
undeveloped acreage in the Gulf Coast Region as of December 31, 1998 is as
follows:
Undeveloped Acreage
Prospect Description State Gross Net
East Bayou Sorrel Louisiana 1,110 111(1)
Maurice Prospect Louisiana 843 76(2)
Parallel 3-D Program-Leases Texas 18,797 2,350(2)
Parallel 3-D Program-Options Texas 13,938 1,742(3)
Austin Bayou Texas 694 15(2)
---------- ---------
Totals: 35,382 4,294
======== =======
(1) Substantially all of these leases will expire in 2001 unless production has
been obtained. (2) Substantially all of these leases will expire in 2000 unless
production has been obtained. (3) Substantially all of these leases/options will
expire in 1999 unless production has been obtained.
GULF COAST PROPERTIES AND PROSPECTS
Overview - The U.S. Gulf Coast, although it has been actively explored, remains
a prolific area with excellent upside potential for exploration due to modern
proprietary 3-D seismic surveys. The Company believes that the combination of
technology and the availability of leases to drill make this an opportune time
for an aggressive exploration program. The three significant areas where the
Company currently participates as a non-operating, minority interest partner are
described below.
East Bayou Sorrel - During 1997, the Company acquired a 10% working interest and
a 7.125% after prospect payout leasehold interest in the 1996 discovery of a new
oil and gas field, East Bayou Sorrel Field located in Iberville Parish,
Louisiana. Subsequently, this field has been explored with other well tests and
a 3-D seismic survey was completed in February 1998. As of the date of this
report, the production from the three producing wells in this field represents
approximately 50% of the Company's net daily production (per BOE). The
production is being drawn from the Cibb haz 2 and Cibb haz 3 sand formations.
Preliminary results of the 3-D survey appear to confirm the producing reservoirs
at East Bayou Sorrel, and a number of potential undrilled targets contained
within the 3-D volume. Additional development drilling of the East Bayou Sorrel
Field, as well as exploratory drilling based on images from the 3-D seismic is
expected to be conducted sometime in the future.
Maurice Field - In 1997, the Company joined Davis Petroleum and Amerada Hess
Corporation ("AHC") to drill a discovery well at Maurice Field, Vermilion
Parish, Louisiana. Since then two additional wells have been successfully
drilled and completed. A 3-D survey is currently being interpreted and
additional wells are expected to be drilled during 1999 and 2000 in order to
develop the field. The three producing wells representing approximately 50% of
the Company's net daily production (per BOE) and are being drawn from the Bol
mex, Marg tex and Camerina sand formations. The Company's working interest in
this field ranges from 6.9% to 8.4%
Formosa, Texana and Ganado 3-D Exploration Prospects - During 1997, the Company
secured a 12.5% working interest in three specific on-shore upper Gulf Coast
exploration projects located in and around Jackson County, Texas. The 3-D survey
will cover over 200 square miles (130,000 acres) in and around Jackson County,
Texas. The surveys on the three projects are completed and the data is currently
being interpreted and integrated with known geology. The Company expects that
there may be as many as 50 to 60 wells ultimately drilled on these prospects
based on our preliminary evaluation of the 3-D seismic and local geology.
Parallel Petroleum of Midland, Texas is the designated operator for these wells.
The subject lands lie in close proximity to productive oil and gas fields which
produce from the Miocene/Frio intervals. The subject acreage block is bounded by
fields that have cumulatively produced in excess of 2 trillion cubic feet of
natural gas and 500 million barrels of oil.
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<PAGE>
Within the project areas, there is an extremely high potential exploration
opportunity that is being defined with the use of 3-D seismic. The Jackson
County area has proven to be ideal for 3-D seismic as faulting and structures
are easily identified and many stratigraphic reservoirs exhibit hydrocarbon
indicators from the shallowest Miocene sands, throughout the Frio, and into the
Vicksburg and Yegua intervals. The Formosa Grande Prospect Area has numerous
regional down-to-the-coast faults that are easily identified at the top of the
Frio, but also has deep seated faulting that does not exhibit displacement at
the shallower horizons. Very often, these deep faults do create hydrocarbon
traps. Most fields in this trend area exhibit multiple stacked reservoirs.
A Greta level structure map exhibits numerous large four-way closures, primarily
downthrown to regional growth faulting. These large structures have, for the
most part, been exploited, some as early as the 1930s and 1940s. Although it is
not readily apparent in regional mapping, much of the Frio production is
stratigraphic in nature, that is, trapped in channel sands that traverse
structures, or in sands that "pinch out" up onto the flanks of these large
structures. Significant reserves may remain in similar traps, further off
structure than has been developed to date. Such traps should be readily defined
with 3-D seismic data.
The Company's project area appears to be an excellent area to apply 3-D seismic
technology to exploit reserves that have been passed over in existing fields as
well as to discover new reserves in deeper pools and undrained fault segments in
compartmentalized fields. Drilling will commence on these prospects during the
first quarter of 1999.
ROCKY MOUNTAIN PROPERTIES
During 1998, the Company sold all of its Rocky Mountain oil and gas assets.
Accordingly, the Company's only remaining reserves, revenues and future cash
flows are now limited to those oil and gas properties located in the Gulf Coast
region.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, only a perfunctory title
examination is conducted at the time oil and gas leases are acquired by the
Company. Prior to the commencement of drilling operations, a thorough title
examination is conducted. The Company believes that title to its properties is
good and defensible in accordance with standards generally accepted in the oil
and gas industry, subject to such exceptions, which in the opinion of counsel,
are not so material as to detract substantially from the property economics. In
addition, some prospects may be burdened by customary royalty interests, liens
incident to oil and gas operations and liens for taxes and other governmental
charges as well as encumbrances, easements and restrictions. The Company does
not believe that any of these burdens will materially interfere with the use of
the property.
ESTIMATED PROVED RESERVES
The oil and gas reserve and reserve value information is included in Part II,
Item 7 at footnote 10 of the consolidated financial statements, titled "Oil and
Gas Producing Activities". This information is prepared pursuant to Statement of
Financial Accounting Standards No. 69, which includes the estimated net
quantities of the Company's "proved" oil and gas reserves and the standardized
measure of discounted future net cash flows. The 1997 reserve information for
the Rocky Mountains is based upon an engineering evaluation by McCartney
Engineering, Inc. The estimated proved reserves information for the Gulf Coast
for both 1997 and 1998 is based upon an engineering evaluation by Netherland,
Sewell & Associates, Inc. The estimated proved reserves represent
forward-looking statements and should be read in connection with the disclosure
on forward-looking statements included herein under Item 6 in Managements'
Discussion and Analysis.
The Company has not filed any reports containing oil and gas reserve estimates
with any federal authority or agency other than the Securities and Exchange
Commission and the Department of Energy. There were no differences in the
reserve estimates reported to these two agencies.
All of the Company's oil and gas reserves are located in the Continental United
States. The Table below sets forth the Company's estimated quantities of proved
reserves, and the present value of estimated future net revenues
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discounted by 10 percent per year using prices being received by the Company at
the end of each of the last two fiscal years on a non-escalated basis.
<TABLE>
<CAPTION>
December 31,
1998 1997
-------- ----------------------------------------
Gulf Coast Rocky Mtns Total
<S> <C> <C> <C> <C>
Estimated Proved Oil Reserves (Bbls) ...... 275,000 308,000 777,000 1,085,000
Estimated Proved Gas Reserves (Mcf) ....... 1,368,000 1,360,000 3,175,000 4,535,000
Estimated Future Net Revenues ............. $ 4,054,000 $ 5,796,000 $ 8,575,000 $14,371,000
Present Value of Estimated Future
Net Revenues .......................... $ 2,951,000 $ 4,460,000 $ 5,218,000 $ 9,678,000
Prices used to determined reserves:
Oil (per Bbl) ........................ $ 10.15 $ 17.11 $ 16.15
Gas (per Mcf) ........................ $ 2.43 $ 2.61 $ 1.78
</TABLE>
NET QUANTITIES OF OIL AND GAS PRODUCED
The Company's net oil and gas production for each of the last two years (all of
which was from properties located in the United States) was as follows:
Year Ended December 31,
1998 1997
---------- --------------
Oil (Bbls)
Gulf Coast 58,000 43,000
Rocky Mtns. 51,000 80,000
--------- --------
Total 109,000 123,000
======= =======
Gas (Mcf)
Gulf Coast 320,000 91,000
Rocky Mtns 230,000 392,000
------- -------
Total 550,000 483,000
======= =======
The average sales price per barrel of oil and Mcf of gas, and average production
costs per barrel of oil equivalent ("BOE") excluding depreciation, depletion and
amortization were as follows:
Average
Year Ended Average Sales Prices Production
December 31 Oil (Bbls) Gas (Mcf) Per BOE Cost Per BOE
------------ ----------- ----------- -------- ------------
1998:
Gulf Coast $ 12.19 $ 2.22 $ 12.73 $ 2.17
Rocky Mtns $ 12.11 $ 1.39 $ 10.50 $ 9.04
Combined Avg. $ 12.16 $ 1.87 $ 11.74 $ 5.22
1997:
Gulf Coast $ 19.15 $ 2.94 $ 18.76 $ 2.84
Rocky Mtns $ 18.75 $ 1.46 $ 14.25 $ 9.09
Combined Avg. $ 18.89 $ 1.74 $ 15.54 $ 7.29
-8-
<PAGE>
DRILLING ACTIVITY
The following table summarizes the Company's oil and gas drilling activities
that were completed during the last two fiscal years, all of which were located
in the continental United States:
Year Ended December 31,
1998 1997
--------------- ---------------
Wells Drilled Gross Net Gross Net
Exploratory
Oil 1 .09 1 .10
Gas 4 .14 1 .08
Non-productive 3 .32 6 .77
------ ------ ----- -------
Total 8 .55 8 .95
====== ====== ====== =======
Development
Oil - - - -
Gas - - - -
Non-productive - - - -
-------- ------- ------ --------
Total - - - -
======== ======== ====== ========
During the first quarter of 1999, the Company drilled a successful development
well in the Maurice Prospect in which the Company owns a 6.9% working interest.
This well is not included in the above schedule.
ITEM 3 - 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. At December 31,
1998 and as of the date of this report, the Company was not involved in any
litigation which it believes could have a materially adverse effect on its
financial condition or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's Security holders during the
fourth quarter ended December 31, 1998.
Part II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information - On November 16, 1998, the Company's Board of Directors
approved a reverse stock split of 1:10. No shareholder approval was necessary
and the Company proceeded with the administrative procedures necessary to effect
the reverse split. Accordingly, the reverse split was effective at the close of
business on December 1, 1998. The Company's common stock was traded on the
Nasdaq SmallCap electronic market system under the symbol "WPOG" until January
14, 1999 at which time the stock was delisted by Nasdaq 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. In addition, it may impair the ability for a
stockholder to liquidate any holdings. The Company also has warrants that are
publicly traded on the Nasdaq "pink sheets" under the symbol "WPOGW". There are
approximately 3 million warrants outstanding, each of which give the holders the
right to purchase one share of the Company's common stock for ten warrants at
$60.00 per share. These warrants expire on August 13, 1999.
Bid Quotations - The following table shows the range of high and low bid
quotations for each quarterly period since January 1, 1997, as reported by the
National Association of Securities Dealers, Inc. (such quotations represent
prices between dealers and do not include retail markups, markdowns, or
commissions and do not necessarily represent actual transactions.):
-9-
<PAGE>
Bid Prices of
Common Stock
Quarter Ended High Low
March 31, 1997 35 5/8 25
June 30, 1997 38 7/16 21 7/8
September 30, 1997 30 5/8 24 3/8
December 31, 1997 35 15
March 31, 1998 19 11/16 8 7/16
June 30, 1998 13 3/4 6 9/16
September 30, 1998 7 1/2 1 1/4
December 31, 1998 3 1/8 13/16
On December 1, 1998 the Company effected a 1:10 reverse stock split. The above
quotations have been retroactively adjusted to reflect the reverse split.
(b) Stockholders - As of March 22,1999 the Company had at least 1,348 round lot
shareholders holding 1,179,649 shares (or approximately 70%) of the Company's
Common Stock.
(c ) Dividends - The Company has not paid cash dividends on its Common Stock in
the past and does not anticipate doing so in the foreseeable future. The Company
is precluded from paying dividends on its Common Stock so long as any dividends
on the Preferred Stock are in arrears.
Under the Company's Articles of Incorporation, as amended ("Articles"), the
Board of Directors has the power, without further action by the holders of the
Common Stock, to designate the relative rights and preferences of the Company's
Preferred Stock, when and if issued. Such rights and preferences could include
preferences as to liquidation, redemption and conversion rights, voting rights,
dividends or other preferences, any of which may be dilutive of the interest of
the holders of the Common Stock. The Board previously designated Series A
Cumulative Convertible Preferred Stock, none of which is outstanding and all of
which has been retired.
The Company has designated 145,300 shares of Series B Preferred, of which
113,333 shares were issued on December 31, 1997, and the balance are reserved
for issuance of payment in kind ("PIK") dividends on outstanding Series B
Preferred. The Series B Preferred is entitled to a dividend of $2.50 per year,
payable calendar quarterly, which amount may be paid, at the election of the
Company, in cash or in kind. If a dividend is paid in kind, each share of Series
B Preferred issued shall be valued at $50. The dividend is cumulative to the
date of payment. The shares of Series B Preferred have a liquidation preference
equal to $50 plus any unpaid dividends. The Series B Preferred was issued in a
private placement and is not publicly traded nor does the Company expect these
securities to be publicly traded in the future.
Additional classes of Preferred Stock may be designated and issued from time to
time in one or more series with such designations, voting powers or other
preferences and relative other rights or qualifications as are determined by
resolution of the Board of Directors of the Company. The issuance of Preferred
Stock may have the effect of delaying or preventing a change in control of the
Company and may have an adverse effect on the rights of the holders of Common
Stock.
(d) 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 fiscal year ended December 31, 1998 and
through the date of this report (all amounts have been retroactively adjusted to
reflect the 1:10 reverse stock split in December 1998):
1. On February 2, 1998, the Company issued 125 shares of its common
stock upon exercise of outstanding stock purchase warrants at $7.50
per share for total proceeds of $938 to the Company. The
Certificates representing the shares issued upon exercise bear a
restrictive legend prohibiting transfer without registration under
the Securities Act or the availability of an exemption from
registration and "stop transfer" instructions have been issued to
the transfer agent. These warrants were issued in February
-10-
<PAGE>
1996 in connection with the Consulting Agreement entered into with
Beta Capital Group, Inc. The shares of common stock issued upon
exercise of the warrants were registered for resale by the holder
in Registration No. 333-19589.
2. On May 20, 1998 the Company issued 3,003 shares of its common stock
upon conversion of 497 shares of Series B Preferred Stock. The
Certificates representing the shares issued upon conversion bear a
restrictive legend prohibiting transfer without registration under
the Securities Act or the availability of an exemption from
registration. The shares issued upon conversion were registered by
the Company for resale by the holders in Registration No.
333-44305. The Company relied upon Section 3(a)(9) of the
Securities Act of 1933, as amended, in claiming exemption from the
registration requirements of the Securities Act for issuance of the
securities upon conversion.
3. On July 17, 1998 the Company issued 6,354 shares of its common
stock upon conversion of 500 shares of Series B Preferred Stock.
The Certificates representing the shares issued upon conversion
bear a restrictive legend prohibiting transfer without registration
under the Securities Act or the availability of an exemption from
registration. The shares issued upon conversion were registered by
the Company for resale by the holders in Registration No.
333-44305. The Company relied upon Section 3(a)(9) of the
Securities Act of 1933, as amended, in claiming exemption from the
registration requirements of the Securities Act for issuance of the
securities upon conversion.
4. On August 18, 1998 the Company issued 12,227 shares of its common
stock upon conversion of 500 shares of Series B Preferred Stock.
The Certificates representing the shares issued upon conversion
bear a restrictive legend prohibiting transfer without registration
under the Securities Act or the availability of an exemption from
registration. The shares issued upon conversion were registered by
the Company for resale by the holders in Registration No.
333-44305. The Company relied upon Section 3(a)(9) of the
Securities Act of 1933, as amended, in claiming exemption from the
registration requirements of the Securities Act for issuance of the
securities upon conversion.
5. 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.
6. 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.
7. 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 also
relied upon Section 4(2) of the Securities Act in claiming exemption for the
registration requirement of the Securities Act. All of the persons to whom the
securities were issued had full information concerning the business and affairs
of the Company and acquired the shares for investment purposes. Certificates
representing the securities issued bear a restrictive legend and stop transfer
instructions have been entered prohibiting transfer of the securities except in
compliance with applicable securities law.
On March 23, 1999 there were outstanding 106,153 shares of Series B Preferred
Stock held by 10 holders. The Series B Preferred Stock is convertible into
common stock at a ratio dependent upon the reported closing market
-11-
<PAGE>
price at the time of conversion. Based on such price on March 23, 1999, the
outstanding Series B Preferred Stock would have been convertible into
approximately 15.1 million shares. The Company's Articles of Incorporation
authorize a total of up to 4,000,000 shares of common stock, of which 1,688,718
were issued and outstanding on March 23, 1999. The Company is obligated to take
appropriate action and seek stockholder approval to increase the number of
authorized common stock at the next meeting of stockholders to provide for this
contingency.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
At December 31, 1998, the Company's cash balance was $1,049,582 with a positive
working capital position of $1,101,888, compared to a cash balance of $6,547,804
and a positive working capital position of $5,295,474 of December 31, 1997. The
change in the Company's cash balance is summarized as follows:
Cash balance at December 31, 1997 $ 6,547,804
Sources of Cash:
Proceeds from the sale of property and equipment 3,823,286
Proceeds from long term debt 32,610
Proceeds from the redemption of certificate of deposit 25,000
Proceeds from the exercise of common stock warrants 938
Total Sources of Cash 3,881,834
--------------
Uses of Cash:
Capital Expenditures for property, plant and equipment (7,396,842)
Repayment of long term debt (1,207,805)
Cash used in operating activities (211,453)
Series B Preferred Stock dividends (210,941)
Purchase and retirement of Series B Preferred Stock (206,250)
Costs associated with the sale of Series B Preferred Stock (146,765)
----------------
Total uses of cash (9,380,056)
---------------
Cash balance at December 31, 1998 $ 1,049,582
==============
During 1998, the Company generated approximately $3.4 million from the sale of
existing assets consisting principally of its Rocky Mountain assets (certain oil
and gas properties, the gas plant, service and supply businesses). The Company
used approximately $1.2 million of these proceeds to pay down the existing
convertible debentures in connection with the mortgage release of the
corresponding oil and gas properties. The Company is currently under contract to
sell all of its remaining Rocky Mountain assets for $100,000 and is scheduled to
close in April, 1999. The proceeds will be available for working capital.
As noted, most of the Company's uses of cash were deployed in exploration
activities in the Gulf Coast. The costs incurred in 1998 are summarized as
follows (the difference between the total incurred, as illustrated in the
following table, and the total amount paid in 1998, relates to the changes in
accounts payable at December 31, 1997 and December 31, 1998 as well as other
non-cash amounts capitalized in the full cost pool).
<TABLE>
<CAPTION>
Total %
Exploration Activities -
<S> <C> <C>
Land, Geologic and Geophysical Costs on Seismic Programs 2,976,835 43%
Exploratory Dry Holes 1,539,464 22%
Discovery wells 937,273 14%
Capitalized Interest Cost 852,980 12%
Other Exploration Costs 492,830 7%
--------------- --------
Total Exploration Activities 6,799,382 98%
Workovers or Recompletions of Rocky Mountain properties 13,468 *
Total Oil and Gas properties 6,812,850
Service and Other Field Equipment 62,014 1%
Office Equipment 5,159 *
--------------- --------
Total Capital Expenditures 6,880,023 100%
============== ========
* less than 1%
</TABLE>
-12-
<PAGE>
The total costs incurred for exploration activities of $6,799,382 is summarized
below by program operator:
<TABLE>
<CAPTION>
PROGRAM OPERATOR
NEGX Parallel AHC Other Total %
Category:
<S> <C> <C> <C> <C> <C> <C>
Exploratory Dry Holes ................ $1,350,585 $ 188,879 $ -- $ -- $1,539,464 23%
Land, G&G Costs on Seismic
Programs .......................... 1,283,521 1,557,698 135,616 -- 2,976,835 44%
Discovery wells ...................... 362,254 -- 575,019 -- 937,273 14%
Capitalized Interest ................. 272,954 571,497 8,529 -- 852,980 12%
Other Exploration Costs .............. -- -- -- 492,830 492,830 7%
---------- ---------- ---------- ---------- ----------
Total Exploration Costs ....... $3,269,314 $2,318,074 $ 719,164 $ 492,830 $6,799,382 100%
========== ========== ========== ========== ==========
% of Exploration Costs ........ 48% 34% 11% 7% 100%
</TABLE>
In 1999 the Company will focus its future 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, Texas and Ganado 3-D prospects encompassing
130,000 acres in and around Jackson County, Texas,
operated by Parallel Petroleum ("Parallel").
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 effect 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 December 31, 1998.
Under the existing commitments related to these three areas, the following table
summarizes the range of expected capital requirements for 1999 by program:
Estimated Investment (in millions)
Operator Minimum Maximum
East Bayou Sorrel Area $ - $ 400,000
Formosa, Texana, and Ganado Prospects 200,000 500,000
Maurice Prospect 350,000 600,000
----------- -------------
Total $ 550,000 $ 1,500,000
========== ============
Given the range of potential capital requirements for 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
-13-
<PAGE>
been unable to attract additional equity capital. For example, using the
Company's recent common stock price of $0.47, 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
15.1 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 might 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.
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 consummated within a reasonable period of
time and under reasonable terms, then the Company may have to seek additional
financing. However, as previously discussed, 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 has 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 revenue, costs, operating margins and cash flows historically
generated and discussed under the captions "Gas Plant Processing", "Oil Field
Services and Supply", "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.
-14-
<PAGE>
Total Revenue
Total Revenue from all operations was as follows:
For the Year Ended December 31,
1998 1997
--------------------- -------------------
Amount % Amount %
Oil and gas sales $ 2,359,905 81% $ 3,168,042 68%
Gas plant processing 256,174 9% 691,828 15%
Oil field services and supply 271,932 9% 707,060 15%
Well administration and other income 28,971 1% 92,379 2%
-------------- ------ ------------ -----
Total revenue $ 2,916,982 100% $ 4,659,309 100%
=========== ==== =========== ====
The decrease in total revenue is substantially attributable to: 1.) the sale of
the Rocky Mountain assets in 1998; and 2.) the substantial decrease in oil
prices between the two periods. These circumstances, along with any known trends
or changes that affect revenue on a line-by-line basis, are discussed in the
following paragraphs under their respective captions.
Oil and Gas
Operating statistics for oil and gas production for the periods presented are as
follows:
For the Year Ended
December 31,
1998 1997
--------------- -------------
Production:
Oil (Bbls)
Rocky Mtns. 51,000 80,000
Gulf Coast 58,000 43,000
---------- ---------
Combined Total 109,000 123,000
========= ========
Gas (Mcf)
Rocky Mtns. 230,000 392,000
Gulf Coast 320,000 91,000
--------- -------
Combined Total 550,000 483,000
========= =======
BOE (6:1)
Rocky Mtns. 89,000 145,000
Gulf Coast 112,000 59,000
--------- ---------
Combined Total 201,000 204,000
======== ========
Average Collected Price:
Oil (per Bbl)
Rocky Mtns. $ 12.11 $ 18.75
Gulf Coast $ 12.19 $ 19.15
-------------- ---------------
Combined Average $ 12.16 $ 18.89
============== ===============
Gas (per Mcf)
Rocky Mtns. $ 1.39 $ 1.46
Gulf Coast $ 2.22 $ 2.94
--------------- ----------------
Combined Average $ 1.87 $ 1.74
=============== ================
Per BOE (6:1)
Rocky Mtns. $ 10.50 $ 14.25
Gulf Coast $ 12.73 $ 18.76
-------------- ---------------
Combined Average $ 11.74 $ 15.54
============== ===============
For the Year Ended December 31,
1998 1997
----------------- -----------
Operating Margins:
Rocky Mtns:
Revenue -
Rocky Mtns. Oil $ 612,370 $ 1,498,800
Rocky Mtns. Gas 321,333 571,213
--------------- -------------
$ 933,703 $ 2,070,013
Costs (806,224) (1,320,758)
---------------- -----------
Operating Margin $ 127,479 $ 749,255
Operating Margin Percent 14% 36%
Gulf Coast:
Revenue -
Gulf Coast - Oil $ 715,699 $ 828,779
Gulf Coast - Gas 710,503 269,250
--------------- -------------
1,426,202 $ 1,098,029
Costs (243,339) (165,980)
---------------- -------------
Operating Margin $ 1,182,863 $ 932,049
Operating Margin Percent 83% 85%
Combined Totals:
Revenue $ 2,359,905 $ 3,168,042
Costs (1,049,563) (1,486,738)
--------------- ------------
Operating Margin $ 1,310,342 $ 1,681,304
-============= --=========
Operating Margin Percent 56% 53%
Production Costs per BOE before
DD&A:
Rocky Mtn Region $ 9.04 $ 9.09
Gulf Coast Region 2.17 2.84
--------------- -------------
Combined Average $ 5.22 $ 7.29
=============== =============
Change in Revenue Attributable
to:
Production (143,959)
Price (661,732)
Total Increase in Revenue (805,691)
Gas Plant Processing Revenues
This category accounts for the natural gas processed and the natural gas liquids
that were extracted and sold by the Gas Plant facility (which was sold in 1998).
Operating statistics for the periods presented are as follows:
For the Year Ended December 31,
1998 1997
--------------- -------------
Production:
Natural Gas Processed (Mcf) 232,700 331,900
-------------- --------------
Liquids Produced -
B-G Mix (gallons) 542,200 769,300
Propane (gallons) 404 642,500
---------- --------------
Total liquids produced 947 1,411,800
========== =============
Average Sales Price of Liquids (per gallon)$ 0.27 $ 0.41
========== ==============
Gross Margin: Amount Amount
------------ -----------
Revenue $ 256,174 $ 691,828
Costs (275,224) (388,851)
--------------- -----------
Gross Margin $ (19,050) $ 302,977
================ ============
Gross Margin Percent -7% 44%
-15-
<PAGE>
Oil Field Services and Oil Field Supply
Operating statistics for the Company's oil field service and supply operations
(which were sold in 1998) for the periods presented are as follows:
For the Year Ended December 31,
1998 1997
---------------- ----------------
Revenue $ 271,932 $ 707,060
Costs (295,789) (651,458)
-------------- -------------
Net Operating Income $ (23,857) $ 55,602
============== =============
Well Administration and Other Income
This revenue primarily represents the revenue generated by the Company for
operating oil and gas properties. The decrease in 1998 when compared to 1997 is
primarily attributed to the sale of the Rocky Mountain oil and gas properties in
1998. The Company 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 provides for minimum
monthly cash payments of $17,500 plus reimbursement for out-of-pocket expenses.
The contract ended in February 1999. Accordingly, the Company expects the cost
will be less than $40,000 in 1999.
During 1997, the Company granted Beta warrants for an additional 100,000 shares
of common stock which after the reverse stock split translates to 10,000 shares
of common stock. These warrants are exercisable for a period of four years at an
exercise price of $37.50 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 year ended December 31, 1997. An independent contractor for
Beta is also a member of the Company's Board of Directors.
General and Administrative
General and Administrative ("G&A") expenses increased approximately $100,000 in
1998 when compared to 1997. However, the totals in 1998 include several
non-recurring expenses as follows:
$ 150,000 - Severance for Willard H. Pease, Jr., the Company's former
President and CEO
150,000 - Fee paid to San Jacinto Securities in connection with
seeking a merger candidate
100,000 - Costs associated with the corporate restructuring and
divestment of Rocky Mountain assets.
----------
$ 400,000
The Company has and will take steps to significantly reduce future G&A costs,
and expects G&A costs in 1999 to be approximately $60,000 to $80,000 per month.
The Company capitalized $236,931 and $280,000 in 1998 and 1997, respectively, of
G&A costs associated with the Gulf Coast exploration activities.
Depreciation, Depletion and Amortization
Depreciation, Depletion and Amortization ("DD&A") for the periods presented by
cost center consisted of the following:
For the Year Ended December 31
1998 1997
------------- --------------
Oil and Gas Properties - Rocky Mountains $ 275,137 $ 1,176,865
Oil and Gas Properties - Gulf Coast 1,639,125 1,018,499
Gas Plant Operations 164,881 232,304
Service and Supply Operations 108,464 146,436
Furniture and Fixtures 53,485 49,219
Non-Compete Agreements - 45,996
---------------- -----------
Total $ 2,241,092 $ 2,669,319
=========== ===========
-16-
<PAGE>
DD&A associated with the Rocky Mountain assets (oil and gas properties, gas
plant and service and supply) decreased in 1998 when compared to 1997 as a
result of the sale of those assets in 1998 and the impairment recognized in
1997. The DD&A for the Gulf Coast oil and gas properties increased in 1998 as a
result of increased production and lower commodity prices.
Interest Expense
Total interest incurred, and its allocation, for the periods presented is as
follows:
For the Year Ended December 31,
1998 1997
---------------- ---------------
Interest paid or accrued $ 399,218 $ 448,705
Amortization of debt discount 367,443 353,310
Amortization of debt issuance costs 485,535 223,003
-------------- -------------
Total interest incurred 1,252,196 1,025,018
Interest capitalized (852,978) (323,641)
--------------- --------------
Interest expense $ 399,218 $ 701,377
============= ============
The higher interest incurred in 1998 is attributed to a $396,792 charge for the
early retirement of approximately $1.2 million of the 1996 convertible
debentures. The $1.2 million payment was made in connection with the sale of the
Rocky Mountain assets and the corresponding deferred charges (debt discount and
issuance costs) were reduced proportionately by charging that amount to expense.
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. Accordingly, at December 31, 1997, the
Company incurred an impairment charge of $3,946,733 related to its Gulf Coast
oil and gas properties. The majority of this charged was the result of the dry
holes drilled in 1997. In 1998 the Company incurred an additional impairment
charge of $7,278,818 which can be attributed to: a.) $3,292,324 in dry holes;
b.) $2,971,309 related to the expiration of leases in the acreage associated
with Parallel Petroleum's 3-D program in S. Texas; and c.) $1,015,185 to the
continuing collapse of oil prices.
Impairment - Assets Held For Sale
In 1997 when the Company's Board of Directors decided to divest its Rocky
Mountain assets, the Company evaluated these assets for impairment and
recognized an impairment charge of $8,965,972. This charge was recognized during
the fourth quarter of 1997 in order to reduce the net carrying value of the
assets to the estimated net realizable value ("NRV") of $4,048,000.
The Company recognized an additional charge of $313,953 during 1998 to account
for the difference between the estimated NRV in 1997 and the amount actually
received in 1998.
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 potential common shares have been excluded from the
computations because their effect would be antidilutive.
-17-
<PAGE>
The net loss applicable to common stockholders is determined by adding any
dividends accruing to the benefit of the preferred stockholders to the net loss.
The dividends included for this calculation include: 1) paid dividends; 2)
accrued but unpaid dividends; and 3) any imputed dividends attributable to the
beneficial conversion feature. During 1997, the net loss applicable to common
stockholders includes $89,969 for the year ended December 31, 1997 of accrued
but unpaid dividends related to the Series A Preferred Stock. The Series A
Preferred Stock automatically converted into common on June 11, 1997. During
1998, the net loss applicable to common stockholders includes the following
charges associated with the Series B Preferred Stock that was issued on December
31, 1997:
Dividends declared $ 278,026
Imputed non-cash dividend 1,789,468
------------
Total $ 2,067,494
===========
The Series B Preferred Stock became convertible into common stock on April 1,
1998 at a conversion price equal to a 12% discount to the average trading price
of the common stock prior to conversion. This discount increases monthly through
March 1999 when the discount tops out at 25% (this discount is considered a
"beneficial conversion feature" and at December 31, 1998 was at 24%). The
additional non-cash imputed dividend charge included in the net loss applicable
to common stockholders represents the intrinsic value of the discount applicable
through December 31, 1998. As long as any Series B Preferred Stock is
outstanding, additional non-cash imputed dividend charges will be incurred in
future periods as the conversion discount increases until the discount tops out
at 25%. 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.
-18-
<PAGE>
OTHER MATTERS
Disclosure Regarding Forward-Looking Statements
This report on Form 10-KSB includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
facts included in this report, including, without limitation, statements under
"Business and Properties" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" regarding the Company's financial position,
reserve quantities and net present values, business strategy, plans and
objectives of management of the Company for future operations and capital
expenditures, are forward-looking statements and the assumptions upon which such
forward- looking statements are based are believed to be reasonable. The Company
can give no assurance that such expectations and assumptions will prove to be
correct. Reserve estimates of oil and gas properties are generally different
from the quantities of oil and natural gas that are ultimately recovered or
found. This is particularly true for estimates applied to exploratory prospects.
Additionally, any statements contained in this report regarding forward- looking
statements are subject to various known and unknown risks, uncertainties and
contingencies, many of which are beyond the control of the Company. Such things
may cause actual results, performance, achievements or expectations to differ
materially from the anticipated results, performance, achievements or
expectations. Factors that may affect such forward-looking statements include,
but are not limited to: the Company's ability to generate additional capital to
complete its planned drilling and exploration activities; risks inherent in oil
and gas acquisitions, exploration, drilling, development and production; price
volatility of oil and gas; competition; shortages of equipment, services and
supplies; government regulation; environmental matters; financial condition of
the other companies participating in the exploration, development and production
of oil and gas programs; and other matters beyond the Company's control. In
addition, since all of the prospects in the Gulf Coast are currently operated by
another party, the Company may not be in a position to control costs, safety and
timeliness of work as well as other critical factors affecting a producing well
or exploration and development activities. All written and oral forward-looking
statements attributable to the Company or persons acting on its behalf
subsequent to the date of this report are expressly qualified in their entirety
by this disclosure.
Year 2000 Issue
The Company has 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.
-19-
<PAGE>
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.
-20-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Balance Sheet - December 31, 1998 . . . . . . . . . . . . . . 24
Consolidated Statements of Operations -
For the Years Ended December 31, 1998 and 1997. . . . . . . . . . . . . . . 25
Consolidated Statements of Stockholders' Equity -
For the Years Ended December 31,1998 and 1997. . . . . . . . . . . . . . . . 26
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . 27-28
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . 29-40
-21-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Pease Oil and Gas Company
Grand Junction, Colorado
We have audited the accompanying consolidated balance sheet of Pease Oil and Gas
Company and subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pease Oil and Gas
Company and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1997
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. As discussed in Note 1 to the Financial Statements, the Company has
incurred net losses of $10.6 million in 1998 and $15.9 million in 1997. These
conditions and others matters discussed in Note 1 raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also discussed in Note 1. The Financial Statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ HEIN + ASSOCIATES LLP
Denver, Colorado
March 5, 1999
-22-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C>
Cash and equivalents ..................................................... $ 1,049,582
Trade receivables, net of allowance for bad debts of $13,645 ............. 420,460
Assets held for sale ..................................................... 100,000
Prepaid expenses and other ............................................... 170,687
------------
Total current assets ................................... 1,740,729
OIL AND GAS PROPERTIES, at cost (full cost method):
Unevaluated properties ................................................... 2,816,475
Costs being amortized .................................................... 16,834,274
Total oil and gas properties ................................ 19,650,749
Less accumulated amortization ............................................ (13,883,174)
Net oil and gas properties .................................. 5,767,575
OTHER ASSETS:
Debt issuance costs, net of accumulated amortization of $326,610 ......... 322,551
Office equipment and vehicles, net of accumulated depreciation of $156,124 74,623
Deposits and other ....................................................... 7,493
------------
Total other assets .......................................... 404,667
------------
TOTAL ASSETS ................................................................... $ 7,912,971
============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C>
Current maturities of long-term debt ................................... $ 5,825
-------------------
Accounts payable, trade ................................................ 310,447
-------------------
Accrued expenses ....................................................... 322,569
-------------------
Total current liabilities ................................. 638,841
LONG-TERM DEBT, less current maturities: ..................................... 2,293,261
COMMITMENTS AND CONTINGENCIES (Notes 3, 5, and 9)
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share, 2,000,000 shares authorized,
107,336 shares of Series B 5% PIK Cumulative Convertible Preferred
Stock issued and outstanding (liquidation preference of $5,366,800) 1,073
Common Stock, par value $.10 per share, 4,000,000 shares authorized,
1,601,062 shares issued and outstanding ............................ 160,106
Additional paid-in capital ............................................. 37,811,006
Accumulated deficit .................................................... (32,991,316)
-------------------
Total stockholders' equity ................................ 4,980,869
-------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................... $ 7,912,971
===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-23-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998 and 1997
1998 1997
-------------- -------------
REVENUE:
Oil and gas sales ...................... $ 2,359,905 $ 3,168,042
Gas plant processing ................... 256,174 691,828
Oilfield services and supply ........... 271,932 707,060
Well administration and other .......... 28,971 92,379
------------ ------------
Total revenue ............. 2,916,982 4,659,309
------------ ------------
EXPENSES:
Oil and gas production costs ........... 1,049,563 1,486,738
Gas plant .............................. 275,224 388,851
Oilfield services and supply ........... 295,789 651,458
Consulting expense-related party ....... 247,123 437,236
General and administrative ............. 1,587,013 1,487,236
Depreciation, depletion and amortization 2,241,092 2,669,319
Impairment expense:
Oil and gas properties ......... 7,278,818 3,946,733
Assets held for sale ........... 313,953 8,965,972
------------ ------------
Total expenses ............ 13.288,575 20,033,543
------------ ------------
LOSS FROM OPERATIONS ......................... (10,371,593) (15,374,234)
OTHER INCOME (EXPENSES):
Interest expense ....................... (399,218) (701,377)
Interest and other income .............. 139,785 180,774
Gain (Loss) on sale of assets .......... 3,555 (230)
------------ ------------
NET LOSS ..................................... $(10,627,471) $(15,895,067)
============ ============
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ... $(12,694,965) $(15,985,036)
============ ============
NET LOSS PER COMMON SHARE .................... $ (7.99) $ (12.21)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING ............................ 1,588,000 1,309,000
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
-24-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
----------- ------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996 ....................... 179,938 $1,799 753,039 $75,304 $ 19,789,707 $ (6,468,778) $ 13,398,032
Fair value of warrants granted for services .... -- -- -- -- 240,000 -- 240,000
Issuance of common stock for:
Acquisition of oil and gas properties ....... -- -- 31,815 3,182 881,818 -- 885,000
Exercise of stock options ................... -- -- 4,268 427 44,964 -- 45,391
Exercise of warrants ........................ -- -- 319,260 31,926 3,880,287 -- 3,912,213
Services .................................... -- -- 615 61 14,790 -- 14,851
Cash in private placements .................. -- -- 379,200 37,920 9,442,080 -- 9,480,000
Conversion of 10% collateralized convertible
debentures, net of discount .............. -- -- 34,166 3,417 488,637 -- 492,054
Conversion of Series A preferred stock ...... (179,938) (1,799) 56,990 5,699 (3,900) -- --
Issuance of Series B preferred stock ........... 113,333 1,133 -- -- 5,665,517 -- 5,666,650
Offering costs ................................. -- -- -- -- (2,147,446) -- (2,147,446)
Net loss ....................................... -- -- -- -- -- (15,895,067) (15,895,067)
--------- ------- --------- ------- ---------- ------------ ------------
BALANCES, December 31, 1997 ....................... 113,333 1,133 1,579,353 157,936 38,296,454 (22,363,845) 16,091,678
Purchase and retirement of Series B preferred stock (4,500) (45) -- -- (206,205) -- (206,250)
Issuance of common stock for:
Exercise of warrants .......................... -- -- 125 12 926 -- 938
Conversion of Series B preferred stock ........ (1,497) (15) 21,584 2,158 (2,143) -- --
Series B preferred stock dividends ................ -- -- -- -- (278,026) -- (278,026)
Net Loss .......................................... -- -- -- -- -- (10,627,471) (10,627,471)
----------- ------ --------- -------- ------------ ------------ ------------
BALANCES, December 31, 1998 ....................... 107,336 $1,073 1,601,062 $160,106 $ 37,811,006 $(32,991,316) $ 4,980,869
=========== ====== ========= ======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-25-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss .......................................................... $(10,627,471) $(15,895,067)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization ............. 2,241,092 2,623,323
Amortization of debt discount and issuance costs ..... 396,742 576,313
Amortization of non-compete agreements ............... -- 45,996
Impairment expense:
Assets held for sale .......................... 313,953 8,965,972
Oil and gas properties ........................ 7,278,818 3,946,733
Loss (Gain) on sale of assets ........................ (3,555) 230
Issuance of common stock and warrants for services ... -- 74,851
Other ................................................ 175,682 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade receivables ........................... 336,974 (157,786)
Inventory .................................. -- (156,822)
Prepaid expenses and other ................. 8,292 14,685
Increase (decrease) in:
Accounts payable ........................... (40,673) 9,068
Accrued expenses ........................... (291,307) (41,182)
------------ ------------
Net cash provided by (used in) operating activities .. (211,453) 6,314
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant and equipment ............ (7,396,842) (12,137,192)
Change in other assets ............................................ 25,000 (95,000)
Proceeds from sale of property, plant and equipment ............... 3,823,286 66,056
------------ ------------
Net cash used in investing activities ................ (3,548,556) (12,166,136)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Series B preferred stock .................... -- 5,099,985
Proceeds from exercise of stock options and warrants .............. 938 3,957,604
Series B preferred stock dividends ................................ (210,941) --
Proceeds from long-term debt ...................................... 32,610 --
Repayment of long-term debt ....................................... (1,207,805) (391,407)
Proceeds from sale of common stock ................................ -- 8,920,000
Offering costs .................................................... (146,765) (874,416)
Purchase and retirement of Series B preferred stock ............... (206,250) --
------------ ------------
Net cash provided by (used in) financing activities .. (1,738,213) 16,711,766
------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS ......................... (5,498,222) 4,551,944
CASH AND EQUIVALENTS, beginning of year ................................. 6,547,804 1,995,860
------------ ------------
CASH AND EQUIVALENTS, end of year ....................................... $ 1,049,582 $ 6,547,804
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-26-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S> <C> <C>
Cash paid for interest ............................................. $ 400,309 $ 505,523
=========== ===========
Cash paid for income taxes ......................................... $ -- $ --
===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Fair value of warrants granted for oil and gas exploration services $ -- $ 180,000
Conversion of long-term debt, net of discount, to common stock .... -- 492,054
Debt incurred for purchase of vehicles ............................ -- 50,691
Increase (decrease) in payables for:
Oil and gas properties ....................................... (1,002,353) 1,077,266
Offering costs ............................................... (146,765) 146,765
Series B preferred stock dividends ........................... 67,085 --
Issuance of common stock for oil and gas properties ............... -- 885,000
Capitalized portion of amortized debt issuance/discount costs ..... 485,534 --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-27-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations - At December 31, 1998 the principal business of Pease
Oil and Gas Company (the "Company") is to participate as a non-operating,
minority interest owner in exploration, development, production and sale of oil,
natural gas and natural gas liquids. The Company was previously engaged in the
processing and marketing of natural gas at a gas processing plant, the sale of
oil and gas production equipment and oilfield supplies, and oil and gas well
completion and operational services. However, as discussed in Note 2, during
1998 the Company's gas processing plant and the oilfield service and supply
businesses were sold. The Company conducts its operations through the following
wholly-owned subsidiaries: Loveland Gas Processing Company, Ltd. ("LGPCo); Pease
Oil Field Services, Inc.; Pease Oil Field Supply, Inc.; and Pease Operating
Company, Inc.. All the subsidiaries are currently inactive.
Continuing Operations - The Company has incurred net losses of $10.6
million in 1998 and $15.9 million in 1997. As a result of continuing losses, the
Company's working capital has been reduced to $1.1 million at December 31, 1998
and stockholders' equity is less than $5 million. At December 31, 1998, the
liquidation preference of the Series B Preferred stock is in excess of total
stockholders' equity and the hyperdilutive potential of the conversion feature
has resulted in the Company's inability to raise additional equity capital which
is critical to carry out development and exploration activities that are planned
for the next several years. The Company may be required to redeem the Series B
Preferred stock on December 31, 2002 at a price equal to the liquidation
preference. Alternatively, the Company can force the holders to convert to
common stock which would result in ownership by the Preferred holders in excess
of 90% (based on the current trading price of the common stock). However, the
Company does not currently have a sufficient number of common shares authorized
to convert all of the Preferred stock. Under the terms of the Preferred Stock
Agreement, the Company is obligated to take the appropriate steps to increase
the number of authorized shares in the future. However, no assurance can be
given at this time whether or not additional shares can or will be authorized.
In April 2001, the Company will also be required to pay off convertible
debentures with a current outstanding balance of $2,782,500. During 1998, the
Company has taken several steps to reduce general and administrative costs and
management believes the Company will be able to generate positive operating cash
flows in 1999. Management believes capital requirements for 1999 will be between
$550,000 and $1,500,000. Accordingly, management believes that existing working
capital at December 31, 1998 plus cash expected to be generated from operating
activities will be sufficient to meet commitments for capital expenditures and
other obligations of the Company through at least 1999. However, should the
existing working capital not be sufficient to meet future obligations, 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.
In response to historically poor financial results and depressed oil
commodity markets, the Company is also aggressively pursuing a merger candidate.
To this end, the Company engaged San Jacinto Securities, Inc. ("SJS"), an
investment banking firm located in Dallas, Texas to assist the Company in this
venture. Although no formal agreements have been reached, the Company is engaged
in 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.
Principles of Consolidation - The accompanying financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All material
intercompany transactions and accounts have been eliminated in consolidation.
Cash and Equivalents - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Oil and Gas Properties - The Company's oil and gas producing activities are
accounted for using the full cost method of accounting. The Company has one cost
center (full cost pool) since all of its oil and gas producing activities are
conducted in the United States. Under the full cost method, all costs associated
with the acquisition, development and exploration of oil and gas properties are
capitalized, including payroll and other internal costs that are directly
attributable to these activities. For the years ended December 31, 1998 and
1997, capital expenditures include internal costs of $236,931 and $280,000,
respectively. Proceeds from sales of oil and gas properties are credited to the
full cost pool with no gain or lost recognized unless such adjustments would
significantly alter the relationship between capitalized costs and proved oil
and gas reserves.
Acquisition costs of unproved properties and costs related to exploratory
drilling and seismic activities are initially excluded from amortization. These
costs are periodically evaluated for impairment and transferred to properties
being amortized when either proved reserves are established or the costs are
determined to be impaired.
The capitalized costs related to all evaluated oil and gas properties are
amortized using the units of production method based upon production and
estimates of proved reserve quantities. Future costs to develop proved reserves,
as well as site restoration, dismantlement and abandonment costs, are estimated
based on current costs and are also amortized to expense using the units of
production method.
The capitalized costs of evaluated oil and gas properties (net of
accumulated amortization and related deferred income taxes) are not permitted to
exceed the full cost ceiling. The full cost ceiling involves a quarterly
calculation of the estimated future net cash flows from proved oil and gas
properties, using current prices and costs and an annual discount factor of 10%.
Accordingly, the full cost ceiling may be particularly sensitive in the near
term due to changes in oil and gas prices or production rates.
Impairment of Long-Lived Assets - The Company performs an assessment for
impairment whenever events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable. If the net
carrying value exceeds estimated undiscounted future net cash flows, then
impairment is recognized to reduce the carrying value to the estimated fair
value.
Property, Plant and Equipment - Property, plant and equipment is stated at
cost. Depreciation of property, plant and equipment was calculated using the
straight-line method over the estimated useful lives of the assets, as follows:
Years
Gas plant 17
Service equipment and vehicles 4-7
Buildings and office equipment 7-15
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PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense related to property, plant and equipment amounted to
$328,164 and $429,012 for the years ended December 31, 1998 and 1997,
respectively.
The costs of normal maintenance and repairs are charged to operating
expenses as incurred. Material expenditures which increase the life of an asset
are capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of properties sold, or otherwise disposed of, and the related
accumulated depreciation or amortization are removed from the accounts, and any
gains or losses are reflected in current operations.
Non-compete Agreements - The costs of non-compete agreements were incurred
in connection with the 1993 acquisition of substantially all of the Company's
Rocky Mountain assets. These costs were being amortized over the terms of the
two to ten-year agreements on a straight-line basis. At December 31, 1997, the
remaining net book value of $260,682 was charged to impairment expense in
connection with the sale of assets discussed in Note 2.
Debt Issuance Costs - Debt issuance costs relate to the $5 million private
placement of convertible debentures discussed in Note 3. These costs are being
amortized using the interest method.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. The actual results could differ from those estimates.
The Company's financial statements are based on a number of significant
estimates including the allowance for doubtful accounts, assumptions affecting
the fair value of stock options and warrants, and oil and gas reserve quantities
which are the basis for the calculation of amortization and impairment of oil
and gas properties. Management emphasizes that reserve estimates are inherently
imprecise and that estimates of more recent discoveries are more imprecise than
those for properties with long production histories.
Income Taxes - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on previously
recorded deferred tax assets and liabilities resulting from a change in tax
rates is recognized in earnings in the period in which the change is enacted.
Revenue Recognition - The Company recognizes gas plant revenues and oil and
gas sales upon delivery to the purchaser. Revenues from oil field services are
recognized as the services are performed. Oil field supply and equipment sales
are recognized when the goods are shipped to the customer.
Net Loss Per Common Share -Net loss per common share is presented in
accordance with the provisions of Statement of Financial Accounting Standards
No. 128, Earnings Per Share (FAS 128), which requires disclosure of basic and
diluted earnings per share (EPS). Basic EPS excludes dilution for potential
common shares and is computed by dividing income or loss applicable to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock and resulted in the issuance of common stock. Basic and
diluted EPS are the same in 1998 and 1997 as all potential common shares were
antidilutive.
Stock Split - Effective December 1, 1998, the Board of Directors declared a
1 for 10 reverse stock split related to the Company's common stock. All share
and per share amounts in the accompanying financial statements and notes have
been retroactively restated for this stock split.
Stock-Based Compensation - The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options granted to
employees is measured as the
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PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
excess, if any, of the quoted market price of the Company's common stock at the
measurement date (generally, the date of grant) over the amount an employee must
pay to acquire the stock.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock- Based Compensation" (FAS 123). FAS 123
requires that options, warrants, and similar instruments which are granted to
non-employees for goods and services be recorded at fair value on the grant
date. Fair value is generally determined under an option pricing model using the
criteria set forth in FAS 123.
2. ASSETS HELD FOR SALE:
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 be divested. Accordingly, the Company evaluated these assets for
impairment and recognized a charge of $8,965,972 in 1997 to reduce the net
carrying value of the assets to the estimated fair value of $4,048,000. These
assets were sold during 1998 for cash proceeds of $3,054,000 and an additional
payment of $100,000 is due by April 1999.
The results of operations, exclusive of the impairment charge, related to
the Rocky Mountain assets for the years ended December 31, 1998 and 1997 are as
follows:
1998 1997
-------------- ---------------
Revenues $ 1,488,843 $ 3,683,000
Operating costs and expenses (1,394,141) (2,368,000)
Depreciation and amortization (549,816) (1,606,000)
--------------- ---------------
Loss from operations $ (455,114) $ (291,000)
============== ===============
The Company recognized an additional impairment charge in 1997 of $313,953,
to account for the difference between the net realizable value estimated in 1997
and the actual amount realized in 1998.
3. DEBT FINANCING ARRANGEMENTS:
Long-Term Debt - Long-term debt at December 31, 1998 consists of the
following:
Convertible debentures, interest at 10%,
due April 2001, unsecured, $ 2,782,500
Less unamortized discount (511,787)
----------------
Net carrying value 2,270,713
Note payable to bank, interest at 8.5%,
monthly payments of $669, due March 2003,
collateralized by vehicle 28,373
Total long-term debt 2,299,086
Less current maturities (5,825)
Long-term debt, less current maturities $ 2,293,261
=============
Aggregate maturities of long-term debt are as follows:
Year Ending December 31:
1999 $ 5,825
2000 6,340
2001 2,277,613
2002 7,510
2003 1,798
----------------
$ 2,299,086
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PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible Debentures and Consulting Agreement - In March 1996, the
Company entered into a consulting agreement with a company (the "Consultant")
that specializes in developing and implementing capitalization plans, including
the utilization of debt capital in business operations. The agreement expired in
February 1999, and provides for minimum monthly cash payments of $17,500. In
addition to cash compensation, the Company agreed to grant warrants to purchase
100,000 shares of the Company's common stock. The exercise price of the warrants
is $7.50 per share and they expire in March 2001.
In April 1996, the Company, with the assistance of the Consultant,
initiated a private placement to sell up to $5,000,000 of collateralized
convertible debentures in the form of "Units". Each Unit consists of one $50,000
five-year 10% collateralized convertible debenture and detachable warrants to
purchase 2,500 shares of the Company's common stock at $12.50 per share (see
Note 7 for additional information with respect to the warrants). In November
1996, the offering was completed and the Company was successful in selling the
entire $5,000,000 generating net cash proceeds of $4,300,000. The estimated fair
value of the detachable warrants of $1,829,000 is treated as a discount and is
being amortized using the interest method. The debentures were initially
collateralized by a first priority interest in certain Rocky Mountain oil and
gas properties owned and operated by the Company.
The debentures are convertible, at the holder's option, into the Company's
common stock for $30.00 per share and may be redeemed by the Company, in whole
or in part, beginning at a premium of 110% of the original principal amount
subject to adjustment beginning on April 25, 1999. During the year ended
December 31, 1997, the holders of $1,025,000 of debentures elected to convert to
341,665 shares of common stock. Effective October 1, 1998, the holders of the
debentures voted to amend the debentures to release the oil and gas properties
which previously collateralized this debt. In exchange for this release, the
Company agreed to retire 30% of the outstanding principal balance which amounted
to an aggregate of $1,192,500. Interest on the debentures is payable quarterly
and the principal balance is due on April 15, 2001.
The Company also agreed to pay the Consultant a fee equal to 2% of the net
proceeds from the private placement and up to 7% of the net proceeds from any
warrants which are exercised during the term of the agreement or up to six
months after termination in certain circumstances. All of the compensation paid
to the Consultant is limited to 15% of the gross proceeds generated from the
private placement, exercise of warrants, or other debt or equity financings that
may be consummated during the term of the agreement. In August 1996, a major
shareholder of the Consultant was elected to the Company's Board of Directors.
4. INCOME TAXES:
Deferred tax assets (liabilities) as of December 31, 1998 and 1997 are
comprised of the following:
1998 1997
--------------- --------------
Long-term Assets:
Net operating loss carryforwards $ 7,897,000 $5,816,000
Property, plant and equipment 1,178,000 229,000
Tax credit carryforwards 294,000 294,000
Percentage depletion carryforwards 160,000 120,000
Other 21,000 41,000
-------------- ------------
Total 9,550,000 6,500,000
Less valuation allowance (9,550,000) (6,500,000)
------------- -----------
Net long-term asset $ - $ -
============= ============
During the years ended December 31, 1998 and 1997, the Company increased
the valuation allowance by $3,050,000 and $5,865,000, respectively, primarily
due to an increase in the net operating loss carryforwards which are not
considered to be realizable. The Company has provided a valuation allowance for
the net operating loss and credit carryforwards based upon the various
expiration dates and the limitations which exist under IRS Sections 382 and 384.
At December 31, 1998, the Company had net operating loss carryforwards for
income tax purposes of approximately $20 million, which expire primarily in 2008
through 2018. Some of these net operating losses are subject
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PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to limitations under IRS Sections 382 and 384, particularly should a significant
number of Series B Preferred stock convert into common stock in the future.
Additionally, the Company has tax credit carryforwards at December 31, 1998, of
approximately $294,000 and percentage depletion carryforwards of approximately
$429,000.
5. COMMITMENTS AND CONTINGENCIES:
Employment Agreements - During 1994, the Board of Directors approved
employment agreements with the Company's executive officers. The agreements may
be terminated by the officers upon 90 days notice or by the Company without
cause upon 30 days notice. In the event of a termination by the Company without
cause, the Company would be required to pay the officers their respective
salaries for one to three years. If the termination occurs following a change in
control, the Company would be required to make lump sum payments equivalent to
two to three years salary for each of the officers.
Profit Sharing Plan - The Company has established a 401(k) profit sharing
plan that covers all employees with six months of service who elect to
participate in the Plan. The Plan provides that the employees may elect to
contribute up to 15% of their salary to the Plan. All of the Company's
contributions are discretionary and amounted to $5,401 and $5,669 for the years
ended December 31, 1998 and 1997, respectively.
Environmental - The Company is subject to extensive Federal, state and local
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites. Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefits are expensed. Liabilities
for expenditures of a noncapital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be reasonably
estimated.
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
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PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Bankruptcy of Third Party Operator - 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 represents approximately 50% of the Company's current
production, the bankruptcy petition might adversely effect 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 December 31, 1998.
Contingencies - 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 operations 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 conditions or results of operations.
6. PREFERRED STOCK
The Company has the authority to issue up to 2,000,000 shares of Preferred
Stock, which may be issued in such series and with such preferences as
determined by the Board of Directors. During 1993, the Company issued 1,170,000
shares of Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock"). Each share of Series A Preferred Stock was entitled to
receive dividends at 10% per annum when, as and if declared by the Company's
Board of Directors. Unpaid dividends accrued and were cumulative. During 1997,
the holders of all remaining shares of Series A Preferred Stock elected to
convert to 56,990 shares of common stock pursuant to the original conversion
terms. Upon conversion, the holders also received warrants to purchase 56,990
shares of common stock at $60.00 per share through August 13, 1998. On March 4,
1998, the expiration date of these warrants was extended for one year.
In December 1997, the Board of Directors authorized a new series of
preferred stock which was designated as the Series B 5% PIK Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock"). The Company has
authority to issue up to 145,300 shares of Series B Preferred Stock. The Series
B Preferred Stock provides for a liquidation preference of $50 per share and the
holders are entitled to dividends at 5% per annum, payable quarterly in cash or
additional shares of Series B Preferred Stock at the option of the Company. The
Series B Preferred Stock became convertible into common stock on March 31, 1998
at a conversion price equal to a 12% discount to the average trading price of
the common stock prior to conversion. This discount increases monthly through
March 1999 when the discount tops out at 25%. The discount is being accounted
for as an additional dividend on the Series B Preferred Stock which is
recognized as a charge to earnings applicable to common stockholders.
Beginning in June 1999, the Company may force the holders to convert to
common stock at a conversion price that generally represents a 25% discount from
the fair value of the common stock.
If not previously converted, the Company is required to redeem the Series B
Preferred Stock on December 31, 2002 at a price equal to the Liquidation
Preference. On December 31, 1997, the Company issued 113,333 shares of Series B
Preferred Stock for $5,666,650.
In connection with the issuance of this preferred stock, the Company agreed
to issue warrants to the placement agent for 32,380 shares of common stock at
$17.50 per share.
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PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK BASED COMPENSATION:
Stock Option Plans - The Company's shareholders have approved the following
stock option plans that authorize an aggregate of 185,732 shares for stock
options that may be granted to officers, directors, employees, and consultants:
9,000 shares in June 1991; 27,732 shares in June 1993; 15,000 shares in June
1994; 34,000 shares in August 1996; and 100,000 shares in May 1997.
The plans permit the issuance of incentive and nonstatutory options and
provide for a minimum exercise price equal to 100% of the fair market value of
the Company's common stock on the date of grant. The maximum term of options
granted under the plan is 10 years and options granted to employees expire three
months after the termination of employment. None of the options may be exercised
during the first six months of the option term.
No options may be granted after 10 years from the adoption date of each
plan. The following is a summary of activity under these stock option plans for
the years ended December 31, 1997 and 1996:
1998 1997
----------------------- ------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
Of Shares Price Of Shares Price
Outstanding, beginning of year ... 118,880 $ 19.61 62,130 $ 10.20
Canceled ................ (46,350) 21.36 (2,483) 21.60
Expired ................. (1,500) 29.40 (500) 34.40
Repriced ................ (20,000) 26.90 -- --
Granted ................. 20,000 11.25 64,000 28.30
Exercised ............... -- -- 10.60
------ --------
Outstanding, end of year ......... 71,030 $ 13.85 118,800 $ 19.60
====== ========
For all options granted during 1998 and 1997, the market price of the
Company's common stock on the grant date was approximately equal to the exercise
price. All options are currently exercisable and if not previously exercised,
will expire as follows:
Weighted
Range of Average
Exercise Prices Exercise Number
Low High Price Of Shares
Year Ending December 31,
2000 $ 7.00 $ 8.30 $ 7.84 25,432
2001 10.00 18.10 13.41 12,348
2002 5.00 5.00 5.00 10,000
2002 17.50 29.70 24.45 23,250
---------
$ 13.85 71,030
=========
Warrants and Non-Qualified Stock Options - The Company has also granted
warrants and non-qualified options which are summarized as follows for the years
ended December 31, 1998 and 1997:
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PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997
-------- ------
Weighted Weighted
Average Average
Number Exercise Number Exercise
Of Shares Price Of Shares Price
<S> <C> <C> <C> <C>
Outstanding, beginning of year ............................ 587,790 $ 43.11 721,659 $ 29.50
Granted to:
Beta Capital Group, Inc. (Note 4) .................. -- -- 10,000 37.50
Consultants .................................... -- 5,000 15.00
Directors for services ............................. -- 30.30
Former officers and directors for severance ........ 39,850 14.88 -- --
Brokers and underwriter in private placements ...... -- 62,275 22.60
Issued to underwriter and former holders of preferred
stock upon conversion .............................. -- 103,116 57.10
Expired ............................................... (57,444) 45.81 (500) 12.50
Exercised ............................................. (125) 7.50 (318,760) 12.20
-------- ------
Outstanding, end of year .................................. 570,071 $ 40.87 587,790 $ 43.11
======== ======
</TABLE>
If not previously exercised, warrants and non-qualified options will expire
as follows:
Weighted
Range of Average
Exercise Prices Exercise Number
Year Ending December 31, Low High Price Of Shares
1999 $ 20.00 $ 60.00 $ 57.61 339,546
2000 5.00 71.90 18.58 66,845
2001 7.50 37.50 10.79 98,900
2002 17.50 30.30 22.05 64,780
---------
$ 40.87 570,071
========
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for stock options and
warrants which are granted to employees. Accordingly, no compensation cost has
been recognized for grants of options and warrants to employees since the
exercise prices were not less than the fair value of the Company's common stock
on the grant dates. Had compensation cost been determined based on the fair
value at the grant dates for awards under those plans consistent with the method
of FAS 123, the Company's net loss and loss per share would have been changed to
the pro forma amounts indicated below.
Year Ended December 31,
1998 1997
-------------- ---------------
Net loss applicable to common stockholders:
As reported $ (12,694,965) $ (15,985,036)
Pro forma (13,171,965) (16,507,036)
Net loss per common share:
As reported $ (7.99) $ (12.20)
Pro forma (8.29) (12.60)
The weighted average fair value of options and warrants granted to employees
for the years ended December 31, 1998 and 1997 was $2.24 and $16.30,
respectively. The fair value of each employee option and warrant granted in 1998
and 1997 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
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PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31,
1998 1997
---------------- ---------------
Expected volatility 80.0% 63.7%
Risk-free interest rate 5.6% 6.0%
Expected dividends - -
Expected terms (in years) 2.2 4.0
8. FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires all entities to
disclose the fair value of certain financial instruments in their financial
statements. Accordingly, at December 31, 1998, management's best estimate is
that the carrying amount of cash, receivables, notes payable to unaffiliated
parties, accounts payable, and accrued expenses approximates fair value due to
the short maturity of these instruments. Management estimates that fair value is
approximately equal to carrying value of the convertible debentures since market
interest rates have not changed significantly since the offering commenced.
9. SIGNIFICANT CONCENTRATIONS:
Substantially all of the Company's accounts receivable at December 31, 1998,
result from crude oil and natural gas sales to companies in the oil and gas
industry. This concentration of customers and joint interest owners may impact
the Company's overall credit risk, either positively or negatively, since these
entities may be similarly affected by changes in economic or other conditions.
In determining whether to require collateral from a significant customer or
joint interest owner, the Company analyzes the entity's net worth, cash flows,
earnings, and/or credit ratings. Receivables are generally not collateralized;
however, receivables from joint interest owners are subject to collection under
operating agreements which generally provide lien rights. Historical credit
losses incurred on trade receivables by the Company have been insignificant.
For the years ended December 31, 1998 and 1997, the Company had oil sales
to a single customer which accounted for 20% of total revenues.
At December 31, 1998, substantially all of the Company's cash and temporary
cash investments were held at a single financial institution. The Company does
not maintain insurance to cover the risk that cash and temporary investments
with a single financial institution may be in excess of amounts insured by
federal deposit insurance.
10. OIL AND GAS PRODUCING ACTIVITIES:
Property Acquisitions - In January 1997, the Company completed the
acquisition of a 7.8125% after prospect payout working interest in a producing
oil and gas prospect in Louisiana. The prospect is operated by National Energy
Group, Inc. (NEGX), an independent oil and gas producer. The purchase price was
$1,750,000 which consisted of $875,000 in cash and the issuance of 31,500 shares
of the Company's common stock with a fair value of $875,000. In February 1997,
the Company entered into agreements with unaffiliated parties for the purchase
of a 10% working interest in this prospect for $2.5 million.
Full Cost Amortization Expense - Amortization expense amounted to $1,914,262
and $2,195,364 for the years ended December 31, 1998 and 1997, respectively.
Amortization expense per equivalent units of oil and gas produced amounted to
$9.52 and $10.77 for the years ended December 31, 1998 and 1997, respectively.
Natural gas is converted to equivalent units of oil on the basis of six Mcf of
gas to one equivalent barrel of oil.
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PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unevaluated Oil and Gas Properties - At December 31, 1998, unevaluated oil
and gas properties consist of the following:
Unproved property acquisition costs $ 1,096,030
Seismic and lease option costs 1,320,735
Interest costs 399,710
-------------
$ 2,816,475
All unevaluated costs were incurred during 1997 and 1998 and management
expects that planned activities will enable the evaluation of substantially all
of these costs by the end of 2000.
Capitalization of Interest - For the years ended December 31, 1998 and 1997,
the Company capitalized interest costs of $854,483 and $323,642, respectively,
related to unevaluated oil and gas properties and other exploration activities.
Full Cost Ceiling - During 1998, the Company recognized an impairment
charge of $7,278,818 due to the full cost ceiling limitation of which $4,739,775
was recognized in the fourth quarter. The fourth quarter impairment charge is
substantially attributed to the expiration of certain previously unevaluated
leases, the continuing collapse of oil prices and one dry hole.
Costs Incurred in Oil and Gas Producing Activities - The following is a
summary of costs incurred in oil and gas producing activities for the years
ended December 31, 1998 and 1997:
1998 1997
----------------- ----------------
Property acquisition costs $ - $ 4,266,955
Development costs 13,468 734,235
Exploration costs 6,799,382 9,499,572
----------------- --------------
Total $ 6,812,850 $ 14,500,762
================ ===============
Results of Operations from Oil and Gas Producing Activities - Results of
operations from oil and gas producing activities (excluding natural gas
marketing and trading, well administration fees, general and administrative
expenses, and interest expense) for the years ended December 31, 1998 and 1997
are presented below.
1998 1997
------------------ ---------------
Oil and gas sales $ 2,360,000 $ 3,168,000
Production costs (1,050,000) (1,487,000)
Amortization expense (1,914,000) (2,195,000)
Impairment expense (7,279,000) (9,506,000)
------------------- ----------------
Results of operations from oil and
gas producing activities $ (7,883,000) $ (10,020,000)
================== -===============
Oil and Gas Reserve Quantities (Unaudited) - Proved oil and gas reserves are
the estimated quantities of crude oil, natural gas, and natural gas liquids
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed oil and gas reserves are those reserves
expected to be recovered through existing wells with existing equipment and
operating methods. The reserve data is based on studies prepared by the
Company's consulting petroleum engineers. Reserve estimates require substantial
judgment on the part of petroleum engineers resulting in imprecise
determinations, particularly with respect to new discoveries. Accordingly, it is
expected that the estimates of reserves will change as future production and
development information becomes available. All proved oil and gas reserves are
located in the United States. At December 31, 1997, approximately 70% of the
Company's proved oil and gas reserve quantities were located in the Rocky
Mountain Region. As discussed in Note 2, the Company has divested these
properties. The following table presents estimates of the Company's net proved
oil and gas reserves, and changes therein for the years ended December 31, 1998
and 1997.
-37-
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------------------------ --------------------------
Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf)
<S> <C> <C> <C> <C>
Proved reserves, beginning of year ......... 1,085,000 4,535,000 1,175,000 4,833,000
Purchase of minerals in place ........... -- -- 165,000 209,000
Sale of minerals in place ............... (725,000) (2,848,000) (16,000) (45,000)
Extensions, discoveries, and
other additions .................... 129,000 517,000 229,000 1,295,000
Revisions of previous estimates ......... (105,000) (286,000) (345,000) (1,274,000)
Production .............................. (109,000) (550,000) (123,000) (483,000)
---------- ---------- ---------- ----------
Proved reserves, end of year ............... 275,000 1,368,000 1,085,000 4,535,000
========== ========== ========== ==========
Proved developed reserves, beginning of year 930,000 3,833,000 1,034,000 4,078,000
========== ========== ========== ==========
Proved developed reserves, end of year ..... 261,000 920,000 930,000 3,833,000
========== ========== ========== ==========
</TABLE>
The downward revisions in both 1997 and 1998 were primarily attributable
to: a.) substantially lower oil and gas prices in effect at their respective
year ends when compared to the prior year; and b.) previously recorded
undeveloped reserves were removed as a result of drilling dry holes.
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
Statement of Financial Accounting Standards No. 69 prescribes guidelines for
computing a standardized measure of future net cash flows and changes therein
relating to estimated proved reserves. The Company has followed these guidelines
which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated quantities of
oil and gas to be produced. Estimated future income taxes are computed using
current statutory income tax rates including consideration for estimated future
statutory depletion and tax credits. The resulting future net cash flows are
reduced to present value amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do not
necessarily reflect the Company's expectations for actual revenues to be derived
from those reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process, as discussed previously, are equally
applicable to the standardized measure computations since these estimates are
the basis for the valuation process.
The following summary sets forth the Company's future net cash flows
relating to proved oil and gas reserves as of December 31, 1998 and 1997 based
on the standardized measure prescribed in Statement of Financial Accounting
Standards No. 69.
<TABLE>
<CAPTION>
1998 1997
-------------- ----------------------------------------------
Gulf Rocky
Coast Mountain Total
<S> <C> <C> <C> <C>
Future cash inflows .............. $ 6,117,000 $ 8,560,000 $ 18,202,000 $ 26,762,000
Future production costs .......... (1,519,000) (1,237,000) (7,947,000) (9,184,000)
Future development costs ......... (544,000) (1,527,000) (1,680,000) (3,207,000)
Future income tax expense ........ -- -- -- --
------------
Future net cash flows ... 4,054,000 5,796,000 8,575,000 14,371,000
10% annual discount for estimated
timing of cash flow .......... (1,103,000) (1,336,000) (3,357,000) (4,693,000)
------------ ------------ ------------ ------------
Standardized Measure of Discounted
Future Net Cash Flows ......... $ 2,951,000 $ 4,460,000 $ 5,218,000 $ 9,678,000
============ ============ ============ ============
</TABLE>
Changes in Standardized Measure (Unaudited) - The following are the
principal sources of change in the standardized measure of discounted future net
cash flows for the years ended December 31, 1998 and 1997:
1998 1997
---------------- ---------------
Standardized measure, beginning of year $ 9,678,000 $ 11,980,000
Sale of oil and gas produced, net of
production costs (1,310,000) (1,681,000)
Purchase of minerals in place - 2,231,000
Sale of minerals in place (5,109,000) (121,000)
Net changes in prices and production costs (1,031,000) (8,437,000)
Net changes in estimated development costs 907,000 (185,000)
Revisions of previous quantity estimates (2,874,000) (2,179,000)
Discoveries, extensions, and other additions 1,722,000 3,214,000
Accretion of discount 968,000 1,198,000
Changes in income taxes, net - 3,658,000
---------------- -------------
Standardized Measure, end of year $ 2,951,000 $ 9,678,000
============= ===============
-38-
<PAGE>
PART II (Continued)
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
This item is not applicable to the Registrant.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer of the Company. The executive officers of the Company are
elected annually by the Board of Directors. The Board of Directors is divided
into three approximately equal classes. The directors serve three year terms and
until their successors are elected. Each year the stockholders elect one class
of directors. The executive officers serve terms of one year or until their
death, resignation or removal by the Board of Directors. There are no family
relationships between any of the directors and executive officers. In addition,
there was no arrangement or understanding between any executive officer and any
other person pursuant to which any person was selected as an executive officer.
The directors and executive officers of the Company are as follows:
Served as
Name Age Position With the Company Director Since
Patrick J. Duncan 36 President, Chief Financial Officer, 1995
and Director (Term Expires 2000)
Steve A. Antry 43 Director (Term Expires 2001) 1996
Stephen L. Fischer 40 Director (Term Expires 2001) 1997
Homer C. Osborne (2) 69 Director (Term Expires 2001) 1994
James C. Ruane (1)(2) 64 Director (Term Expires 2001) 1980
Clemons F. Walker (2) 59 Director (Term Expires 1999) 1996
William F. Warnick (1)(2)51 Chairman of the Board and
Director (Term Expires 1999) 1988
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee.
The Company's Board of Directors held 12 meetings during 1998. One meeting
was held by unanimous written consent signed by all directors without an actual
meeting and eleven were actual meetings at which all directors attended except
for Steve A. Antry who missed two meetings.
The Company has an audit committee, consisting of James C. Ruane and William
F. Warnick which met once in 1998. The functions of the audit committee are to
review financial statements, meet with the Company's independent auditors and
address accounting matters or questions raised by the auditors.
The Company has a compensation committee consisting of James C. Ruane,
Homer C. Osborne, Clemons F. Walker and William F. Warnick, which met once in
1998. The functions of the compensation committee are to review compensation of
officers and employees and administer and award options under all stock option
plans of the Company.
-39-
<PAGE>
Patrick J. Duncan has been the President of the Company since November
1998 and Chief Financial Officer of the Company since September 1994, the
Company's Corporate Secretary since April 1995 and the Company's Treasurer since
March 1996. In addition to managing the day-do-day activities of the Company,
Mr. Duncan is responsible for all the financial, accounting and administrative
reporting and compliance required by his individual job titles. Mr. Duncan was
an Audit Manager with HEIN + ASSOCIATES LLP, Certified Public Accountants, from
1991 until joining the Company as the Company's Controller in April 1994. From
1988 until 1991, Mr. Duncan was an Audit Supervisor with Coopers & Lybrand,
Certified Public Accountants. Mr. Duncan received a B.S. degree from the
University of Wyoming in 1985.
Steve A. Antry is founder and president of Beta Capital Group, Inc., a
financial consulting firm located in Newport Beach, California. Beta specializes
in advising emerging oil and gas exploration companies that have both capital
needs and market support requirements. Prior to forming Beta in 1992, Mr. Antry
was an executive officer of Benton Oil & Gas Company from 1989 to 1992 and a
Marketing Director for Swift Energy's income funds from 1987 to 1989. Mr. Antry
is also a registered representative with Signal Securities, Inc., a registered
broker/dealer, and has B.B.A. and M.B.A. degrees from Texas Christian
University.
Stephen L. Fischer joined Beta Capital Group, Inc., a financial consulting
firm located in Newport Beach, California, in March 1996 as Vice President.
Between 1991 and prior to joining Beta in 1996, Mr. Fischer was a Registered
Representative of Peacock, Hislop, Staley & Given, an Arizona based investment
banking firm. Since 1983, Mr. Fischer has held various positions in the
financial services industry in investment banking, retail, and institutional
sales, with a special emphasis on the oil and gas exploration sector. Mr.
Fischer has been a private investor in the oil and gas industry for over a
decade.
Homer C. Osborne was an officer and director of Garrett Computing System,
Inc., a petroleum engineering and computing firm, from 1967 until 1976, at which
time he organized Osborne Oil Company as a wholly-owned subsidiary of Garrett
Computing Systems, Inc. Mr. Osborne operated Osborne Oil Company as a separate
entity from 1976 until 1998, when he sold the Company. Mr. Osborne is currently
enjoying retirement.
James C. Ruane has owned and operated Goodall's Charter Bus Service, Inc., a
bus chartering business representing Grey Line in the San Diego area, since
1958. Mr. Ruane has been an oil and gas investor for over 20 years.
Clemons F. Walker has been an independent financial consultant since August
of 1996. Prior to that he was employed as an investment banker and stockbroker.
Between 1978 and August 1995 Mr. Walker worked for Wilson Davis in Las Vegas,
Nevada when Presidential Brokerage purchased the Wilson Davis office in Las
Vegas and he continued to work for the surviving entity until August of 1996.
Since 1978 Mr. Walker has focused his efforts in investment banking by
supporting small-cap companies through assistance in private placements, public
offerings and other capital raising efforts. During his career, Mr. Walker has
organized, advised, facilitated, sold and participated in numerous debt and
equity transactions (both public and private) in a variety of industries,
including the oil and gas industry. Mr. Walker has a bachelor of arts degree in
Business Administration from Brigham Young University with a concentration in
Finance.
William F. Warnick has been a practicing attorney in Lubbock, Texas since
1971. He was elected as Chairman of the Board of Directors in July 1998. Mr.
Warnick serves as the Texas Attorney General's appointee to the Texas School
Board Land Commission and is a member of the American, Texas, and Lubbock Bar
Associations. He is an oil and gas investor and has served in various management
positions of private independent oil and gas companies.
Mr. Warnick received a B.A. degree in finance and a J.D. degree in 1971.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of the
Company's Common Stock, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Officers, directors and
greater than ten percent stockholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.
The following disclosure is based solely upon a review of the Forms 3 and 4 and
any amendments thereto furnished to the Company during the Company's fiscal year
ended December 31, 1998, and Forms 5 and amendments thereto
-40-
<PAGE>
furnished to the Company with respect to such fiscal year, or written
representations that no Forms 5 were required to be filed by such persons. Based
on this review the following person who was a director and beneficial owner of
more than 10% of the Company's outstanding Common Stock during such fiscal year
filed late reports on Forms 3 and 4.
Mr. Willard H. Pease, Jr., Mr. Patrick J. Duncan, and Mr. Clemons F. Walker each
filed one late report on Form 4 reporting one transaction. All of the directors
filed a late Form 4 at the end of the year reporting the Company's reverse stock
split.
ITEM 10-EXECUTIVE COMPENSATION
Summary Compensation Table
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities during each of the last three fiscal years
by the Chief Executive Officer and those executive officers who received salary,
bonus or other compensation in excess of $100,000 (these individuals are
collectively referred to herein as the "Named Executive Officers"). The
following information for the Named Executive Officers includes the dollar value
of base salaries, bonus awards, the number of stock options granted and certain
other compensation, if any, whether paid or deferred.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation Awards
Restricted Securities
Name and Principal Other Stock Underlying
Position Year Salary (1) Bonus Compensation Awards Options/SARs(#)
- ------------------------------ ----- ---------- ----- ------- ------- -------------
<S> <C> <C>
Patrick J. Duncan ............ 1998 $104,370 None None None None
President and CFO (6) .... 1997 $ 79,791 $ 5,000 None None 24,500
1996 $ 65,548 $ 5,000(3) None None 2,900
Willard H. Pease, Jr ......... 1998 $108,303 $ 25,000 $150,000(4) None None
Former President and ..... 1997 $ 93,270 $ 5,000 None None 25,000
Chief Executive Officer(4) 1996 $ 78,530 $ 5,000(3) $101,250(2) None 11,040
J.N. Burkhalter .............. 1998 None None None None None
Former V.P. Engineering .. 1997 $ 84,790 None $138,050(5) None 3,500
and Production (5) ....... 1996 $ 68,690 $ 5,000(3) None None 2,700
</TABLE>
(1) Includes $240 contributed by the Company each year to a qualified
401(k) retirement plan.
(2) At December 31, 1995 the Company owed $60,000 to Mr. Pease. This loan
was unsecured, bore interest at 8% per annum and was originally due on January
31, 1996. On March 9, 1996 the Board of Directors agreed to change the terms of
the note to allow the note to be convertible into the Company's common stock at
$10.00 per share, the then current market rate, in exchange for a one-year
extension on the note. On December 16, 1996 Mr. Pease elected to convert the
note in its entirety, the note was canceled and Mr. Pease was issued 6,000
shares of the Company's restricted common stock. The $101,250 shown as other
annual compensation represents the difference between the closing sales price as
reported by NASDAQ on December 16, 1996 and the conversion price of $10.00 per
share. No additional amounts have been shown as Other Annual Compensation
because the aggregate incremental cost to the Company of personal benefits
provided to Mr. Pease did not exceed the lesser of $50,000 or 10% of his annual
salary in any given year.
(3) On March 9, 1996 the Board of Directors granted Mr. Duncan, Mr. Pease
and Mr. Burkhalter 500 shares each of the Company's common stock for prior
services. The shares were valued at $5,000, or $10.00 per share, which
represented the market price of the Company's common stock on the date of grant.
The shares are fully vested.
(4) In December 1998 Mr. Pease's employment with the Company was
terminated. In accordance with his amended employment agreement, Mr. Pease
received a cash payment of $150,000 for severance.
(5) Effective January 1, 1998, Mr. Burkhalter resigned his position as the
Company's V.P. of Engineering and Production in light of the Company's
anticipated sale of the Rocky Mountain assets. In connection with his
resignation, Mr. Burkhalter received total severance of $138,050 consisting of
office equipment and one vehicle valued at $5,850, and a future cash obligation
of $132,200. The cash obligation will be paid
-41-
<PAGE>
in monthly installments through August 2000. This severance was granted by the
Company, in part, pursuant to the terms of an employment agreement dated
December 27, 1994.
(6) Mr. Duncan was appointed by the Board of Directors as the Company's
President on an interim basis to succeed Mr. Pease. No additional amounts have
been shown as Other Annual Compensation because the aggregate incremental cost
to the Company for personal benefits provided to Mr. Duncan did not exceed the
lesser of $50,000 or 10% of his annual salary in any given year.
Option Grants in the Last Fiscal Year
There were no grants of stock options to the Named Executive Officers pursuant
to the Company's Stock Option Plans during the fiscal year ended December 31,
1998.
Aggregated Option Exercises in the Last Fiscal Year and the Fiscal Year-End
Option Values
Set forth below is information with respect to the unexercised options to
purchase the Company's Common Stock held by Named Executive Officers at December
31, 1998. No options were exercised during fiscal 1998.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Patrick J. Duncan ........... None None 35,000/35,000 $ 0/0(1)
President and
Chief Financial Officer
Willard H. Pease, Jr ........ None None 50,000/50,000 $0/0
Former President and
Chief Executive Officer
</TABLE>
(1) The value of the unexercised In-the-Money Options was determined by
multiplying the number of unexercised options (that were in other money on
December 31, 1998) by the closing sales of the Company's common stock on
December 31,1998 (as reported by NASDAQ) and from that total, subtracting the
total exercise price. No options were in-the-money at December 31, 1998.
Option and Warrant Repricing
In February 1998 the Board of Directors repriced 20,000 options that had been
previously granted to Mr. Duncan from $27.50 to $17.50 per share. In November of
1998 the Board of Directors repriced 10,000 options that had previously been
granted to Mr. Duncan from $17.50 to $5.00 per share.
In connection with the termination agreement with Willard H. Pease, Jr., the
Board of Directors repriced 20,000 warrants previously granted to him from
$27.50 to $5.00 per share.
Employment Contract
Mr. Willard Pease, Jr.'s employment with the Company was terminated on
December 7, 1998. Mr. Pease had been the Company's President and Chief
Executive Officer. Pursuant to his amended employment agreement, Mr. Pease
was paid $150,000 for severance and signed a formal Severance and Termination
Agreement which canceled any further committment.
The Company reaffirmed the Employment Agreement of Patrick J. Duncan as the
Company's President and Chief Financial Officer dated December 27, 1994 by a
letter dated January 11, 1999 at an annual salary of $97,500. Upon termination
or change of control, the Company is obligated to pay Mr. Duncan one to two
year's salary.
Compensation of Directors
Directors who are employees or otherwise receive compensation from the Company
do not receive additional compensation for service as directors. Outside
directors each receive a $2,500 annual retainer fee, $750 per meeting attended
and $100 per meeting conducted via telephone conference plus options to purchase
5,000 shares of the Company's common stock at the current market price each
January 1st. All fees are paid in the form of Company
-42-
<PAGE>
restricted common stock. Outside directors serving on the Executive Committee
receive a cash fee for the lessor of $75 per hour or $600 per day.
ITEM 11- SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, its only class of outstanding voting
securities as of April 15, 1998, by (i) each of the Company's directors and
officers, and (ii) each person or entity who is known to the Company to own
beneficially more than 5% of the outstanding Common Stock with the address of
each such person or entity:
SECURITY OWNERSHIP OF MANAGEMENT
Name and Address of Amount and Nature of
Officer or Director Beneficial Ownership(1) Percent of Class
- ----------------------------- ----------------------- ----------------
Steve Allen Antry .......... 52,695 Shares (2) 3.04%
Patrick J. Duncan .......... 36,563 Shares (3) 2.62%
Stephen L. Fischer ......... 21,965 Shares (4) 1.28%
Homer C. Osborne ........... 5,256 Shares (5) 0.31%
James C. Ruane ............. 27,684 Shares (6) 1.63%
Clemons F. Walker .......... 25,934 Shares (7) 1.52%
William F. Warnick ......... 8,919 Shares (8) 0.53%
-- ----
All Officers and Directors as a
group (seven persons) ......... 179,016 Shares (9) 9.58%
SECURITY OWNERSHIP OF BENEFICIAL OWNERS
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership(1) of Class
Kayne Anderson, et al .................
1800 Avenue of the Stars
Second Floor
Los Angeles, CA 90067 .............. 8,462,649 Shares(10)(11) 83.36%
State Street, et al
Chase/Chemical Bank
A/C State Street Bank & Trust Co. ..
4 New York Plaza
Ground Floor/Receive Window
New York, NY 10004 ................. 5,688,889 Shares(10)(12) 77.11%
Howard Amster IRA
111 East Kilbourn Ave ..............
Milwaukee, WI 53202 ................ 142,222 Shares(10) 7.77%
The Madav IX Foundation
1750 Euclid Avenue
Cleveland, OH 44115 ................ 284,444 Shares(10) 14.42%
Ramat Securities, Ltd. ................
23811 Chagrin Blvd., Suite 200
Beachwood, OH 44122 ................ 92,444 Shares(10) 5.19%
Tamar Securities, Inc. ................
23811 Chagrin Blvd., Suite 200
Beachwood, OH 44122 ................ 426,667 Shares(10) 20.17%
Security Ownership of Beneficial Owners
as a Group (10 entities) .......... 15,097,315 Shares(10)(13) 89.94%(13)
(1) Beneficial owners listed have sole voting and investment power with respect
to the shares unless otherwise indicated.
-43-
<PAGE>
(2) Includes 300 shares that are owned directly by Mr. Antry, 750 shares
underlying presently exercisable options, 6,146 shares underlying presently
exercisable warrants, and 45,500 shares underlying presently exercisable
warrants that are held by Mr. Antry's wife.
(3) Includes 1,563 shares owned directly by Mr. Duncan, 35,000 shares underlying
presently exercisable options.
(4) Includes 895 shares owned directly by Mr. Fischer, 400 shares owned by his
wife, and 20,670 shares underlying presently exercisable warrants.
(5) Includes 976 shares owned directly by Mr. Osborne and 4,280 shares
underlying presently exercisable options.
(6) Includes 18,753 shares owned directly by Mr. Ruane, 456 shares held by Mr.
Ruane as trustee for two trusts, over which shares Mr. Ruane may be deemed to
have shared voting and investment power, 1,225 shares underlying presently
exercisable warrants, 7,250 shares underlying presently exercisable options.
(7) Includes 10,913 shares owned directly by Mr. Walker, 14,271 shares
underlying presently exercisable warrants, and 750 shares underlying presently
exercisable options.
(8) Includes 3,169 shares owned directly by Mr. Warnick, 5,750 shares underlying
presently exercisable options.
(9) Includes 37,424 shares owned, directly or indirectly, 53,780 shares
underlying presently exercisable options, 87,812 shares underlying presently
exercisable warrants.
(10) Includes the number of shares of Common Stock issuable upon conversion of
outstanding Series B preferred stock at an assumed Conversion Price of $0.35.
The Conversion Price of the Series B preferred stock is based on a discount to
market, at the time of conversion, as defined in the amended Certificate of
Designation (which is currently 25%). Accordingly, the number of shares issued
upon conversion could be larger or smaller, depending on the applicable
Conversion Price at the time of conversion. Also, this table does not include
shares of Common Stock which would be issuable upon conversion of additional
Series B Preferred Stock which might be issued to holders from time to time as
payment in kind for dividends on outstanding Series B Preferred.
(11) The preferred stock is held by four entities which are effectively
controlled by Kayne Anderson Investment Management, Inc., a Nevada corporation.
The entities include Arbco Associates, L.P., Kayne Anderson Non-Tradition
Investments, L.P., Offense Group Associates, L.P. and Opportunity Associates,
L.P.
(12) The preferred stock is held by two entities, Marine Crew & Co, and
Sandpiper & Co. that are effectively controlled by State Street Research and
Management Company, a registered investment advisor.
(13) As of the date of this report, the Company does not have a sufficient
number of authorized shares of common stock necessary for conversion of all
outstanding Series B Preferred stock. Information set forth in this table
assumes that the Company duly authorizes the issuance of additional shares and
is based on the reported closing price of the Company's common stock on March
23, 1999.
ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
General and Overview -
From time to time, various officers and directors of the Company and their
affiliates have participated in the drilling of oil and gas wells which were
drilled and operated by the Company. All such persons and entities have taken
working interests in the wells and have paid the drilling, completion and
related costs of the wells on the same basis as the Company and all other
working interest owners. On occasions of such participation the Company retained
the maximum interest in the well that it could justify, given its cash
availability and the risk involved.
All existing loans or similar advances to, and transactions with, officers and
their affiliates were approved or ratified by the independent and disinterested
directors. Any future material transactions with officers, directors and owners
of 5% or more of the Company's outstanding Common Stock or any affiliate of any
such person shall be on terms no less favorable to the Company than could be
obtained from independent unaffiliated third parties and must be approved by a
majority of the independent disinterested directors.
-44-
<PAGE>
Transactions with Beta Capital Group, Inc.-
In March 1996 the Company entered into a three-year consulting agreement with
Beta Capital Group, Inc. ("Beta"). Beta's president, Steve Antry, has been a
director of the Company since August 1996. The consulting agreement with Beta
provides for minimum monthly cash payments of $17,500 plus reimbursement for
out-of-pocket expenses. The Company also agreed to pay Beta additional fees, as
defined in the agreement, that are based on a percentage of the gross proceeds
generated from any public financing, private financing or from any warrants that
are exercised during the term of the agreement. The following is a summary of
amounts paid by the Company to Beta, or its agents, during the term of the
agreement:
<TABLE>
<CAPTION>
1998 1997 1996 Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Monthly consulting fees ............................... $ 210,000 $ 210,000 $ 162,500 $ 582,500
Reimbursement of out-of-pocket expenses ............... 37,123 167,236 94,700 299,059
Fees related to funds generated from private placements -- 320,933 163,000 483,933
Fees related to funds generated from warrant exercises -- 273,855 4,506 278,361
---------- ---------- ---------- ----------
Total ............................................. $ 247,123 $ 972,024 $ 424,706 $1,643,853
========== ========== ========== ==========
</TABLE>
In addition to the cash compensation, in 1996 the Company granted Beta warrants
to purchase 100,000 shares of the Company's common stock for $7.50 per share.
For financial statement reporting purposes, these warrants were valued at
$294,000. As allowed under the terms of the agreement, Beta subsequently
assigned 40,000 of those warrants to other parties, including 10,000 to a Mr.
Richard Houlihan, a former director of the Company and 20,670 to Mr. Stephen
Fischer, a current director of the Company (Mr. Fischer is also a principal of
Beta). In March 1997, the Company granted Beta warrants to purchase an
additional 10,000 shares of the Company's common stock at $37.50 per share. For
financial statement reporting purposes, these warrants were valued at $60,000.
All the warrants granted Beta expire in April 2001.
Transactions with Other Directors-
In July 1998 the Company's Board of Directors established an Executive Committee
designed to manage the significant aspects of the Company's business on a
committee basis. Mr. William F. Warnick, a director, was elected as Chairman of
the Committee. In exchange for his services in 1998, Mr. Warnick received cash
compensation of $44,010 plus $17,966 for reimbursement of out-of-pocket
expenses.
In May 1997 the Company entered into a consulting agreement with R. Thomas
Fetters, Jr., who also became a director of the Company in May 1997. The terms
of the consulting agreement provide for monthly cash payments of $4,000 plus
reimbursement for out-of-pocket expenses. Total amounts paid to Mr. Fetters in
1997 were $74,610 and $43,112 in 1998. In addition to the cash compensation Mr.
Fetters also received warrants to purchase 1,500 shares of the Company's common
stock at $12.50 per share and warrants to purchase an additional 10,000 shares
at $30.00 per share. The contract was terminated in August 1998 and Mr. Fetters
resigned as a Director in November 1998.
In July 1997, the Company acquired a .1% overriding royalty interest in the East
Bayou Sorrel Field from an entity that Homer Osborne, a director of the Company,
was a principal. The interest was acquired for $50,000, consisting of $40,000
cash and 315 shares of common stock valued at $10,000. Mr. Osborne received all
of the common shares and $7,000 cash in the transaction.
Transactions with Former Officers-
On December 7, 1998, Mr. Willard H. Pease, Jr.'s employment with the company
was terminated. Mr. Pease was formerly the President, Chairman and CEO. In
connection with his termination and pursuant to the terms of his amended
employment agreement, Mr. Pease received a cash payment of $150,000 for
severance.
Effective January 1, 1998, Mr. J. N. Burkhalter resigned as the Company's V.P.
of Engineering and Production in light of the Company's anticipated sale of the
Rocky Mountain assets. In connection with this resignation, the Company entered
into a Retirement, Severance and Termination of Employment Agreement with Mr.
Burkhalter that provided for total severance of $138,050. The severance
consisted of office equipment and one vehicle valued at $5,850 and a cash
obligation of $132,200, which will be paid in monthly installments through
August 2000.
-45-
<PAGE>
PART IV
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description and Method of Filing
(3.1) Articles of Incorporation, as amended.
(3.2) Certificate of Amendment to the Articles of Incorporation
filed on June 23, 1993.
(3.3) Certificate of Amendment to the Articles of Incorporation
filed on June 29, 1993.
(3.4) Plan of Recapitalization
(3.5) Certificate of Amendment to the Articles of Incorporation
filed on July 5, 1994.
(3.6) Certificate of Amendment to the Articles of Incorporation
filed on December 19, 1994. (2)
(3.7) Certificate of Amendment to Article IV of the Articles of
Incorporation incorporated by reference to Exhibit 3(i)
of the Registrant's Form 8-K dated June 11, 1997.(7)
(3.8) Certificate of Change in Number of Authorized Shares of
Common Stock dated November 18, 1998
(3.9) Bylaws, as amended and restated May 11, 1993.
(4.4) Amendment to the Certificate of Designation of Series B 5%
PIK Cumulative Convertible Preferred Stock, incorporated
by reference to Exhibit 3.2 of Registrant's Form 8-K dated
December 31,1997.(8)
(10.2) 1990 Stock Option Plan.
(10.3) 1993 Stock Option Plan
(10.4) 1994 Employee Stock Option Plan. (2)
(10.6) Employment Agreement effective December 27, 1994 between
Pease Oil and Gas Company and Patrick J. Duncan. (2)
(10.8) Agreement dated August 15, 1994, between Hewlett-Packard
Company, Loveland Gas Processing Co., Ltd., Pease Oil and
Gas Company and Pease Operating Company. (2)
(10.9) Agreement between Beta Capital Group, Inc., and Pease Oil
and Gas Company dated March 9, 1996. (3)
(10.10) Form of Warrants issued to Beta Capital Group, Inc.(11)
(10.11) 1996 Stock Option Plan.(11)
(10.13) Purchase and Sale Agreement dated December 31, 1996 by and
between Atocha Exploration, Inc., Browning Oil Company,
Inc., Potosky Oil and Gas, Inc. and Pease Oil and Gas
Company. (4)
(10.14) Letter Agreement dated February 4, 1997 by and between
National Energy Group, Inc. and Pease Oil and Gas
Company. (5)
(10.15) Purchase and Sale Agreement dated February 26, 1997 with
Transworld Exploration & Production, Inc. (6)
(10.16) 1997 Long Term Incentive Option Plan (12)
(10.17) Preferred Stock Investment Agreement dated December 31,
1997.(9)
(10.18) Letter Agreement dated 1/16/98 between National Energy
Group, Inc. and Pease Oil and Gas Company.(12)
(10.19) Letter Agreement dated 7/22/97 between National Energy
Group, Inc., Sullivan & Company 3-D Program 1, LLC and
Willisco, Inc.(12)
(10.20) Agreement between National Energy Group, Inc. and Acadian
Geophysical Services, Inc.(12)
(10.21) Exploration Agreement dated 8/1/97 between Parallel
Petroleum Corporation, TAC Resources, Inc., Allegro
Investments, Inc., Beta Oil and Gas Company, Pease Oil
and Gas Company, Four-Way Texas, LLC, Meyer Financial
Services, inc. and Wes-Tex Drilling Corporation regarding
the Texana Prospect (12)
(10.22) Exploration Agreement dated 8/1/97 between Parallel
Petroleum Corporation, TAC Resources, Inc., Allegro
Investments, Inc., Beta Oil and Gas Company, Pease Oil and
Gas Company, Four-Way Texas, LLC, Meyer Financial
Services, inc. and Wes-Tex Drilling Corporation regarding
the Formosa Prospect (12)
-46-
<PAGE>
(10.23) Exploration Agreement dated 1/1/97 between Parallel
Petroleum Corporation, Sue-Ann Production Company, TAC
Resources, Inc., Allegro Investments, Inc., Beta Oil and
Gas Company, Pease Oil and Gas Company, Meyer Financial
Services, Inc., Four-Way Texas, LLC regarding the
Ganado Prospect (12)
(10.24) Retirement, Severance and Termination of Employment
Agreement from James N. Burkhalter dated 1/1/98. (12)
(10.25) Letter Agreement dated May 20, 1998 between National
Energy Group, Inc. and Pease Oil and Gas Company
(10.26) Amended Employment Agreement effective November 1, 1998
between Willard H. Pease,Jr.and Pease Oil and Gas
Company
(10.27) Severance and Termination of Employment Agreement
effective December 7, 1998 between Willard H. Pease, Jr.
and Pease Oil and Gas Company
(10.28) Confirmation of Employment Contract effective January 11,
1998 between Patrick J. Duncan and Pease Oil and Gas
Company
(10.29) Engagement Letter of San Jacinto Securities, Inc. dated
September 4, 1998 with Pease Oil and Gas Company
(21) List of Subsidiaries
(23.2) Consent of Netherland, Sewell & Associates, Inc.,
Consulting Petroleum Engineers
(23.3) Consent of Hein + Associates LLP, Certified Public
Accountants
(27) Financial Data Schedule.
Footnotes for Exhibits:
(1) Incorporated by reference to Registration Statement No. 33-64448 on
Form SB-2.
(2) Incorporated by reference to the Registrant's 1994 Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994.
(3) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995.
(4) Incorporated by reference to Form 8-K filed January 10, 1997.
(5) Incorporated by reference to Form 8-K filed February 19, 1997.
(6) Incorporated by reference to Form 8-K filed March 17, 1997.
(7) Incorporated by reference to Form 8-K filed June 11, 1997.
(8) Incorporated by reference to Form 8-K filed December 24, 1997.
(9) Incorporated by reference to Form 8-K filed January 13, 1998.
(10)Incorporated by reference to Form 8-K filed March 9, 1998.
(11)Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996.
(12)Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997.
(b) Reports on Form 8-K: The Company filed the following reports on Form 8-K for
the period October 1, 1998 through the date of this report:
Item Reported Date Financial Statements
------------- ---------------------- ----------------------
(1) 5,7 September 30, 1998 None - Not Applicable
(2) 5 December 1, 1998 None - Not Applicable
(3) 5 December 12, 1998 None - Not Applicable
-47-
<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 31, 1999 By:/s/ Patrick J. Duncan .
-------------------------------------
Patrick J. Duncan
President, Chief Financial Officer
And Principal Accounting Officer
Date: March 31, 1999 By: /s/ William F. Warnick
--------------------------------------
William F. Warnick
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Date: March 31, 1999 By:/s/ Patrick J. Duncan .
-------------------------------------
Patrick J. Duncan
President, Chief Financial Officer
Date: March 31, 1999 By:/s/ Steve A. Antry
----------------------------------------
Steve A. Antry, Director
Date: March 31, 1999 By:/s/ Stephen L. Fischer
-------------------------------------
Stephen L. Fischer
Date: March 31, 1999 By:/s/ Homer C. Osborne
-----------------------------------
Homer C. Osborne, Director
Date: March 31, 1999 By:/s/ James C. Ruane
-------------------------------------
James C. Ruane, Director
Date: March 31, 1999 By:/s/ Clemons F. Walker
-----------------------------------
Clemons F. Walker, Director
Date: March 31, 1999 By: /s/ William F. Warnick
--------------------------------------
William F. Warnick, Director
Chairman of the Board
-48-
<PAGE>
ARTICLES OF INCORPORATION
OF
LAST CHANCE MINING CO., INC.
1. The name of the corporation is:
LAST CHANCE MINING CO., INC.
2. The principal office of this corporation is to be located in the City
of Ely, 450 Aultman Street, County of White Pine, State of Nevada, but
this corporation may maintain an office in such towns, cities and
places outside of the State of Nevada as the Board of Directors may
from time to time determine, or as may be designated by the By-Laws of
said corporation.
3. The corporation may engage in any lawful activity and shall have
perpetual existence.
4. a. The amount of the total authorized capital stock of the corporation
is $75,000 consisting of 1,000 shares of stock of the par value of
$75.00 each. All such shares shall be of one class only, without
preference or distinction.
b. Such stock may be issued from time to time without action by the
stockholders for such consideration as may be fixed from time to time
by the Board of Directors, and shares so issued, the consideration for
which has been paid or delivered, shall be deemed full paid stock and
the holder of such shares shll not be liable for any further payment
thereon.
c. The capital stock of this corporation, after the amount of the
subscription price or par value has been paid in, shall not be subject
to assessment to pay debts of the corporation and no paid up stock and
no stock issued as fully paid shall ever be assessable or assessed and
the article of incorporation shall not be amended in this particular.
5. At all elections of directors, each holders of stock possessing voting
power shall be entitled to as many votes as shall equal the number of
his shares of stock multiplied by the number of directors to be elected
and he may cast all of such votes for a single, or may distribute them
among the number to be voted for and/or any two or more of them as he
sees fit.
6. The governing board of the corporation shall consist of not less than
three (3) persons styled directors. The first board of directors, who
also constitute the incorporators, are:
NAME ADDRESS
John Chachas 1080 Lyons Ave. Ely, Nevada
Gregory J. Chachas P.O. Box 537 Ely, Nevada
Theodore J. Chachas 1100 Bell Ave. Ely, Nevada
IN WITNESS WHEREOF, we have hereunto set our hands and sels and
executed these presents this 9th day of September, 1968.
/s/ Gregory J. Chachas /s/ John Chachas
/s/ Theodore J. Chachas
State of Nevada )
County of White Pine ) ss.
On this 9th day of September, 1968, before me, the undersigned, a
Notary Public in and for the County and State aforesaid, personally appeared
John Chachas, Gregory J. Chachas, Theodore J. Chachas, known to me to be the
persons described in and who executed the foregoing Articles of Incorporation,
who acknowledged to me that they executed the same freely and voluntarily and
for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal this day and year in this certificate last above written.
/s/ Deanna Oxborrow
Notary Public
<PAGE>
AMENDMENT TO
ARTICLES OF INCORPORATION
OF
LAST CHANCE MINING COMPANY, INC.
Pursuant to the provisions of Section 78.385 of the Nevada Revised
Statutes, LAST CHANCE MINING COMPANY, INC. adopts the following amendments to
its Articles of Incorporation:
1. The undersigned hereby certify that on the 10th day of
September, 1970, a Special Meeting of the Board of Directors
was duly held and convened at which there were present a
quorum of the Board of Directors acting throughout all
proceedings, and at which time the following resolutions were
duly adopted by the Board of Directors:
a. BE IT RESOLVED: That the President, Thomas E. Murray,
Jr., is hereby ordered and directed to call and
convene a Special Meeting of Stockholders of Last
Chance Mining Company, Inc., on Wednesday, October
28, 1970, at 11:30 a.m., local time, at Two Ryland
Street, Reno, Nevada, for the following purposes:
(1) o amend the Articles of Incorporation as follows:
(a) To change the name of the
corporation from Last Chance Mining
Company, Inc. to Resources Unlimited
Corporation.
(b) To provide that the capitalization
of the corporation shall be
increased from $250,000 to
$1,000,000 and to increase the
number of shares authorized from
500,000 shares to 2,000,000 shares
with the par value of each share
remaining at $0.50 per share, and to
provide further that the
stockholders shall not have
pre-emptive rights to acquire stock
in the corporation nor should they
have cumulative voting rights.
2. A Special Meeting of Stockholders was held on October 28,
1970. With regard thereto, the undersigned hereby certify as
follows:
a. A Notice of the Special Meeting of Stockholders was
mailed to each stockholder on October 2, 1970.
b. There were present, either by proxy or in person,
306,050 shares of the 500,000 shares of capital stock
of Last Chance Mining Company, Inc.
c. That the proposals for Amendment to the Articles of
Incorporation which are set forth as follows were
adopted by 272,000 shares, and 34,050 shares voted
against the proposals.
d. The Amendment to the Articles of Incorporation
are as follows:
(1) ARTICLE I: The name of the corporation shall be RESOURCES UNLIMITED
CORPORATION.
(2)ARTICLE IV: The amount of the capital stock of the corporation shall be
$1,000,000 which shall be divided into 2,000,000 shares, with a par value of
$0.50 per share. The Board of Directors may, form time to time, sell any or all
of the unissued capital stock of the corporation, whether the same be any of the
original authorized capital, or of any increase thereof, without first offering
the same to the stockholders then existing; that all such sales may be made on
such terms and conditions as by the Board may be deemed advisable. Each share of
capital stock of the corporation shall be nonassessable. The stockholders shall
not possess cumulative voting rights.
<PAGE>
Dated this 3rd day of December, 1970.
LAST CHANCE MINING COMPANY, INC.
By /s/ Thomas E. Murray, Jr.
Thomas E. Murray, Jr., President
By /s/ Clarence M. Durrant
Clarence M. Durrant, Secretary
<PAGE>
AMENDMENT TO
ARTICLES OF INCORPORATION
OF
RESOURCES UNLIMITED CORPORATION
Pursuant to the provisions of Section 78, 385 of the Nevada Revised
Statutes, RESOURCES UNLIMITED CORPORATION adopts the following amendments to its
Articles of Incorporation:
1. The undersigned hereby certify that on the 2nd day of June,
1972, a Special Meeting of the Board of Directors was held and
convened at which there were present a quorum of the Board of
Directors acting throughout all proceedings, and at which time
the following resolutions were duly adoptd by the Board of
Directors:
a. BE IT RESOLVED: That the President, Willard H. Pease,
is hereby ordered and directed to call and convene a
Special Meeting of Stockholders of Resources
Unlimited Corporation on Saturday, June 24, 1972, at
11:00 A.M., Local Time, at the Stardust Hotel, Las
Vegas, Nevada for the following purposes:
(1) To amend the Articles of Incorporation as
follows:
(a) To change the name of the
corporation from Resources Unlimited
Corporation to Willard Pease Oil &
Gas Company.
(b) To provide that the capitalization
of the corporation shall be
increased from $1,000,000 to
$5,000,000 and to increase the
number of shares authorized from
2,000,000 shares to 10,000,000
shares, with the par value of each
share remaining at $0.50 per share,
and to provide further that the
stockholders shall not have
pre-emptive rights to acquire stock
in the corporation nor should they
have cumulative voting rights.
2. A Special Meeting of Stockholders was held on June 24, 1972.
With regard thereto, the undersigned hereby certify as
follows:
a. A Notice of the Special Meeting of Stockholders was
mailed to each stockholder on June 2, 1972.
b. There were present, either by proxy or in person,
336,550 shares of the 510,000 shares of capital stock
of Resources Unlimited Corporation.
c. That the proposals for Amendment to the Articles of
Incorporation which are set forth as follows were
adopted by 330,700 shares, and 5,850 shares voted
against the proposals.
d. The Amendments to the Articles of Incorporation are as
follows:
(1) ARTICLE I: The name of the corporation shall
be Willard Pease Oil & Gas Company.
(2) ARTICLE IV: The amount of the capital stock
of the corporation shall be $5,000,000.00
which shall be divided into 10,000,000
shares, with a par value of $0.50 per share.
The Board of Directors may, from time to
time, sell any or all of the unissued
capital stock of the corporation, whether
the same be any of the original authorized
capital, or of any increase thereof, without
first offering the same to the stockholders
then existing; that all such sales may be
made on such terms and conditions as by the
Board may be deemed advisable. Each share of
the capital stock of the corporation shall
be nonassessable. The stockholders shall not
possess cumulative voting rights.
<PAGE>
DATED this 26th day of June, 1972.
RESOURCES UNLIMITED CORPORATION
By /s/ Willard H. Pease, Pres.
WILLARD H. PEASE, President
By /s/ M. R. Jorgenson, Sec.
<PAGE> FILED
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE CERTIFICATE OF AMENDMENT
STATE OF NEVADA OF THE
ARTICLES OF INCORPORATION
JUN 29 1993 OF
1776-68 WILLARD PEASE OIL & GAS COMPANY
Willard Pease Oil & Gas Company, a Nevada corporation ("Corporation") , by-
its President and Secretary does hereby certify, pursuant to the provisions of
Section 78-385 of the Nevada General Corporation Law;
1. The directors of the Corporation at a meeting held by consent and
without an actual meeting effective May 21, 1993, and the stockholders of the
Corporation at the Annual Meeting of Stockholders duly held on June 25, 1993,
adopted the following resolutions to amend Article IV to the Corporation's
Articles of Incorporation:
RESOLVED, that Article IV of the Corporation's Articles of
Incorporation shall be amended to authorize a class of Preferred Stock so
that after such amendment ARTICLE TV shall read as follows:
ARTICLE IV: The aggregate number of shares which the Corporation
shall have authority to issue is 12,000,000, of which 10,000,000 shall
be common stock, $0.10 par value ("Common Stock") and 2,000,000 shall
be preferred stock, $0.01 par value ("Preferred Stock"). Each share of
Common Stock and Preferred Stock of the Corporation shall be
nonassessable. The stockholders shall not possess cumulative voting
rights. The designations, preferences, limitations and relative rights
of shares of each class are as follows:
1. Common stock. The rights of holders of Common Stock to receive
dividends or to share in the distribution of assets in the event of
liquidation, dissolution or winding up of the affairs of the
Corporation shall be subject to the preferences, limitations and
relative rights of the holders of Preferred Stock. The holders of the
Common Stock shall be entitled to one vote for each share of Common
Stock held by them of record at the time for determining the holders
thereof entitled to vote.
2. Preferred Stock. The Corporation may issue the Preferred Stock
from time to time in one or more series with
- 1 -
<PAGE>
such distinctive designations, rights, preferences and limitations as
the Board of Directors shall determine. The Board of Directors hereby
is expressly vested with the authority to fix and determine the
relative rights and preferences of each such series of Preferred Stock
to the fullest extent permitted by these Articles of Incorporation and
the General Corporation Law of Nevada in respect to the following:
(a) The rate of dividend, the time of payment of dividends,
when the dividends are cumulative, and the date from which any
dividends shall accrue;
(b) Whether shares may be redeemed and, if so, the
redemption price and the terms and conditions of redemption;
(c) The amount payable upon shares in event of either
voluntary or involuntary liquidation;
(d) Sinking fund or other provisions, if any, for the
redemption or purchase of shares;
(e) The terms and conditions on which shares may be
converted, if the shares of any series are issued with the
privilege of conversion; and
(f) Voting powers, if any.
Notwithstanding the fixing of the number of shares constituting
the particular series upon the issuance thereof, the Board of
Directors may at any time thereafter authorize the issuance of
additional shares of the same series or may reduce the number of
shares constituting such series.
The Board of Directors expressly is authorized to vary the
provisions relating to the foregoing matters between the various
series of Preferred Stock, but in all other respects the shares of
each series shall be of equal rank with each other, regardless of
series. All Preferred Stock in any one series shall be identical in
all respects.
- 2 -
<PAGE>
2. The number of shares of the Corporation outstanding and entitled to vote
on the amendment to the Articles of Incorporation was 896,986 shares of $0.10
par value common stock. The amendment to Article IV was approved by the vote of
stockholders holding a majority of the outstanding shares of the Corporation's
common stock that were entitled to be voted thereon.
3. Prior to the adoption of this Amendment, the Corporation had only one
class of voting stock outstanding, the $0.10 par value common stock.
IN WITNESS WHEREOF, the Corporation has cuased this Certificate to be
signed by its President and its Secretary on June 24, 1993.
WILLARD PEASE OIL & GAS COMPANY
By: /s/ Willard Hl Pease, Jr.
-------------------------------------
Willard H. Pease, Jr.,
President
ATTEST:
/s/ Lily Roeland
- ------------------------------------
Lily Roeland, Secretary
STATE OF COLORADO )
) ss.
COUNTY OF MESA )
On this 24th dayof June, 1993, before me, a Notary Public, personally
appeared Willard H. Pease, Jr., and Lily Roeland, who acknowledged that they are
the President and Secretary, respectively, of Willard Pease Oil & Gas Company
and that they have executed the above instrument in such capacities on behalf of
Willard Pease Oil & Gas Company.
WITNESS my hand and official.
My commission expires: June 1, 1995
/s/ J. Newton Burkhalter
--------------------------------
Notary Public
S E A L
- 3 -
<PAGE>
FILED
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE CERTIFICATE OF AMENDMENT
STATE OF NEVADA OF THE
ARTICLES OF INCORPORATION
JUN 23 1993 OF
1776-68 WILLARD PEASE OIL & GAS COMPANY
Willard Pease Oil & Gas Company, a Nevada corporation ("Corporation") , by
its President and Secretary does hereby certify, pursuant to the provisions of
Section 78.385 of the Nevada General Corporation Law:
1. The directors and a majority of the stockholders of the Corporation by
consent and without an actual meeting effective May 21, 1993, adopted the
following Resolutions to amend Article IV to the Corporation's Articles of
Incorporation and adopt the Plan of Recapitalization attached hereto as Exhibit
A:
RESOLVED, that the Plan of Recapitalization attached hereto as Exhibit
A and incorporated herein by reference ("Plan") , pursuant to which the
Corporation shall effect a one-for-five reverse stock split of all
outstanding shares of common stock of the Corporation is hereby approved
and adopted; and
FURTHER RESOLVED, that in accordance with the Plan, Article IV of the
Corporation's Article IV of the Articles of Incorporation shall be amended
as follows:
ARTICLE IV: The aggregate number of shares which the Corporation
shall have authority to issue is 10,000,000 shares of common stock,
$0.10 par value ("Common Stock"). Each share of Common Stock of the
Corporation shall be nonassessable. The shareholders shall not possess
cumulative voting rights. The holders of the Common Stock shall be
entitled to one vote for each share of Common stock held by them of
record at the time for determining the holders thereof entitled to
vote.
2. The number of shares of the Corporation outstanding and entitled to vote
on the amendment to the Articles of Incorporation was 4,484,929 shares of $0.05
par N,!ilue common stock. The amendment to Article IV and the adoption of the
Plan of Recapitalization attached hereto as Exhibit A were approved by the
written consent of stockholders holding a majority of the outstanding shares of
the Corporation's common stock that were entitled to be voted thereon.
- 1 -
<PAGE>
3. In connection with the Amendment to the Articles of Incorporation, the
Corporation adopted a Plan of Recapitalization which effected a one-for-five
(1-for-5) reverse stock split, pursuant to which each share of outstanding $0.05
par value common stock on the effective date of the Amendment, which is the date
on which this Certificate of Amendment is filed with the Nevada Secretary of
State, shall automatically and without further action by a stockholder become
one-fifth (1/5th) of a share of $0.10 par value common stock. The stated capital
of the Corporation will be reduced as a result of the reverse stock split.
Immediately prior to the Plan of Recapitalization, there were 4,484,929 shares
of $0.05 par value common stock outstanding with stated capital of $224,246.
Following the adoption of the Plan of Recapitalization there will be
approximately 896,986 shares of $0.10 par value common stock outstanding with
stated capital of $89,699.
4. Upon the date of acceptance of filing of this Certificate of Amendment
of the Articles of Incorporation by the Secretary of State of the state of
Nevada, each holder of record of an outstanding certificate or certificates,
which prior thereto represented shares of the Corporation"s $0.05 par value
common stock, will surrender the same to the Corporation's transfer agent which
shall act as the exchange agent to effect the exchange of certificates in the
manner set forth in the Plan of Recapitalization attached hereto as Exhibit A.
Until surrendered for exchange, each certificate shall continue to represent the
adjusted number of shares.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its President and its Secretary on June 21, 1993.
WILLARD PEASE OIL & GAS
COMPANY
By: /s/ Willard H. Pease, Jr.
------------------------------------
Willard H. Pease, Jr.,
President
ATTEST:
/s/ Lily Roeland
- -----------------------------------
Lily Roeland, Secretary
- 2 -
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF MESA )
On this 21st day of June, 1993, personally appeared Willard H. Pease, Jr.,
and Lily Roeland, who acknowledged that they are the President and Secretary,
respectively, of Willard Pease Oil & Gas Company and that they have executed the
above instrument in such capacities on behalf of Willard Pease Oil and Gas
Company.
WITNESS my hand and official.
My commission expires: June 1, 1995
/s/ J. Newton Burkhalter
--------------------------------
Notary Public
S E A L
- 3 -
<PAGE>
PLAN OF RECAPITALIZATION
The Board of Directors and the holders of a majority of the outstanding
shares of Willard Pease Oil and Gas Company ("Company"), a Nevada corporation,
have adopted a resolution approving the following Plan of Recapitalization and
pursuant to which the following actions will be taken on behalf of the Company:
1. Amendment to Articles of Incorporation. The Company shall file an
amendment to Article IV of its Articles of Incorporation and as amended, Article
IV shall provide as follows:
ARTICLE IV: The aggregate number of shares which the Company shall
have authority to issue is 10,000, 000 shares of common stock, $0. 10 par
value ("Common Stock"). Each share of Common Stock of the Company shall be
nonassessable. The shareholders shall not possess cumulative voting rights.
The holders of the Common Stock shall be entitled to one vote for each
share of Common Stock held by them of record at the time for determining
the holders thereof entitled to vote.
2. Reverse Share Split. Each five of the issued and outstanding shares of
$0.05 par value Common Stock of the Company as of May 21, 1993, shall, without
further action, automatically and without further action by shareholders become
one share of $0. 10 par value Common Stock, thus effecting a five-for-one
(5-for-1) share reverse split.
3. No Fractional 5hares. No fraction of a share of the Company's $0.05 par
value Common Stock will be issued as a result of such reverse stock split. In
lieu thereof, shareholders of record on May 21, 1993, who would otherwise
receive a fractional share as a result of the reverse stock split described in
the preceding paragraph will be issued one full share in lieu thereof.
4. Exchange of Share Certificates. Upon the date of acceptance of filing of
this Plan of Recapitalization, by the Secretary of State of Nevada, each holder
of record of an outstanding certificate or certificates, which prior thereto
represented shares of the Company's $0.05 par value Common Stock, will be given
instructions to surrender the same to the Company's transfer agent which shall
act as the exchange agent to effect the exchange of certificates and each such
shareholder shall be entitled upon surrender to receive (upon payment of
handling and/or postage charges) in exchange therefor, a certificate
representing one share of the Company's $0. 10 par value Common Stock for each
five shares of $0.05 par value Common Stock owned on the record date and any
additional shares issuable as a result of the rounding described in the
preceding paragraph.
1 Exhibit A
<PAGE>
5. Old Certificates to Represent Reduced Number of Shares Until Exchanged.
Until so surrendered, each outstanding certificate which, prior to the date of
filing of this Plan of Recapitalization with the Secretary of State of Nevada
represented shares of the Company's $0.05 par value Common Stock, shall be
deemed for all corporate purposes to evidence the ownership of the reduced
number of shares of the Company's $0. 10 par value Common Stock to which the
holder is entitled as a result of the reverse stock split.
6. Change in Stated Capital. The stated capital of the Company will be
reduced by this recapitalization. The stated capital of the Company, based on
4,484,929 shares of $0.05 par value Common Stock outstanding on May 21, 1993 is
$224,246. Upon effectiveness of the Plan of Recapitalization, the stated capital
would be $89,699 based on 896,986 shares of $0. 10 par value Common Stock
outstanding.
7. Directors May Abandon Plan. Upon the vote of a majority of the Company's
directors that such action is in the best interests of the Corporation and its
shareholders, the directors shall be authorized to abandon the Plan of
Recapitalization at any time prior to the filing of the Certificate of Amendment
with the Secretary of State of Nevada.
2
M. R. JORGENSON, Secretary
FILED
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE CERTIFICATE OF AMENDMENT
STATE OF NEVADA OF THE
ARTICLES OF INCORPORATION
JUL 0 5 1994 OF
1776-68 WILLARD PEASE OIL & GAS COMPANY
Willard Pease Oil & Gas Company, a Nevada corporation ("Corporation") , by
Its President and Secretary does hereby certify, pursuant to the provisions of
Section 78.385.of the Nevada General Corporation Law:
1. The directors of the Corporation at a meeting held by consent and
without an actual meeting effective April. 11, 1994, adopted, and the
stockholders of the Corporation at the Annual Meeting of Stockholders duly held
on June 3, 1994, approved, the following resolutions to amend Article I and add
a new Article VIII to the Corporation's Articles of Incorporation:
RESOLVED, that the directors approve a proposal to submit to the
Company's stockholders at the 1994 Annual Stockholders Meeting, an
amendment to the Company's Articles of Incorporation changing the name
of the Companby to "Pease Oil and Gas Company." The proposed amendment
to the Company's Articles of Incorporation is as follows:
Article I shall be amended to read as follows:
ARTICLE 1: The name of the Corporation shall be Pease Oil and Gas
Company.
FURTHER RESOLVED, that the directors approve a proposal to submit
to the Company's stockholders at the 1994 Annual Stockholders Meeting,
ab amendment to the Company's Articles of Incorporation deleting
certain rights available under the Nevada General Corporation Law and
known as the "Nevada Takeover Statute.: The proposed amendment to the
Company's Articles of Incorporation is as follows:
A new Article VIII shall be added to the Articles of
Icnorporation and shall read as follows:
ARTICLE VIII: Neither the Corporation nor its stockholderes
shalol be subject to, nor entitled to assert the rights of privileges
of, NRS 78.411 through 78.444 of the Nevada General Corporation Law,
as the same may be amended from time to time.
- 1 -
<PAGE>
2. The number of shares of the Corporation outstanding and entitled to vote
on the amendment to the Articles of Incorporation was 981,807 shares of $0.10
par value common stock. The amendment to Article I and the addition of a new
Article VIII were approved by the vote of stockholders holding a majority of the
outstanding shares of the Corporation's common stock that were entitled to be
voted tbereon.
3. Prior to the adoption of this Amendmentr the Corporatlon had only one
class of voting stock outstanding, the $0.10 par value common stock.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its President and its Becrotary on the 28th day of June, 1994.
WILLARD PEASE OIL & GAS COMPANY
By: /s/ Willard H. Pease, Jr.
--------------------------------
Willard H. Pease, Jr., President
ATTEST:
/s/ Lily Roeland
- ------------------------------------
Lily Roeland, Secretary
STATE OF COLORADO )
) ss.
COUNTY OF MESA )
On this 28th day of June, 1994, before me, a Notary Public, personally
appeared Willard H. Pease, Jr., and Lily Roeland, who acknowledged that they are
the President and Secretary, respectively, of Willard Pease Oil & Gas Company
and that they have executed the above instrument in such capacities on behalf of
Willard Pease Oil & Gas Company.
WITNESS my hand and official seal.
My commission expires: 23 September 1997
/s/ Eva M. Edie-Jones
-------------------------------
Notary Public
S E A L
EVA M. EDIT-JONES
NOTARY PUBLIC
STATE OF COLORADO
FILED
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE CERTIFICATE OF AMENDMENT
STATE OF NEVADA OF THE
ARTICLES OF INCORPORATION
DEC 19 1994 OF
1776-68 PEASE OIL AND GAS COMPANY
Pease Oil and Gas Company, a Nevada corporation ("Company"), by its
President and Secretary does hereby certify, pursuant to the provisions of
Section 78.385 of the Nevada General Corporation Law.
1. The directors of the Company at a meeting held by consent and without an
actual meeting effective November 16, 1994, adopted and the Stockholders of the
Company at a Special Meeting of Stockholders duly held on December 13, 1994,
approved the following resolution to amend Article IV to the Company's Articles
of Incorporation.
RESOLVED, that Article IV of the Company's Articles of
Incorporatin shall be amdned to increase the number of authorized
shares of $0.10 par value Common Stock that the Companyis authorized
to issue so that after such amendment Article IV shall read as
follows:
"ARTICLE IV. The aggregate number of shares that the
Corporation shall have authorityu to issue is 27,000,000, of
which 25,000,000 shall be common stock, $0.10 par value ("Common
Stock"), and 2,000,000 shall be Preferred Stock of the
Corporation shall be nonassessable. The stockholders shall not
possess cumulative voting rights. The designation, preferences,
limitations and relative rights of shares in each class are as
follows:
1. Common Stock. The rightrs of holders of Common Stock to
receive dividends or to share in the distribution of assets in
the event of liquidation, dissolution or winding up of the
affi8ars of the Corporation shall be subjet to the preference,s
limitations and relative rights of the holders of Preferred
Stock. The holders of the Common Stock shall be entitled to one
vote for eahc share of Common stock held by them of record at the
time for determining the holderes thereof entitled to vote.
- 1 -
<PAGE>
2. Preferred Stock. The Corporation may issue the Preferred
Stock frokm tome to time in one or more series with such
distinctive designations, rightrs, preferences and limitations as
the Board of Directors shall determine. The Board of Directors
hereby is expesly vested with the authority to fix and determine
the relative rights and preferences of each such series of
Preferred Stock to the fullest extent permitted by these Articles
of Incorporation and the General Corportion Law of Nevada in
respect to the following:
(a) The rate of dividend, the time payment of dividends,
when the dividends are cumulative, and the date from which any
dividends shall accrue;
(b) Whether shares may be redemed and, if so, the redemption
price and the terms and conditions of redemption;
(c) The amount payable upon shares in event of either
voluntary or involuntary liquidation;
(d) Sinking fund or other provision, if any, for the
redemption or purchase of shares;
(e) The terms and conditions on which shares may be
converted, if the shares of any series are issued with the
privilege of conversion; and
(f) Voting powers, if any.
Notwithstanding the fixing of the number of shares
constituting the particular series upon the issuance thereof, the
Board of Directors may at any time thereafter authorize the
issuance of additional shares of the same series or may reduce
the number o shares consitituting such series.
The Board of Directors expressly is authorized to vary the
provisions relating to the foregoing matters between the various
series of Preferred Stock, but in all other respects the shares
of each series shall be of equal rank with each other, regardless
of series. All Preferred Stock in any one series shall be
identical in all respects."
2. The number of shares of the Company outstanding and entitled to vote on
the amendment to the Articles of Incorproatin was 1,999,752 shares of $0.10 par
value common stock. The amendment to Article IV was approved by the vote of
stockholderes holding a majority of the outstanding shreas of the Company's
common stock that were entitled to ve voted thereon.
- 2 -
<PAGE>
3. Prior to the adoption of this Am,endment, the Company had only one class
of voting stock outstanding, the $0.10 par value common stock.
IN WITNESS WHEREOF, the Company has cuased this Ceretificate to be signed
by its President and its Secretqry on the 13th day of December, 1994.
PEASE OIL AND GAS COMPANY
By /s/ Willard H. Pease, Jr.
------------------------------
Willard H. Pease, Jr., President
ATTEST:
/s/ Lily Roeland
- -------------------------------
Lily Roeland, Secretary
STATE OF COLORADO )
) ss.
COUNTY OF MESA )
On this 13th day of December, 1994, before me, a Notary Public, personally
appeared Willard H. Pease, Jr., and Lily Roeland, who acknowledged that they are
the President and Secretary, respectively, of Pease Oil and Gas Company and that
they have executed the above instrument in such capacities on behalf of Pease
Oil and Gas Company.
WITNESS my hand and official sea.
My commission expires: 9-9-98
/s/ Gladys L. Omsted
-------------------------------------
Notary Public
S E A L
- 3 -
CERTIFICATE OF CHANGE
IN NUMBER OF AUTHORIZED SHARES
OF COMMON STOCK
We, the undersigned, Patrick J. Duncan, President and Virginia Cherry,
Assistant Secretary, of Pease Oil and Gas Company, a Nevada corporation, do
hereby certify as follows:
That the Board of Directors of said corporation at a meeting duly
convened and held effective as of the 17th day of November, 1998, in accordance
with N.R.S. ss. 78-207, adopted resolutions to decrease the number of authorized
shares of the corporation's $0.10 par value common stock from 40,000,000 shares
to 4,000,000 shares and correspondingly decreasing the number of issued and
outstanding shares of such class held by each common stockholder of record as of
the close of business on December 1, 1998 (the "Effective Date"). The following
information relates to the reduction in number of authorized shares and the
reverse stock split to be effected:
(a) and (b) The number of authorized shares and the par value
of each class and series of shares before and after the change hereby
effected:
Before Change After Change
Common Stock, $0.10 Par Value 40,000,000 4,000,000
Preferred Stock, $0.01 Par Value 2,000,000 2,000,000
(c) The number of shares of common stock to be issued after
the change in exchange for each issued share of common stock prior to
the change:
Before Change After Change
Each share 1 one-tenth of one share(1)
All outstanding shares: 16,007,048 1,600,705(1)
- -----------------
(1) See item (d) below.
(d) The provisions for the issuance of fractional shares
shall be as follows:
Fractional shares which would otherwise be held by
any stockholder as a result of the reverse stock split shall
each be rounded up to the next highest whole number of shares
and therefore no fractional shares shall be issued as a result
of the reverse stock split.
(e) Approval of stockholders was not required.
(f) The Effective Date for the change shall be the close of
business on December 1, 1998.
The reverse stock split for outstanding $0.10 par value common stock of
the corporation does not affect the number nor the rights or privileges
attributable to the corporation's outstanding or authorized preferred stock.
Dated this 18th day of November, 1998.
PEASE OIL AND GAS COMPANY
By ______________________________
Patrick J. Duncan, President
By ______________________________
Virginia Cherry, Assistant Secretary
STATE OF COLORADO )
) ss.
COUNTY OF GRAND )
On November 18, 1998, personally appeared before me, a notary public,
Patrick J. Duncan, President and Virginia Cherry, Assistant Secretary,
respectively, of Pease Oil and Gas Company, who acknowledged that they executed
the above instrument on behalf of Pease Oil and Gas Company and affirmed that
the facts stated therein are true.
My commission expires:
---------------------------------
Notary Public
AMENDED AND RESTATED
BYLAWS
OF
WILLARD PEASE OIL AND GAS COMPANY
OFFICES
Section 1. Principal Office. The principal office of the corporation In the
state of Nevada shall be located at Reno, Nevada or at such other location as
shall be designated by the Board of Directors from time to time. The corporation
may have such other offices, either within or without the state of Nevada, as
the Board of Directors may designate or as the business of the corporation may
require from time to time.
STOCKHOLDERS
Section 2. Annual Meetings. Unless otherwise directed and fixed by the
Board of Directors, the annual meeting of the stockholders shall be held during
the second fiscal quarter of each year at such time and place as the Chief
Executive Officer, President, Vice President or Secretary shall designate, for
the purpose of electing directors and for the transaction of such other business
as may come before the meeting.
Section 3. Special Meetings. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute, may be called by
the Chief Executive Officer, President or by the Board of Directors, and shall
be called by the President at the request of the holders of not less than
one-third of all of the outstanding shares of the corporation entitled to vote
at the meeting.
Section 4. Place of Meeting. The Board of Directors may designate any
place, either within or without the state of Nevada, as the place of meeting for
any annual meeting or for any special meeting called by the Board of Directors.
If no designation is made, or if a special meeting be otherwise called, the
place of meeting shall be the principal executive office of the corporation in
the state of Colorado.
Section 5. Notice of Meeting. Whenever stockholders are required or
permitted to take any action at a meeting, written notice of the meeting signed
by the President, or a Vice President, or the Secretary or an Assistant
Secretary, shall be given stating the place, day and hour of the meeting and,
the purpose or purposes for which the meeting is called. The notice shall be
delivered not fewer than ten (10) days nor more than sixty (60) days before the
date of the meeting, either personally or by mail, by or at the direction of the
Chief Executive Officer President, Vice President or the Secretary to each
-1-
<PAGE>
stockholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed given as to any stockholder of record, when deposited in the
United States mail, addressed to the stockholder at his address as it appears on
the records of the corporation, with postage thereon prepaid.
When a meeting is adjourned to another time or place, it shall not be
necessary to give any notice of the adjourned meeting if the time and place to
which the meeting is adjourned are announced at the meeting at which the
adjournment is taken and at the adjourned meeting any business may be transacted
that might have been transacted on the original date of the meeting, except as
otherwise provided by the General Corporation Law of Nevada.
If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 6. Fixing Date for Determination of Stockholders of Record. In
order to determine the stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date, which shall not be more than sixty (60) days before the date of
such meeting, nor more than sixty (60) days prior to any other action. If no
record date is fixed by the Board of Directors, the record date shall be
determined in accordance with the provision of the General Corporation Law of
Nevada.
Section 7. List of Stockholders The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least ten (10) days before
every meeting of the stockholders, a complete list of the stockholders entitled
to vote at the meeting, arranged in alphabetical order, and showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten (10) days prior to the meeting, either at a place within the
city where the meeting is to be held (which place shall be specified in the
notice of the meeting) or, if not so specified, at the place where said meeting
is to be held, and the list shall be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who may be present.
-2-
<PAGE>
Section 8. Stockholder's Right of Inspection. Any person who has been a
stockholder of record of the corporation for at least six months immediately
preceding his demand, or any person holding, thereunto authorized in writing by
the holders of, at least five percent of all of its outstanding shares, upon at
least five days' written demand, shall have the right to inspect in person or by
agent or attorney, during usual business hours, the stock ledger or duplicate
stock ledger, whether kept in the registered office of the corporation in Nevada
or elsewhere, and to make extracts therefrom. However, any inspection may be
denied to any stockholder or other person upon his refusal to furnish to the
corporation an affidavit that such inspection is not desired for a purpose which
is in the interest of a business or object other than the business of the
corporation and that he has not at any time sold or offered for sale any list of
stockholders of any domestic or foreign corporation or aided or abetted any
person in procuring any such record of stockholders for any such purpose. In
every instance where an attorney or other agent shall be the person who seeks
the right of inspection, the demand under oath shall be accompanied by a power
of attorney signed by the stockholder which authorizes the attorney or the agent
to inspect on behalf of the stockholder. The demand under oath shall be directed
to the corporation at its registered office in this state or at Its principal
place of business. The corporation may impose a reasonable charge to recover the
costs of labor and materials and the cost of copies of any documents provided to
the stockholder.
Section 9. quorum. A majority of the outstanding shares of the corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. If a quorum is present, the act of stockholders
who hold a majority of the voting power and are present at a meeting at which a
quorum is present and entitled to vote on the subject matter (including, but not
limited to, the adoption of an incentive stock option plan) shall be the act of
the stockholders, unless the vote of a greater proportion or number or voting by
classes is required by the General Corporation Law of Nevada or the Articles of
Incorpo ration. If less than a majority of the outstanding shares are
represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The stockholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
- 3 -
<PAGE>
Section 10. Method of Voting. The vote upon any question before the meeting
need not be by ballot. When a quorum is present at any meeting, the Vote of the
holders of a majority of the stock having Voting Power present in person or
represented by Proxy shall decide any question brought before such meeting,
unless the question is one upon which by express Provision of the statutes or of
the Articles of Incorporation a different Vote is required in which case such
express provision shall govern and control the decision of such question.
Section 11. Voting Rights of Stockholders and Proxies. Each stockholder of
record entitled to vote in accordance with the laws of the state of Nevada, the
Articles of Incorporation or these Bylaws, shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share, or
fraction thereof, of stock entitled to Vote standing in his name on the books of
the corporation, but no proxy shall be voted on after six months from Its date,
unless the proxy provides for a longer period.
Section 12. Ownership of its Own Stock. Shares of its own stock belonging
to the corporation or to another corporation, if a majority of the shares
entitled to vote in the election of directors of such other corporation is held,
directly or indirectly, by the Corporation, shall neither be entitled to vote
nor counted for quorum purposes. Nothing in this section shall be construed as
limiting the right of the corporation to vote any shares of stock held by It in
a fiduciary capacity.
Section 13. Voting by Fiduciaries and Pledgors. Persons holding stock in a
fiduciary capacity shall be entitled to vote the shares so held, and persons
whose stock is pledged shall be entitled to vote, unless in the transfer by the
pledgor on the books of the corporation he has expressly empowered the pledgee
to vote thereon, in which case only the pledgee, or his proxy, may represent
said stock and vote thereon.
Section 14. No Cumulative Voting. There shall be no cumulative voting of
shares.
Section 15. Informal Action by Stockholders and Ratifica tion. Any action
required to be taken at a meeting of the stockholders, or any other action which
may be taken at a meeting of the stockholders, may be taken without a meeting if
a consent in writing, setting forth the action so taken, shall be signed by
stockholders in the manner provided for under the General Corporation Law of
Nevada. If any meeting is irregular due to a lack of notice or written consent,
provided a quorum was present, the proceedings of the meeting may be ratified
and approved and rendered valid and such irregularity or defect waived by a
writing signed by all Stockholders having the right to vote at such meeting.
- 4 -
<PAGE>
BOARD OF DIRECTORS
Section 16. General Powers. The business and affairs of the corporation
shall be managed by its Board of Directors, except as otherwise may be provided
in the Articles. One member of the Board of Directors may be appointed by the
directors to the position of Chairman of the Board. If the position is filled,
the Chairman of the Board, when present, shall preside at all meetings of the
stockholders and of the Board of Directors and shall perform all duties incident
to the office of Chairman of the Board and such other duties as may be
prescribed by the Board of Directors from time to time. The Board of Directors,
by resolution adopted by a majority of the full Board of Directors, may
designate from among its members an executive committee, a compensation
committee and/or one or more other committees, each of which shall have the
authority provided for in such resolution subject to the limitations on such
authority provided in the General Corporation Law of Nevada.
Section 17. Number. Tenure and Qualification. The number of directors of
the corporation shall be set by resolution adopted by the Board of Directors of
the corporation, but in no event shall there be less than three (3) directors.
The Board of Directors shall be divided into three classes, Class A, Class B,
and Class C, each class to be as nearly equal in number as possible, with the
initial term of office of directors of Class A to expire at the first Annual
Meeting of Stockholders following their election, the initial term of Class B
directors to expire at the second Annual Meeting of Stockholders following their
election, and the initial term of Class C directors to expire at the third
Annual Meeting of Stockholders following their election. After the expiration of
the initial term of each class of directors, each subsequent term will be three
(3) years, with the result that each year the stockholders will elect one class
of directors, provided, however, that at least one-fourth in number of the
directors must be elected annually. Each director shall hold office until his
successor shall have been elected and qualified. Directors need not be residents
of Nevada or stockholders of the corporation.
Section 18. Regular Meetings. A regular meeting of the Board of Directors
shall be held without notice other than this Bylaw immediately after, and at the
same place as, the annual meeting of stockholders. The Board of Directors may
provide, by resolution, the time and place, either within or without Nevada, for
the holding of additional regular meetings without other notice than such
resolution.
-5-
<PAGE>
Section 19. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board, or, if a
Chairman of the Board has not been elected, by the President, or, by a majority
of the directors. The person or persons authorized to call special meetings of
the Board of Directors may fix any Place, either Within or without the state of
Nevada, as the Place for holding any special meeting of the Board of Directors
called by them.
Section 20. Notice. Notice of any special meeting shall be given at least
two days previous thereto by written notice delivered Personally or mailed to
each director at his business address, by telegram, or by electronic facsimile
transmission. If mailed, such notice shall be deemed to be delivered when
deposited in the United States Mail so addressed, with Postage thereon prepaid.
If notice be given by telegram, such notice shall be deemed to be delivered when
the telegram is delivered to the telegraph company. Any director may waive
notice of any meeting. The attendance of a director at a meeting constitutes a
waiver of notice of such meeting, except in cases in which a director attends a
meeting for the express purposes of objecting to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
Board of Directors need be specified in the notice or waiver of notice of such
meeting.
Section 21. Quorum. A majority of the number of directors fixed by Section
17 shall constitute a quorum for the transaction of business at any meeting of
the Board of Directors, but if less than such majority is present at a meeting,
a majority of the directors present may adjourn the meeting from time to time
without further notice.
Section 22. Manner of Acting. Unless a greater number of directors are
required under these Bylaws or the corporation's Articles of Incorporation, the
act of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors.
Section 23. Vacancies and Newly Created Directorships. All vacancies,
including those caused by an increase in the number of directors, may be filled
by a majority of the remaining directors, though less than a quorum, and the
directors so chosen shall hold office until their successors shall be elected
and qualified, or until their earlier resignation or removal. When one or more
directors shall give notice of his or their resignation to the Board, effective
at a future date, the Board shall have power to fill such vacancy or vacancies
- 6 -
<PAGE>
to take effect when such resignation or resignations shall become effective,
each director so appointed to hold office during the remainder of the term of
office of the resigning director or directors.
Section 24. Compensation. By resolution of the Board of Directors, the
directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors, may be paid a fixed sum for attendance at each meeting
of the Board of Directors or a stated salary as director; and may be paid such
other compensation for serving as a director of the corporation as may be
determined by the Board of Directors. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor.
Section 25. Presumption of Assent. A director of the corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent shall be entered in the minutes of the meeting or unless he shall
file his written dissent to such action with the person acting as the secretary
of the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the secretary of the corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
Section 26. Informal Action by Directors. Any action required to be taken
at a meeting of the Board of Directors, or any other action which may be taken
at a meeting of the Board of Directors or any committees thereof, may be taken
without a meeting if, before or after the action, a consent in writing, setting
forth the action so taken, shall be signed by all of the members of the Board or
of the committee. Directors or members of any committee designated by the Board
of Directors may participate in a meeting of the Board of Directors or such
committee by means of a telephone conference or similar method of communication
by which all persons participating in the meeting can hear each other at the
same time. Such participation shall constitute presence in person at the
meeting. Each director participating in any such meeting shall sign the minutes
thereof which may be signed in counterparts.
Section 27. Committees. The Board of Directors may, by resolution passed by
a majority of the whole Board, designate one or more committees, each committee
to include at least one director. The Board may appoint natural persons who are
not directors to serve on committees and may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he, she or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
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at the meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the Articles of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stock- holders a
dissolution of the corporation or a revocation of a dissolution, or amending the
Bylaws of the corporation; and unless the resolution or the Articles of
Incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the Board of Directors. Each committee
shall keep regular minutes of its meetings and report the same to the Board of
Directors when required.
OFFICERS
Section 28. Number and Age Requirement. The officers of the corporation
shall be a Chief Executive Officer, president, a secretary, and a Treasurer,
each of whom shall be elected by the Board of Directors. One or more Vice
presidents, a Chairman of the Board, a Chief Financial Officer, and such other
officers and assistant officers as may be deemed necessary may be elected or
appointed by the Board of Directors. Any two or more offices may be held by the
same person, except the same person shall not be both president and Vice
president, or president and secretary. The officers of the corporation shall be
natural persons of the age of eighteen years or older.
Section 29. Election and Term of Office. Unless an officer has been elected
or appointed for a longer term, the officers of the corporation to be elected by
the Board of Directors shall be elected annually by the Board of Directors at
the first meeting of the Board of Directors held after each annual meeting of
the stockholders. If the election of officers shall riot be held at such
meeting, such election shall be held as soon thereafter as conveniently may be.
Each officer shall hold office until his successor shall have been duly elected
arid shall have qualified or until his death or until he shall resign or shall
have been removed in the manner hereinafter provided. Election or appoint- merit
of a person as an officer of the corporation shall not create any contract
rights. Such rights may only be created by a binding written contract.
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Section 30. Removal. Any officer or agent elected or appointed by the Board
of Directors may be removed by a majority of the Board of Directors whenever in
their judgment the best interests of the corporation would be served thereby,
but such removal shall be without prejudice to the contractual rights, if any,
of the person so removed.
Section 31. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filed by the Board
of Directors for the unexpired portion of the term.
Section 32. Chief Executive Officer. The Chief Executive Officer of the
Board of Directors, if elected, shall preside at all meetings of the
stockholders arid the Board of Directors and shall perform such other duties as
may be prescribed from time to time by the Board of Directors or by the Bylaws.
Section 33. President. The President shall be the Chief Executive Officer
of the corporation and shall in general supervise arid control all the
day-to-day business and affairs of the corporation. He shall preside at meetings
of the stockholders. He may sign, with the Treasurer, Assistant Treasurer,
Secretary, Assistant Secretary, or any other proper officer of the corporation
thereunto authorized by the Board of Directors, including the Chairman,
certificates for shares of the corporation, any deeds, mortgages, bonds,
contracts or other instruments which the Board of Directors has authorized to be
executed, except in cases in which the signing and execution thereof shall be
expressly delegated by the Board of Directors or by these Bylaws to some other
officer or agent of the corporation, or shall be required by law to be otherwise
signed or executed; and in general shall perform all duties as may from time to
time be prescribed by the Chairman or the Board of Directors.
Section 34. The Vice presidents. In the absence of the president or in the
event of his death, inability or refusal to act, the Vice president (or in the
event there be more than one Vice President, the Vice presidents in the order
designated at the time of their election, or in the absence of any designation,
then in the order of their election), if there be a Vice president, shall
perform the duties of the President, arid when so acting, shall have all the
powers of and be subject to all the restrictions upon the president. Any Vice
president so authorized by the Board of Directors may sign, with the Secretary
or an Assistant secretary, certificates for shares of the corporation or
contracts on behalf of the corporation; and shall perform such other duties as
from time to time may be assigned to him by the president or by the Board of
Directors.
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Section 35. The Secretary The Secretary shall: (A) keep the minutes of the
stockholders and of the Board of Directors meetings in one or more books
provided for that purpose; (B) see that all notices duly are given in accordance
with the provisions of these Bylaws or as required by law; (C) be custodian of
the corporate records arid of the seal of the corporation and see that the seal
of the corporation is affixed to all documents the execution of which on behalf
of the corporation under its seal duly is authorized; (D) keep a register of the
post office address of each stockholder which shall be furnished to the
Secretary by such stockholder; (E) sign with the President, or a Vice President,
certificates for shares of the corporation, the issuance of which shall have
been authorized by resolution of the Board of Directors; (F) have general charge
of the stock transfer books of the corporation; and (G) in general perform all
duties incident to the office of Secretary and such other duties as from time to
time may be assigned to him by the President or by the Board of Directors.
Section 36. The Treasurer. The Treasurer shall: (A) have charge and custody
of arid be responsible for all funds arid securities of the corporation; receive
and give receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in such
banks, trust companies or other depositories as shall be selected; and (B) in
general perform all of the duties incident to the office of Treasurer and such
other duties as from time to time may be assigned to him by the President or by
the Board of Directors.
Section 37. Assistant Secretaries and Assistant Treasurers. The Assistant
Secretaries, when authorized by the Board of Directors, may sign with the
President or a Vice President certificates for shares of the corporation the
issuance of which shall have been authorized by a resolution of the Board of
Directors. The Assistant Treasurers shall respectively, if required by the Board
of Directors, give bonds for the faithful discharge of their duties in such sums
and with such sureties as the Board of Directors shall determine. The Assistant
Secretaries arid Assistant Treasurers, in general, shall perform such duties as
shall be assigned to them by the Secretary or the Treasurer, respectively, or by
the President or the Board of Directors.
Section 38. Salaries. The salaries of the officers shall be fixed from time
to time by the Board of Directors and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a director of the
corporation.
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CONTRACTS, LOANS. CHECKS. DEPOSITS AND INDEMNIFICATION
Section 39. Contracts. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the corporation, and such authority
may be general or confined to specific instances.
Section 40. Loans. No loans shall be contracted on behalf of the
corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors. Such authority may be
general or confined to specific instances.
Section 41. Checks, Drafts. Etc. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation, shall be signed by such officer or officers, agent or agents of
the corporation and in such manner as shall from time to time be determined by
resolution of the Board of Directors. Such authority may be general or confined
to specific instances.
Section 42. Deposits. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies or other depositories as the Board of Directors may
select.
Section 43. Indemnification. The corporation shall provide indemnification
of officers, directors and employees to the fullest extent permitted under the
Nevada General Corporation Law, as such statute may be in effect from time to
time.
MISCELLANEOUS
Section 44. Rules of Order. At any meeting of stockholders or directors of
the corporation at which a question of procedure arises, the persons presiding
at the meeting may rely upon Roberts Rules of Order to resolve any such
question.
Section 45. Certificates for Shares. The shares of the corporation shall be
represented by certificates, provided that the Board of Directors of the
corporation may provide by resolution or resolutions that some or all of any or
all classes or securities of its stock shall be uncertificated shares. Any such
resolutions shall not apply to shares represented by a certificate until such
certificate is surrendered to the corporation. Notwithstanding the adoption of
such a resolution by the Board of Directors, every holder of stock represented
by certificates and upon request, every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the corporation by
the Chairman or Vice Chairman of the Board of Directors, or the president or
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vice President and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant secretary of the corporation representing the number of shares
registered in certificate form. Any or all of the signatures on the certificate
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
All certificates for shares shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the shares represented
thereby are issued, with the number of shares and date of issue, shall be
entered on the stock transfer books of the corporation. All certificates
surrendered to the corporation for transfer shall be cancelled and no new
certificate shall be issued until the former certificate for a like number of
shares shall have been surrendered and cancelled, except that in case of a lost,
destroyed or mutilated certificate a new one may be issued therefor upon such
terms and indemnity to the corporation as the Board of Directors may prescribe.
Section 46. Transfer of Shares. Transfer of shares of the corporation shall
be made only on the stock transfer books of the corporation by the holder of
record thereof or by his legal representative, who shall furnish proper evidence
of authority to transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the secretary of the corporation, and on
surrender for cancellation of the certificate for such shares. The person in
whose name shares stand on the books of the corporation shall be deemed by the
corporation to be the owner thereof for all purposes.
Section 47. Dividends. The Board of Directors may from time to time
declare, and the corporation may pay, dividends in the manner and upon the terms
and conditions provided by law and its Articles of Incorporation.
Section 48. Seal. The Board of Directors shall provide a corporate seal
which shall be circular in form and shall have inscribed thereon the name of the
corporation and the state of incorporation and the words, Corporate Seal.
Section 49. Waiver of Notice. Whenever any notice is required to be given
to any stockholder or director of the corporation under the provisions of these
Bylaws or under the provisions of the Articles of Incorporation or under the
provisions of the General Corporation Law of Nevada, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice.
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Section 50. Amendments. These Bylaws and any amendment thereof may be
altered, amended or repealed, or new Bylaws may be adopted, by the Board of
Directors at any regular or special meeting by the affirmative vote of a
majority of all the members of the Board.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Secretary of the
corporation, do hereby certify that the above and foregoing Amended and Restated
Bylaws were duly adopted as the Bylaws of said corporation at the meeting of the
directors thereof held by consent on May 11, 1993.
May 11, 1993 /s/ Lily Roeland
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Date Lily Roeland, Secretary
WILLARD PEASE OIL AND GAS COMPANY
1990 STOCK OPTION PLAN
1. Purpose of the Plan. The purpose of this 1990 Stock Option Plan ("Plan")
is to secure and retain key employees and directors responsible for the success
of Willard Pease Oil and Gas Company ("Company"), to motivate such persons to
exert their best efforts on behalf of the Company, to encourage stock ownership
and to provide such persons with proprietary interests in, and a greater concern
for, the welfare of, and an incentive to continue service with, the Company.
Options issued pursuant to this Plan will constitute incentive stock options
within the meaning of ss. 422A of the Internal Revenue Code of 1986 ("Code"), as
amended, ("Incentive Stock Options") or other options ("Nonstatutory Stock
Options"). Incentive Stock Options and Nonstatutory Stock Options may both be
granted hereunder and any option granted which for any reason does not qualify
as an Incentive Stock Option, including any option granted to a director of the
Company who is not also an employee of the Company, shall be a Nonstatutory
Stock Option.
2. Stock Subject to the Plan. The number of shares of the Company's $0.05
par value common stock ("Common Stock") which may be optioned under the Plan is
500,000 shares. Such shares may consist, in whole or in part, of unissued shares
or treasury shares. Nonstatutory Stock Options to acquire no more than 200,000
of such shares may be granted to directors of the Company who are not also
employees. The maximum number of shares issuable pursuant to the Plan, including
shares subject to outstanding options, shall be subject to adjustment as
provided in Section 6 of the Plan. No option shall be granted under the Plan
after December 30, 2000. The aggregate fair market value of the shares subject
to options granted to any optionee which become exercisable in a particular
calendar year shall not exceed $100,000. For purposes of this Plan, the fair
market value of Common Stock subject to an option shall be equal to the mean
between the bid and asked prices reported in the over-the-counter market at the
close of business on the date the option is granted. If no market exists, the
Compensation Committee described in Section 3 shall determine the fair market
value for purposes of this Plan. If any outstanding option under the Plan for
any reason expires or is terminated, the shares of Common Stock allocable to the
unexercised portion of such option may again be optioned under the Plan subject
to the limitations, terms and conditions of the Plan. The Board of Directors,
and the proper officers of the Company shall from time to time take appropriate
action required for delivery of Common Stock, in accordance with the options and
any exercises thereof.
3. Administration. Administration of the Plan, insofar as it relates to
Incentive Stock Options and the granting of Incentive Stock Options under the
Plan shall be administered by the Compensation Committee of the Board of
Directors of the Company, hereinafter referred to as the "Committee." The
Committee shall consist of at least three members of the Board of Directors of
the Company chosen by the Board, who as of the date of any action of the
Committee, are not, and have not been during the preceding 12 months, employees
of the Company. If the Committee thus established shall consist of fewer than
three members at the time of any action by the Committee, then the directors
shall select enough other shareholders to serve on the Committee to have three
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members and to meet any requirements of ss. 422A of the Code and regulations
adopted thereunder and regulations adopted under Section 16(b) of the Act. The
decision of a majority of those present at any meeting of the Committee where a
quorum consisting of a majority of the Committee is present shall constitute the
decision of the Committee. The Committee is authorized and empowered to
administer the Plan insofar as it relates to Incentive Stock Options and,
consistent with the terms of the Plan, to (a) select the employees to whom
Incentive Stock Options are to be granted and to fix the number of shares and
other terms and conditions of the Incentive Stock Options to be granted; (b)
determine the date upon which options shall be granted and the terms and
conditions of the granted options in a manner consistent with the Plan, which
terms need not be identical as between options or optionees; (c) interpret the
Plan and the Incentive Stock Options granted under the Plan; (d) adopt, amend
and rescind rules and regulations for the administration of the Plan insofar as
it relates to Incentive Stock Options; and (e) direct the Company to execute
Incentive Stock Option agreements pursuant to the Plan. All such actions of the
Committee shall be binding upon all participants in the Plan.
The administration of the Plan insofar as it relates to Nonstatutory Stock
Options and the granting of Nonstatutory Stock Options under the Plan shall be
administered by the Board of Directors. The decision of a majority of those
present at any meeting of the Board of Directors where a quorum consisting of a
majority of the Board is present shall constitute the decision of the Board. The
Board is authorized and empowered to administer the Plan insofar as it relates
to Nonstatutory Stock Options and, consistent with the terms of the Plan, to (a)
select any directors who are not also employees of the Company to whom
Nonstatutory Stock Options are to be granted and to fix the number of shares and
other terms and conditions of the options to be granted; (b) determine the date
upon which Nonstatutory Stock Options shall be granted and the terms and
conditions of the granted options in a manner consistent with the Plan, which
terms need not be identical as between options or optionees; (c) interpret the
Plan and the Nonstatutory Stock Options granted under the Plan; (d) adopt, amend
and rescind rules and regulations for the administration of the Plan insofar as
it relates to Nonstatutory Stock Options; and (e) direct the Company to execute
Nonstatutory Stock Option agreements pursuant to the Plan. All such actions of
the Board shall be binding upon all participants in the Plan.
4. Eligibility The employees of the Company who shall be eligible to
receive grants of Incentive Stock Options under the Plan shall be those key
employees, including officers or directors of the Company who are also
employees, who are from time to time responsible for the management, growth or
success of the business of the Company and who shall have been selected by the
Committee. Officers of the Company who are also directors shall be eligible to
participate in the Plan if they are also employees. The persons to receive
Incentive Stock Options under the Plan shall be selected from time to time by
the Committee, in its sole discretion, and the Committee shall determine, in its
sole discretion, the number of shares to be covered by the Incentive Stock
Option or Options granted to each person selected. Subject to the exception
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under Section 5(b), no person may be granted an Incentive Stock Option if such
person, at the time the option is granted, owns shares of Common Stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company. For purposes of calculating such stock ownership, the
attribution rules of stock ownership set forth in Section 425(d) of the Code as
amended shall apply. Accordingly, an optionee, with respect to whom such 10%
limitation is being determined, shall be considered as owning Common Stock owned
directly or indirectly by or for the optionee's brothers and sisters (whether by
the whole or half-blood), spouse, ancestors and lineal descendants; and any
Common Stock owned directly or indirectly by or for a corporation, partnership,
estate or trust, shall be considered as being owned proportionately by or for
its shareholders, partners or beneficiaries.
5. Terms and Conditions. Nonstatutory Stock Options granted under the Plan
shall be subject to the restrictions of Sections 5(a), 5(d), 5(e), 5(f), 5(g),
5(i), 56) and 5(o) and all Incentive Stock Options granted under this Plan shall
be subject to the terms and conditions of this Plan, including all of the
following:
(a) Option Price. Subject to the provisions of Section 5(b), the
option price per share shall be determined by the Committee but shall not
be less than 100% of the fair market value of such shares at the time the
option is granted.
(b) More than 10% Shareholder. If an employee owns more than 10% of
the fair market value of Common Stock as determined under Section 4, at the
time an Incentive Stock Option is granted under the Plan, the Committee may
issue an Incentive Stock Option to such person at 110% of the fair market
value of Common Stock determined by using the mean between the bid and
asked prices in the over-the-counter market at the close of the market on
the date such option was granted or if there is no public trading market,
110% of the fair market value of the common stock as determined by the
Committee. Any Incentive Stock Option granted to any employee who owns more
than 10% of Common stock shall not be exercisable after the expiration of
five years from the date such option is granted.
(c) Limitations on Grant of Option . Subject to the limitations under
Section 5(b) of this Plan, no Incentive Stock Option shall be granted which
may be exercised more than ten years after the date it was granted.
(d) Limitations on Exercise of Option- No optionee granted a stock
option under the Plan may exercise such option for six months following the
date of grant of the option and unless at all times during the period
beginning on the date of the granting of the option and ending on the day
three months before the date of such exercise such optionee was employed by
the Company or a corporation or subsidiary thereof issuing or assuming the
option in a transaction set forth under Section 6 of this Plan (as to an
Incentive Stock Option) or within three months of the date when the
optionee ceased to serve as a director of the Company (as to a Nonstatutory
Stock Option).
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(e) Payment for Shares. Payment in full, in cash, shall be made for
all shares pursuant to the exercise of an option, provided that the
Committee may permit payment to be made with shares of the Company's Common
Stock owned by optionee to be valued at the fair market value at the date
of exercise. All options shall be exercised for 100 shares, or a multiple
thereof, or for the full number of shares for which the option is then
exercisable. No optionee shall have the right to dividends or other rights
of a stockholder with respect to shares subject to an option until the
optionee has given written notice of exercise of the optionee's option and
paid in full for such shares.
(f) Manner of Exercise. Any option granted pursuant to this Plan may
be exercised at such time or times as set forth in the option, by the
delivery of written notice to any officer of the Company, other than the
optionee, together with payment in full, in cash, for the number of shares
to be purchased pursuant to such exercise. Such notice (i) shall state the
election to exercise the option, (ii) shall state the number of shares in
respect of which the option is being exercised, (iii) shall state the
optionee's address, (iv) shall state the optionee's social security number,
(v) shall contain such representations and agreements concerning optionee's
investment intent with respect to such shares of Common Stock as shall be
satisfactory to the Company's counsel, (vi) shall state that the
certificate evidencing the shares may be stamped with a restrictive legend
and the shares evidenced by such certificate will constitute "restricted
securities" as defined in Rule 144 promulgated under the Securities Act of
1933 and (vii) shall be signed by optionee.
(g) Limitation on Transfer of Shares. All shares of Common Stock
acquired by an optionee upon exercise of a stock option granted under the
Plan shall be deemed to be "restricted securities" as defined in Rule 144
promulgated under the Securities Act of 1933, as amended (the 'Act") and
the certificate evidencing such shares shall contain a legend as follows:
"The securities represented by this certificate may not be offered for
sale, sold or otherwise transferred except pursuant to an effective
registration statement under the Securities Act of 1933 (the 'Act') or
pursuant to an exemption from registration under the Act, the
availability of which is to be established to the satisfaction of the
Company."
(h) Other Representations or Warranties. Asa further condition to
exercise of any Incentive Stock Option granted under the Plan, the Company
may require each optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
(i) Holding Period of Shares. No shares of Common Stock acquired upon
exercise of a stock option granted under this Plan shall be sold or
otherwise disposed of, within the meaning of Section 425(c) of the Code, at
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any time before the sooner of two years from the date of the grant of an
option under this Plan or one year after the date of exercise of the
option. However, an optionee who has acquired shares of Common Stock upon
exercise of a stock option granted under this Plan, who transfers such
shares to a trustee, receiver, or other similar fiduciary in any proceeding
under Title 11 of the United States Bankruptcy Law or any other similar
insolvency proceeding at a time when such optionee is insolvent shall not
have been deemed to have made a transfer or disposition for purposes of
this subsection, nor shall one who acquires the shares from the Company
with another person in joint tenancy be deemed to have made a transfer or
disposition.
(j) Death of Optionee. If an optionee dies, any option previously
granted to the optionee shall be exercisable by the personal representative
or administrator of the deceased optionee's estate, or by any trustee,
heir, legatee or beneficiary who shall have acquired the option directly
from the optionee by will or by the laws of descent and distribution at any
time within one year after his death, but not more than ten years [five
years if Section 5(b) is applicable] after the date of granting of the
option, provided the deceased optionee was entitled to exercise such option
at the time of his death.
(k) Retirement. If an optionee's employment with the Company
terminates by reason of retirement, any option previously granted to him
shall be exercisable as determined in the sole discretion of the Committee
only within three months after the date of such termination, but not more
than ten years [five years if Section 5(b) is applicable] after the date of
granting of the option, and then only to the extent to which it was
exercisable at the time of such termination by retirement; provided,
however, that if the optionee dies within three months after termination by
retirement, any unexercised option, to the extent to which it was
exercisable at the time of his death, shall thereafter be exercisable for
one year after the date of his death, but not more than ten years after the
date of granting of the option.
(l) Disability If an optionee becomes disabled within the meaning of
Section 105(d)(4) of the Code, and at the time of such disability the
optionee is entitled to exercise such option, the optionee shall have the
right to exercise such option within one year after such disability
provided that the optionee exercises within ten years after the date of
grant thereof [or five years if Section 5(b) is applicable], and then only
to the extent to which it was exercisable at the time of such disability.
(m) Optionee's Termination. If an optionee's employment by the Company
is terminated for any reason other than death, retirement or disability,
any Incentive Stock Option previously granted to the optionee which was
exercisable at the time of termination shall terminate three months after
the date upon which the optionee's's employment terminates or at such
earlier time as provided in the terms of the optionee's option.
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(n) Leave of Absence. For the purposes of this Plan (i) a leave of
absence, duly authorized in writing by the Company for military service or
sickness, or for any other purpose approved by the Company, if the period
of such leave does not exceed 90 days and (ii) a leave of absence in excess
of 90 days, duly authorized in writing by the Company provided the
optionee's right to re-employment is guaranteed either by statute or by
contract, shall not be deemed a termination of employment.
(o) Nontransferability of Option . No option granted under this Plan
will be transferable by the optionee other than by will or the laws of
descent and distribution. During the lifetime of the optionee, the option
will be exercisable only by optionee.
6. Recapitalization or Merger. If the outstanding shares of Common Stock
which are eligible for the granting of options hereunder, or subject to options
theretofore granted, shall at any time be changed or exchanged by declaration of
a stock dividend, split-up, subdivision or combination of shares,
recapitalization, merger, consolidation or other corporate reorganization in
which the Company is the surviving corporation, the number and kind of shares
subject to this Plan or subject to any options previously granted, and the
option prices, shall be appropriately and equitably adjusted, so as to maintain
the proportionate number of shares without changing the aggregate option price.
In the event of a dissolution or liquidation of the Company, or a merger,
consolidation, sale of all or substantially all of its assets, or other
corporate reorganization in which the Company is not the surviving corporation
and the holder of Common Stock receives securities of another corporation, any
outstanding options hereunder shall terminate as of the effective date of such
event; provided that immediately prior to such event each optionee shall have
the right to exercise any unexpired option in whole or in part. The Company
shall afford each person who holds an option under this Plan with at least 30
days advance written notice of such event. However, no option shall be exercised
more than ten years [five years if Section 5(b) is applicable] after the
granting thereof. The existence of this Plan, or of any options hereunder, shall
not in any way prevent any transaction described in this section, nor shall
anything contained in this Plan prevent the substitution of a new option by a
surviving corporation.
7. Use of Proceed . Proceeds from the sale of stock pursuant to options
granted under this Plan shall constitute general funds of the Company.
8. Reservation of Issuance of Shares. The Company shall at all times during
the duration of this Plan reserve and keep available such number of shares of
Common Stock as will be sufficient to satisfy the requirements of all options
granted pursuant to this Plan, and shall pay all original issue and transfer
taxes with respect to the issuance of shares pursuant to the exercise of such
options, and shall pay all of the fees and expenses necessarily incurred in
connection with the exercise of such options and the issuance of such shares.
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9. Amendments. The Board of Directors may amend, alter, or discontinue this
Plan, but no amendment, alteration or discontinuation shall be made which would
impair the rights of any optionee under any options previously granted, without
the optionee's consent, or which, without the approval of the stockholders,
would:
(i) except as is provided in Section 6 of this Plan, increase the
total number of shares reserved for the purposes of the Plan;
(ii) decrease the option price to less than 100% of the fair market
value [or 110% if Section 5(b) is applicable] on the date of the granting
of the option;
(iii) change the persons (or class of persons) eligible to receive
options under the Plan;
(iv) increase the number of shares which may be subject to
Nonstatutory Stock Options granted to directors who are not employees of
the Company under this Plan; or
(v) increase the aggregate fair market value of options which may be
granted under this Plan to any person and which become exercisable in any
year to an amount in excess of $100,000.
10. Indemnification.- In addition to such other rights of indemnification
as they may have as directors, the members of the Committee and the Board of
Directors shall be indemnified by the Company against reasonable expenses,
including attorneys' fees actually incurred in connection with the defenses of
any action, suit or proceeding, or in connection with any appeal therefrom, to
which they or any of them may be a party by reason of any action taken or
failure to act under or in connection with the Plan or any option granted
thereunder, and against all amounts paid by them in settlement thereof (provided
such settlement is approved by independent legal counsel selected by the
Company) or paid by them in satisfaction of judgment in any action, suit or
proceeding, except in relation to matters as to which it shall be adjudged in
such action, suit or proceeding, that such member of the Board of Directors is
liable for gross negligence, fraud or willful misconduct in the performance of
the director's duties so long as within 60 days after institution of ally such
action, suit or proceeding, the director shall in writing offer the Company the
opportunity, at its own expense, to handle and defend such action, suit or
proceeding.
11. Approval of Shareholders. The Plan shall take effect upon approval by
the holders of a majority of the shares of the Company's Common Stock present at
a meeting attended by a quorum of shareholders, which approval must occur within
12 months after the date the Plan is adopted by the Board of Directors.
12. Miscellaneous. Unless the context requires otherwise, words denoting
the as denoting the singular, and words of one gender may be construed as
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<PAGE>
denoting such other gender as is appropriate. Paragraph headings are not to be
considered part of this Plan and are included solely for convenience and are not
intended to be full or accurate descriptions of the contents thereof.
Adopted December 31, 1990.
WILLARD PEASE OIL AND GAS COMPANY,
a Colorado corporation
ATTEST By /s/ Willard Pease, Jr.
-----------------------------------
Willard Pease, Jr., President
/s/ Lily Roeland
- ---------------------------------
Lily Roeland, Secretary
S E A L
-8-
PEASE OIL AND GAS COMPANY
1994 EMPLOYEE STOCK OPTION PLAN
1. Purpose of Plan. The purpose of this 1994 Employee Stock Option Plan
("Plan") is to secure and retain employees responsible for the success of Pease
Oil and Gas Company ("Company"), to motivate such persons to exert their best
efforts on behalf of the Company, to encourage stock ownership and to provide
such persons with proprietary interests in, and a greater concern for, the
welfare of and an incentive to continue service with, the Company. For purposes
of this Plan, the term "Company" shall include where appropriate in the context
used any "parent corporation" or "subsidiary corporation" of the Company, as
those terms are defined in Sections 424(e) and (f) of the Code, whether in
existence on the date of adoption of the Plan or formed after the adoption of
this Plan. Options issued pursuant to this Plan will constitute, incentive stock
options within the meaning of ss. 422 of the Internal Revenue Code of 1986, as
amended ("Code"), at the time of grant ("Incentive Stock Options"), or other
options ("Nonstatutory Stock Options"). Incentive Stock Options and Nonstatutory
Stock Options may both be granted hereunder and any option granted which for any
reason does not qualify as an Incentive Stock Option shall be a Nonstatutory
Stock Option. Unless the context requires otherwise, the term "Option" in this
Plan refers to both Incentive Stock Options and Nonstatutory Stock Options.
2. Stock Subject to-the Plan. The number of shares of the Company's $10 par
value common stock ("Common Stock") which may be optioned under this Plan is
150,000 shares. Such shares may consist, in whole or in part, of unissued shares
or treasury shares. The maximum number of shares issuable pursuant to this Plan,
including shares subject to outstanding options, shall be subject to adjustment
as provided in Section 6 of this Plan. No option shall be granted under this
Plan after June 3, 2004. The aggregate fair market value of the shares subject
to Incentive Stock Options granted to any optionee which become exercisable in a
particular calendar year shall not exceed $100,000. For purposes of such
limitation, the fair market value of Common Stock shall be determined as of the
J date of grant and the limitations shall be applied by taking into account
Incentive Stock Options in the order granted. For purposes of this Plan, market
value of shares subject to an option shall be determined as follows:
(i) If the Common Stock is listed on the New York Stock Exchange, the
American Stock Exchange or such other securities exchange designated by the
Committee, or admitted to unlisted trading privileges on any such exchange,
or if the Common Stock is quoted on a National Association of Securities
Dealers, Inc. system that reports closing prices, the fair market value
shall be the closing price of the Common Stock as reported by the Wall
Street Journal on the day the fair market value is to be determined, or if
no such price is reported for such day, then the determination of such
closing price shall be as of the last immediately preceding day on which
the closing price is so reported; or
<PAGE>
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges or so quoted, the fair market value shall be the average
of the last reported highest bid and the lowest asked prices quoted on the
National Association of Securities Dealers, Inc. Automated Quotations
System or, if not so quoted, then by the National Quotation Bureau, Inc. on
the day the fair market value is determined; or
(iii) If the Common Stock is not so listed or admitted to unlisted
trading privileges or so quoted, and bid and asked prices are not reported,
the fair market value shall be determined in such reasonable manner as may
be prescribed by the Committee.
If any outstanding Option under this Plan for any reason expires or is
terminated, the shares of Common Stock allocable to the unexercised portion of
such Option may again be optioned under this Plan subject to the limitations,
terms and conditions of this Plan. The Board of Directors, and the proper
officers of the Company shall from time to time take appropriate action required
for delivery of Common Stock, in accordance with any exercise of Options under
this Plan.
3. Administration. Administration of the Plan shall be administered by the
Compensation Committee of the Board of Directors of the Company, hereinafter
referred to as the "Committee." The Committee shall consist of at least two
members of the Board of Directors of the Company chosen by the Board, who as of
the date of any action of the Committee, are not, and have not been during the
preceding 12 months, employees of the Company. if the Committee thus established
shall consist of fewer than two members at the time of any action by the
Committee, then the directors shall select enough other shareholders to serve on
the Committee to have two members and to meet any requirements of ss. 422 of the
Code and regulations adopted thereunder and regulations adopted under Section
16(b) of the Securities Act of 1934, as amended ('1934 Act"). With respect to
persons subject to Section 16 of the 1934 Act, transactions under this Plan are
intended to comply with all applicable conditions of Rule 16b-3 or its
successors under the 1934 Act. To the extent any provision of the Plan or action
by the Committee fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
The decision of a majority of those present at any meeting of the Committee
where a quorum consisting of a majority of the Committee is present shall
constitute the decision of the Committee. The Committee is authorized and
empowered to administer the Plan insofar as it relates to Options and,
consistent with the terms of the Plan, to (a) select the employees to whom
Options are to be granted and to fix the number of shares and other terms and
conditions of the Options to be granted; (b) determine the date upon which
Options shall be granted and the terms and conditions of the granted Options in
a manner consistent with the Plan, which terms need not-be identical as between
Options or optionees; (c) interpret the Plan and the Options granted under the
Plan; (d) adopt, amend and rescind rules and regulations for the administration
- 2 -
<PAGE>
of the Plan insofar as it relates to Options; and (e) direct the Company to
execute Stock Option agreements pursuant to the Plan. All such actions of the
Committee shall be binding upon all participants in the Plan.
4. Eligibility. The employees of the Company who shall be eligible to
receive grants of Options under this Plan shall be those key employees,
including officers or directors of the Company who are also employees, who are
from time to time responsible for the management, growth or success of the
business of the Company and who shall have been selected by the Committee.
Officers of the Company who are also directors shall be eligible to participate
in this Plan if they are also employees. The directors of the Company and other
stockholders who are not also employees shall not be eligible to receive grants
of Options under the Plan.
The persons to receive Options under the Plan shall be selected from time
to time by the Committee, in its sole discretion, and the Committee shall
determine, in its sole discretion, the number of shares to be covered by the
Options granted to each person selected. Subject to the exception under Section
5(b), no person may be granted an Option if such person, at the time the Option
is granted, owns shares of Common Stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company. For purposes of
calculating such stock ownership, the attribution rules of stock ownership set
forth in Section 424(d) of the Code shall apply. Accordingly, an optionee, with
respect to whom such 10% limitation is being determined, shall be considered as
owning Common Stock owned directly or indirectly by or for the optionee's
brothers and sisters (whether by the whole or half-blood), spouse, ancestors and
lineal descendants; and any Common Stock owned directly or indirectly by or for
a corporation, partnership, estate or trust, shall be considered as being owned
proportionately by or for its shareholders, partners or beneficiaries.
5. Terms and Conditions. All Options granted under this Plan shall be
subject to the terms and conditions of this Plan, including all of the
following:
(a) Option Price . Subject to the provisions of Section 5(b), the
Option price per share shall be determined by the Committee but shall not
be less than 100% of the fair market value of such shares at the time the
Option is granted.
(b) More than 10% Shareholder. If an employee owns more than 10% of
the total combined voting power of all classes of stock of the Company as
determined under Section 4, at the time an Incentive Stock Option is
granted under this Plan, the Committee may issue an Incentive Stock Option
to such person at 110% of the fair market value of the Common Stock. Any
Incentive Stock Option granted to any such employee shall not be
exercisable after the expiration of five years from the date such Incentive
Stock Option is granted.
(c) Limitations on Grant of Option. Subject to the limitations under
Section 5(b) of this Plan, no Option shall be granted which may be
exercised more than ten years after the date it was granted.
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<PAGE>
(d) Limitations on Exercise of Options. No optionee granted an Option
under this Plan may exercise such Option for six months following the date
of grant of the Option and unless at all times during the period beginning
on the date of the granting of the Option and ending on the day three
months before the date of such exercise such optionee was employed by the
Company or a corporation or subsidiary thereof issuing or assuming the
Option in a transaction set forth under Section 6 of this Plan.
(e) Payment for Shares Payment in full, in cash, shall be made for all
shares issued pursuant to the exercise of an Incentive Stock Option,
provided that the Committee may permit payment to be made with shares of
the Company's Common Stock owned by the optionee to be valued at the fair
market value at the date of exercise. All Options shall be exercised for
100 shares, or a multiple thereof, or for the full number of shares for
which the Option is then exercisable. No optionee shall have the right to
dividends or other rights of a stockholder with respect to shares subject
to an Option until the optionee has given written notice of exercise of the
optionee's Incentive Stock Option and paid in full for such shares.
(f) Manner of Exercise . Any Option granted pursuant to this Plan may
be exercised at such time or times as set forth in the Option, by the
delivery of written notice to any officer of the Company, other than the
optionee, together with payment in full, for the number of shares to be
purchased pursuant to such exercise. Such notice (i) shall state the
election to exercise the Option, (ii) shall state the number of shares in
respect of which the Option is being exercised, (iii) shall state the
optionee's address, (iv) shall state the optionee's social security number,
(v) shall contain such representations and agreements concerning optionee's
investment intent with respect to such shares of Common Stock as shall be
satisfactory to the Company's counsel, (vi) shall state that the
certificate evidencing the shares may be stamped with a restrictive legend
and the shares evidenced by such certificate will constitute "restricted
securities" as defined in Rule 144 promulgated under the Securities Act of
1933, as amended (the 'Act") (unless the shares to be acquired are
registered under the Act) and (vii) shall be signed and dated by optionee.
(g) Limitation on Transfer of Shares. Unless shares issued upon
exercise are at the time of exercise registered under the Securities Act of
1933, as amended, all shares of Common Stock acquired by an optionee upon
exercise of an Option granted under this Plan shall be deemed to be
"restricted securities" as defined in Rule 144 promulgated under the Act
and the certificate evidencing such shares shall contain a legend as
follows:
"The securities represented by this certificate may not be offered for
sale, sold or otherwise transferred except pursuant to an effective
registration statement under the Securities Act of 1933 (the 'Act') or
pursuant to an exemption from registration under the Act, the
availability of which is to be established to the satisfaction of the
Company."
- 4 -
<PAGE>
(h) Other Representations or Warranties. As a further condition to the
exercise of any Option granted under this Plan, the Company may require
each optionee to make any representation and warranty to the Company as may
be required by any applicable law or regulation.
(i) Holding Period of Shares. No shares of Common Stock acquired upon
exercise of an Incentive Stock Option granted under this Plan shall be sold
or otherwise disposed of, within the meaning of Section 424(c) of the Code,
at aw time before the sooner of two years from the date of the grant of an
Incentive Stock Option under this Plan or one year after the date of
exercise of the Incentive Stock Option. However, an optionee who has
acquired shares of Common Stock upon exercise of a stock option granted
under this Plan, who transfers such shares to a trustee, receiver, or other
similar fiduciary in any proceeding under Title 11 of the United States
Bankruptcy Law or any other similar insolvency proceeding at a time when
such optionee is insolvent shall not have been deemed to have made a
transfer or disposition for purposes of this subsection, nor shall one who
acquires the shares from the Company with another person in joint tenancy
be deemed to have made a transfer or disposition. Shares of Common Stock
acquired by exercise of a Nonstatutory Stock Option under the Plan shall
not be sold or otherwise disposed of at any time before one year from the
date of the grant of the Nonstatutory Stock Option.
(j) Death of Optionee. If an optionee dies, any Option previously
granted to the optionee shall be exercisable by the personal representative
or administrator of the deceased optionee's estate, or by any trustee,
heir, legatee or beneficiary (collectively referred to for convenience as
the "legal representative") who shall have acquired the Option directly
from the optionee by will or by the laws of descent and distribution at any
time within one year after his death, but not more than ten years [five
years if Section 5(b) is applicable] after the date of granting of the
Option, provided the deceased optionee was entitled to exercise such Option
at the time of his death. Prior to the exercise of any such Option, the
legal representative of the deceased optionee shall furnish to the Company
written notice of such exercise, together with a certified copy of letters
testamentary or other proof deemed sufficient by the Committee of the right
of the legal representative to exercise such Option in accordance with the
provisions of this Plan.
(k) Retirement. If an optionee's employment with the Company
terminates by reason of retirement, any Option previously granted to him
shall be exercisable as determined in the sole discretion of the -Committee
at any time within three months after the date of such termination, but not
more than ten years [five years if Section 5(b) is applicable] after the
date of granting of the Option, and then only to the extent to which it was
exercisable at the time of such termination by retirement; provided,
- 5 -
<PAGE>
however, that if the optionee dies withinl three months after termination
by retirement, any unexercised Option, to the extent to which it was
exercisable at the time of his death, shall thereafter be exercisable for
one year after the date of death death, but not more than ten years [five
years if Section 5(b) is applicable] after the date of granting of the
Option.
(1) Disability. If an optionee becomes disabled within the meaning of
Section 22(e)(3) of the Code, and at the time of such disability the
optionee is entitled to exercise an Option, the optionee shall have the
right to exercise such Option within one year after such disability
provided that the optionee exercises within ten years after the date of
grant thereof [or five years if Section 5(b) is applicable], and then only
to the extent to which it was exercisable at the time of such disability.
(m) Optionee's Termination. If an optionee's employment by the Company
is terminated for any reason other than death, retirement or disability,
any Option previously granted to the optionee which was exercisable at the
time of termination shall terminate three months after the date upon which
the optionee's employment terminates or at such earlier time as provided in
the terms of the Option granted to the optionee.
(n) Leave of Absence. For the purposes of this Plan (i) a leave of
absence, duly authorized in writing by the Company for military service or
sickness, or for any other purpose approved by the Company, if the period
of such leave does not exceed 90 days and (ii) a leave of absence in excess
of 90 days, duly authorized in writing by the company provided the
optionees right to re-employment is guaranteed either by statute or by
contract, shall not be deemed a termination of employment.
(o) Nontransferability of Options. No Option granted under this Plan
will be transferable by the optionee other than by will or the laws of
descent and distribution. During the lifetime of the optionee, the Option
will be exercisable only by optionee.
(p) Exercisability of Options. No optionee granted an Option under
this Plan shall be entitled to exercise such Option at any time after the
expiration of such Option as specified in the option certificate evidencing
such Option.
6. Adjustments Upon Recapitalization, Merger, Etc, If the outstanding
shares of $10 par value Common Stock of the Company shall at any time be changed
or exchange by declaration of a stock dividend, split-up, subdivision or
combination of shares, recapitalization, merger, consolidation or
other,.corporate reorganization in which the Company (including a merger or
similar reorganization which effects a reincorporation of the Company in a
different county or province) is the surviving corporation, the number and kind
of shares subject to this Plan or subject to any Options previously granted, and
the Option prices, shall be appropriately and equitably adjusted, so as to
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<PAGE>
maintain the proportionate number of shares without changing the aggregate
Option price. In the event of a dissolution or liquidation of the Company, or a
merger, consolidation, sale of all or substantially all of its assets, or other
corporate reorganization in which the Company is not the surviving corporation
and the holder of Common Stock receives securities of another corporation, then
any outstanding Options hereunder shall terminate as of the effective date of
such event; provided that immediately prior to such event each optionee shall
have the right to exercise any unexpired Option in whole or in part whether or
not the Option would otherwise be exercisable. The Company shall afford each
person who holds an Incentive Stock Option under this Plan with at least 30 days
advance written notice of such event. The existence of this Plan, or of any
Options hereunder, shall not in any way prevent any transaction described in
this section, nor shall anything contained in this Plan prevent the substitution
of a new Option by a surviving corporation.
7. Use of Proceeds from the sale of stock pursuant to Options granted under
this Plan shall constitute general funds of the Company may be used for such
general corporate purposes as the Company's Board of Directors shall determine.
8. Reservation of Issuance of Shares. The Company shall at all times during
the duration of this Plan reserve and keep available such number of shares of
Common Stock as will be sufficient to satisfy the requirements of all Options
granted pursuant to this Plan, and shall pay all original issue and transfer
taxes with respect to the issuance of shares pursuant to the exercise of such
Options, and shall pay all of the fees and expenses necessarily incurred in
connection with the exercise of such Options and the issuance of such shares.
9. Amendments. The Board of Directors may amend, alter, or discontinue this
Plan, but no amendment, alteration or discontinuation shall be made which would
impair the rights of any optionee under any Options previously granted, without
the optionee's consent, or which, without the approval of the stockholders,
would:
(i) except as is provided in Section 6 of this Plan, increase the
total number of shares reserved for the purposes of this Plan;
(ii) decrease the Option price to less than 100% of the fair market
value [or 110% if Section 5(b) is applicable] on the date of the granting
of the Option;
(iii) change the persons (or class of persons) eligible to receive
Options under this Plan;
(iv) increase the aggregate fair market value of the Common Stock
underlying the Options which may be granted under this Plan to any person
and which become exercisable in any year to an amount in excess of
$100,000; or
(v) modify the provisions of the Plan relating to eligibility.
- 7 -
<PAGE>
10. Indemnification. In addition to such other rights of indemnification as
they may have as directors, the members of the Committee and the Board of
Directors shall be indemnified by the Company against reasonable expenses,
including attorneys' fees actually incurred in connection with the defense of
any action, suit or proceeding, or in connection with any appeal therefrom, to
which they or any of them may be a party by reason of any action taken or
failure to act under or in connection with this Plan or any Option granted
hereunder, or shares purchased pursuant to the exercise of Options under this
Plan, and against all amounts paid by them in settlement thereof (provided such
settlement is approved by independent legal counsel selected by the Company) or
paid by them in satisfaction of judgment in any action, suit or proceeding,
except in relation to matters as to which it shall be adjudged in such action,
suit or proceeding, that such member of the Board of Directors is liable for
gross negligence, fraud or willful misconduct in the performance of the
director's duties so long as within 60 days after institution of any such
action, suit or proceeding, the director shall in writing offer the Company the
opportunity, at its own expense, to handle and defend such action, suit or
proceeding.
11. Approval of Shareholders. This Plan shall take effect upon approval by
the holders of a majority of the issued and outstanding shares of the Company's
Common Stock present, or represented, and entitled to vote, at a meeting at
which a quorum of shareholders of the Company is present or represented. Such
approval must occur within 12 months after the date this Plan is adopted by the
Board of Directors.
12. Miscellaneous. Unless the context requires otherwise, words denoting
the singular may be construed as denoting the plural, and words denoting the
plural may be construed as denoting the singular, and words of one gender may be
construed as denoting such other gender as is appropriate. Paragraph headings
are not to be considered part of this Plan and are included solely for
convenience and are not intended to be fall or accurate descriptions of the
contents thereof.
Adopted by Directors: April 11, 1994
Adopted by Shareholders: June 3, 1994
PEASE OIL AND GAS COMPANY
organized under the laws of Nevada
ATTEST:
By /s/ Willard Pease, Jr.
------------------------------------
, Chairman
-------------
/s/ Lily Roeland
- --------------------------------
, Secretary
- -------------
S E A L
- 8 -
EMPLOYMENT AGREEMENT
THIS AGREEMENT is effective as of December 27, 1994, by and between Pease
Oil and Gas Company, a Nevada corporation ("Corporation"), and Patrick J. Duncan
("Employee").
The Corporation desires to employ the Employee and the Employee desires to
be employed by the Corporation upon the terms and conditions set forth in this
Agreement.
The Parties hereby enter into this Agreement (i) setting forth their mutual
promises and understandings and (ii) Mutually acknowledging the receipt and
sufficiency of consideration to enter into this Agreement and the mutual
promises, conditions and understandings set forth below.
ARTICLE I
EMPLOYMENT DUTIES AND RESPONSIBILITIES
Section 1.1. Employment. The Corporation hereby employs the Employee as
Chief Financial Officer. The Employee accepts such employment and agrees to
abide by the Articles of Incorporation, Bylaws and decisions of the Board of
Directors of the Corporation.
Section 1.2. Duties and Responsibilities. The Employee is employed pursuant
to the terms of this Agreement and agrees to render full-time services to the
Corporation under this Agreement. The Employee shall perform such duties as (i)
are specified by the Bylaws of the Corporation and (ii) may be determined and
assigned to him from time to time by the Board of Directors of the Corporation.
Initially, Employee shall perform the duties set forth on Exhibit A~ The
Employee may not pursue any other material business activities on his own behalf
unless the Board of Directors in a formal written statement expressly authorizes
the Employee to do so, provided that Employee shall be authorized to continue to
manage and operate various personal and family assets unrelated to the business
of the Corporation.
Section 1.3. Working Facilities, The Employee shall be based in the Grand
Junction, Colorado metropolitan area where the Corporation shall provide
reasonable office facilities. The Employee agrees to travel to the extent
necessary to perform his duties hereunder, including travel to the various
properties and field offices of the Corporation. The Corporation shall provide
reasonable transportation to perform these duties. Corporation agrees to
provide, at Corporation's cost, adequate transportation for Employee to perform
his duties in the field and to reimburse Employee for such costs, subject to an
accounting of such costs by Employee.
Section 1.4. Vacations. The Employee shall be entitled to vacations
totaling at least three weeks per year. Each vacation shall be taken by the
Employee over a period meeting with the approval of the Board of Directors of
the Corporation and no one vacation shall be so long as to disturb the
operations of the Corporation. Should the business of the Corporation preclude
the Employee from taking all vacation earned during a year, then, with the
consent of the Board of Directors, the vacation shall be accrued and available
to be taken by the Employee in subsequent years. If the Board of Directors does
not consent to such accrual of vacation time, the Corporation shall pay the
- 1 -
<PAGE>
Employee an amount equal to the number of days of unused vacation times the
Employee's equivalent daily compensation. Employee may accrue a maximum of 20
unused vacation days per year.
Section 1.5. Expenses.
A. Employee Reimbursed for Expenses. During the period of employment
pursuant to this Agreement, the Employee will be reimbursed for reasonable
expenses incurred for the benefit of the Corporation in accordance with the
general policy of the Corporation as adopted from time to time by the
Corporation's Board of Directors, and specifically approved beforehand by
the Board of Directors. Those reimbursable expenses shall include, but
shall not be limited to, entertainment and promotional expenses,
transportation expenses, and the expenses of membership in certain civic
groups and business organizations. Any other reimbursable expenses shall be
set forth on Exhibit B.
B. Additional Expenses. In addition to such reimbursable expenses, the
Employee may incur in the course of the employment by the Corporation
certain other necessary expenses of the business which the Employee will be
required to pay personally but which the Corporation shall be under no
obligation to reimburse or otherwise compensate the Employee, including,
but not limited to, the cost of maintaining office facilities in the
Employee's home or similar items of reasonable and necessary expense
incurred by the Employee in the course of employment. However, nothing in
this Section shall prevent the Corporation from assuming to pay or
reimbursing the Employee for any such expense if the Board of Directors so
determines.
C. Employee Shall Account for Expenses to Corporation. With respect to
any expenses which are to be reimbursed by the Corporation to the Employee,
the Employee agrees to make an itemized accounting to the Corporation (1)
for proper accounting by the Corporation and (ii) in detail sufficient to
entitle the Corporation to an income tax deduction for paid items if
deductible.
Section 1.6. Review of Work. The Employee's performance shall at all times
be subject to review by the Board of Directors, in its sole discretion.
[change initialed by PJD and WPJ--words "President and/or added before
"Board of Directors" and "its" changed to "their."]
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<PAGE>
ARTICLE 11
COMPENSATION
Section 2.1. Salary. The Corporation shall pay a base salary to the
Employee during the term of this Agreement as described on Exhibit C of this
Agreement.
Section 2.2. Death During Employment. In the event of the Employee's death
during the term of this Agreement the Corporation shall pay to the Employee's
surviving souse or, if there is no surviving spouse, to Employee's children on a
pro-rata basis to each child, bi~weekly, the compensation which otherwise would
be payable to the Employee for a six month period following the Employee's death
at the rate of compensation described in Exhibit C.
Section 2.3. Benefits. In addition to all other compensation, the Employee
shall be entitled to participate in any pension plans, profit sharing plans,
medical or dental reimbursement plans, group term Or other life insurance plans,
medical or hospitalization insurance plans and any other group employee benefit
plan which may be established by the Corporation. Such participation shall be in
accordance with the terms of any such plan. The Corporation shall pay premiums
for and shall include the Employee, his spouse, and dependents in any major
medical or hospitalization insurance program established or utilized by the
Corporation on behalf of its executive officers if requested to do so by
Employee.
Section 2.4. Life and Disability Insurance. The Corporation may obtain for
its own benefit such amounts of key executive term life insurance on the life of
the Employee as it may deem necessary or advisable. The proceeds of this may be
used to pay Corporation obligations under Sections 2.2 and 3.6 of this contract;
but the Corporation's obligations thereunder shall be absolute.
ARTICLE III
TERM OF EMPLOYMENT AND TERMINATION
Section 3.1. Term. This Agreement shall be in effect for a period until
termination in accordance with this Article III (the "Term").
Section 3.2. Termination by the Corporation Without Cause. The Board of
Directors, without cause, may terminate this Agreement at any time upon 30 days
written notice to the Employee, unless Section 3.7 applies in which case this
Section 3.2 shall be inapplicable. In such event, the Employee, if requested by
the Board of Directors, shall continue to render the services required under
this Agreement for 30 days. Upon termination under this Section 3.2, except as
provided in Section 3.7, the Employee shall continue to be paid compensation as
set forth in Exhibit C of this Agreement up to a date which is 12 months after
the Employee receives written notice of termination, plus all outstanding stock
options will be extended for a period of two years from the date of termination.
- 3 -
<PAGE>
Section 3.3. Termination by the Employee Without Cause. The Employee,
without cause, may terminate this Agreement upon 90 days written notice to the
Corporation. In such event, the Employee shall, if requested by the Corporation,
continue to render the services required under this Agreement to the date
identified in the Employee's written notice. The Employee shall continue to be
paid compensation at the rate set forth in Exhibit C of this Agreement for at
least 30 days and thereafter through the earlier of (i) the date identified in
the Employee's written notice or (ii) the date through which the Employee
furnishes services at the request of the Corporation, and no further payments
shall be made by the Corporation unless agreed to by the Board of Directors.
Section 3.4. Termination by the Corporation With Cause. The Corporation may
terminate the Employee's employment for cause, which shall be limited to the
following: (a) the Employee's knowing and willful or reckless commission of an
act of gross misconduct which the Employee knows or reasonably should have known
at the time would be injurious to the Corporation; or (b) the Employee's refusal
to devote substantially all his time and efforts to his duties under this
Agreement after the Board of Directors has notified the Employee in writing of
his noncompliance; or (c) the Employee's continued refusal, after written notice
from the Board of Directors to follow the specific instructions of the Board of
Directors. Termination pursuant to this subsection shall result in no further
compensation being due or payable to the Employee hereunder from and as of the
date of such termination.
Section 3.5. Termination Upon Death of Em . Subject to Section 2.2 of this
Agreement, this Agreement shall be terminated in the event of the Employee's
death.
Section 3.6. Termination Upon Disability of - Employee. The Corporation may
terminate the Employee's employment if, during the Term, the Employee becomes
physically or mentally disabled, whether totally or partially, so that the
Employee is unable substantially to perform his services under this Agreement
(i) for a period of two consecutive months or (ii) for shorter periods
aggregating four months during any twelve month period, by written notice to the
Employee. Notwithstanding any such disability, the Corporation shall continue to
pay the Employee the greater of (a) his full salary up to and including the date
of such termination and for six months thereafter, or (b) any amounts payable to
Employee under any disability or similar insurance.
Section 3.7. Termination Upon Change of Control. Notwithstanding the
provisions of Section 3.2, if the Employee is terminated as a direct or indirect
result of either (i) actions taken by the Board of Directors following the
replacement of at least 40% of the members of the Board of Directors with
persons who are not also employees of the Corporation in any 15 month period
which were opposed by a majority of the directors before the replacement or (ii)
a shareholder or group of shareholders or a person acting on behalf of
shareholders increasing his, hers, their or its ownership of the Corporation's
outstanding stock by more than 10% within 24 months of the Employee's
termination, then the Employee shall, as of the date of termination, be paid in
a lump sum an amount equal to two years annual compensation at the rate set
forth in Exhibit C of this Agreement as then in effect, and all outstanding
options will be extended for a period of two years from the date of termination.
Upon such a change of control, at Employee's option, Corporation shall
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<PAGE>
immediately repurchase any outstanding shares of the Corporation's stock which
are held by Employee at the per share price equal to the greater of the price
paid per share by Employee or the fair market value of the stock at the date of
termination. If the Corporation does not pay the amount specified by this
Section 3.7 on a timely basis, the unpaid amount shall bear interest at the
greater of 10% per annum or the prime rate at Colorado National Bank on the date
of such termination until paid and the Corporation shall pay all costs and
expenses, including attorney's fees, incurred by the Employee in collecting all
amounts owed under this Section 3.7.
ARTICLE IV
DISCLOSURE OF INFORMATION
Section 4.1. Definitions.
4. 1. 1. As used herein, the term "proprietary information" shall mean
technical information and know-how concerning the Corporation's oil and gas
exploration, development, production and servicing business and its related
equipment, books, maps and records developed by or otherwise owned or
controlled by the Corporation.
4.1.2. As used herein, the term "trade secrets" shall mean any
proprietary information and any other non-public information used by the
Corporation, including such matters as geologic records, maps, surveys,
documents evidencing interests in real property, patented or unpatented
technology, supplier information, books, processes, concepts, methods,
formulae or technique know-how, customer or vendor lists or information or
development plans or strategy, owned or controlled by the Corporation or
otherwise subject to an obligation or intent of the Corporation to maintain
the confidentiality thereof which is of a proprietary or secret nature and
which is or may be applicable to, or related to the business, equipment or
services, present or future, of the Corporation or the oil and gas
exploration and development business of the Corporation, or the contractual
relationships of the Corporation with customers or clients.
4.1.3. As used herein, the term "document" shall mean any data, notes,
drafts, manuals, blueprints, maps, notebooks, reports, photographs,
drawings, sketches or other records, in any tangible form whatsoever,
whether originals, copies, reproductions, or excerpts, produced or obtained
from the Corporation by the Employee or any other representative of the
Corporation which relates to trade secrets of the Corporation.
4.1.4. As used herein, the term "Corporation invention" shall mean any
invention, discovery, improvement, or trade secret, whether patentable or
not and whether or not reduced to practice, conceived or learned by the
Employee either alone or Jointly with others, while employed by the
Corporation, which relates to or results from the actual or anticipated
investigation, research, development, or production of the Corporation, or
which results to any extent from use of the Corporation's facilities.
- 5 -
<PAGE>
4.1.5. As used herein, the term "Corporation" shall mean not only the
Corporation as first defined above, but also the Corporation's subsidiaries
and all affiliates of the Corporation.
Section 4.2. Employee Shall Not Disclose Proprietary Information or Trade
Secrets. The Employee recognizes that the trade secrets of the Corporation, as
they may exist from time to time, are a valuable, special and unique asset of
the Corporation. The Employee will not, during or for a period of 24 months
after termination of the Employee's employment relationship under this
Agreement, disclose or confirm the Corporation's trade secrets or any part
thereof to any person, firm, corporation, association or other entity for any
reason or purpose whatsoever, without the prior written authorization to do so
from the Corporation.
Further, all documents shall be property of the Corporation and the
Employee shall not remove these documents upon termination of employment with
the Corporation except pursuant to a specific authorization in writing from the
Board of Directors of the Corporation. The Employee agrees that any document
produced or obtained by the Employee while employed by the Corporation shall be
the sole and exclusive property of the Corporation. The Employee agrees to
return any such document to the Corporation immediately upon termination of
employment with the Corporation, or upon request of the Corporation.
In no event shall the Employee copy or remove any documents of any person,
company or association with whom the Employee did not directly work while an
Employee of the Corporation.
The Employee recognizes and acknowledges that much of the information and
knowledge which he has received or will receive by virtue of his employment with
the Corporation is or will be proprietary information and trade secrets which
have unique, special value to the successful operation of the Corporation's
business. The Employee agrees not to disclose any proprietary information or
trade secrets to any other person for any purpose, for his own direct or
indirect benefit or the benefit of any other employer or affiliate during the
term of this Agreement or for a period of 24 months thereafter without the prior
written consent of the Corporation.
The aforesaid noncompetition covenant shall remain in any effect at all
times while the Employee is in the employ of the Corporation and for a period of
24 months after termination of the Employee's relationship with the Corporation
in any capacity whatsoever, regardless of the reason for termination or
cessation of the Employee's relationship. The aforesaid covenant is intended to
be a reasonable restriction on the Employee. If all, or any portion of the
covenant is held unreasonable or unenforceable by a court or agency having valid
Jurisdiction, the Employee expressly agrees to be bound by any lesser covenant
subsumed within the terms of such covenant that imposes the maximum duty
permitted by law, as if the resulting covenant were separately stated in and
made apart of this Article IV.
Section 4.3. Duty of Loyalty; Conflicts of Interest. 'The Employee agrees
that he will not, while employed by the Corporation and for a period of 24
months thereafter, be an employee or consultant, or assist in any way, or work
directly or indirectly on behalf of, any person, corporation, firm or other
entity engaged in, or proposing to engage in, a line of business which would
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<PAGE>
directly compete or conflict with the Corporation's business, without the prior
express written consent of the Corporation. Notwithstanding the foregoing,
however, the Corporation and the Employee acknowledge that at the present time,
the Employee individually owns various interests in certain oil and gas
properties in which the Corporation also owns interests and/or which are
operated by the Corporation; and the parties agree that in such circumstances,
where the Board of Directors is fully informed about and approves of the
Employee's individual interest in a business opportunity of the Corporation, it
shall not be considered a violation of this Section 4.3. The Employee agrees
that he will not use any assets of the Corporation for his own individual
projects and that he will not use any proprietary information to the
disadvantage of the Corporation. The Employee agrees that he will not interfere
with the right of the Corporation to do business with any person, corporation,
firm or other entity.
Section 4.4. Enforcement. The Employee acknowledges that monetary damages
would not adequately or fairly compensate the Corporation for breach of any of
the obligations of the Employee under Article IV of this Agreement and agrees
that in the event of any breach or threatened breach the Corporation shall be
entitled to seek appropriate injunctive relief from a court of competent
jurisdiction, in addition to any other relief or damages which may be available.
ARTICLE V
MISCELLANEOUS
Section 5.1. Colorado Law. It is the intention of the parties hereto that
this Agreement and its performance hereunder be construed in accordance with and
pursuant to the laws of the state of Colorado and that, in any action, special
proceedings, or other proceeding that may be brought arising out of, in
connection with, or by reason of this Agreement, the law of the state of
Colorado shall be applicable and shall govern to the exclusion of any forum,
without regard to the Jurisdiction in which any action or special proceeding may
be instituted.
Section 5.2. No Waiver. No provision of this Agreement may be waived except
by an agreement in writing signed by the waiving party. A waiver of any term or
provision shall not be construed as a waiver of any other term or provision.
Section 5.3. Amendment. This Agreement may be amended, altered or revoked
at any time, in whole or in part, by filing with this Agreement a written
instrument setting forth such changes, signed by all of the parties.
Section 5.4. Effect of Agreement. The terms of this Agreement shall be
binding upon and inure to the benefit of the Employee and the Corporation and
their heirs, personal representatives, successors and assigns to the extent that
any such benefits survive or may be assigned under the terms of this Agreement.
Section 5.5. Construction. Throughout this Agreement the singular shall
include the plural, the plural shall include the singular, and the masculine and
neuter shall include the feminine, wherever the context so requires.
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<PAGE>
Section 5.6. Text to Control. The headings of articles and sections are
included solely for convenience or reference. ff any conflicts between any
headings and the text of this Agreement exists, the text shall control.
Section 5.7. Severability. If any provision of this Agreement is declared
by any court of competent jurisdiction to be invalid for any reason, such
invalidity shall not affect the remaining provisions. On the contrary, such
remaining provisions shall be fully severable, and this Agreement shall be
construed and enforced as if such invalid provisions never had been inserted in
the Agreement.
Section 5.8. Complete Agreement. This Agreement contains the complete
agreement concerning the employment arrangement between the parties and shall,
as of the effective date hereto, supersede all other agreements between the
parties, whether oral or written. The parties acknowledge that neither of them
has made any representations with respect to the subject matter of this
Agreement, including the execution and delivery hereof, except such
representations as are specifically set forth herein, and each of the parties
hereto acknowledges that he or it has relied on his or its own judgment in
entering into this Agreement. The parties hereto further acknowledge that any
statement or representation that may have heretofore been made by either of them
to the other are of no effect and that neither of them has relied thereon in
connection with his or its dealings with the other.
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<PAGE>
This Agreement is effective as of the date first above written.
BOARD OF DIRECTORS: PEASE OIL AND GAS COMPANY,
a Nevada corporation
/s/ James N. Burhalter By: /s/ Willard Pease, Jr.
- --------------------------------- -------------------------------
/s/ Willard Pease, Jr.
- --------------------------------- EMPLOYEE
/s/ William F. Warnick /s/ Patrick J. Duncan
- --------------------------------- -----------------------------------
Patrick J. Duncan
- ---------------------------------
- ---------------------------------
- ---------------------------------
- ---------------------------------
- 9 -
<PAGE>
EXHIBIT A
OUTLINE OF DUTIES
Position Title: Chief Financial Officer
Reports to: President and Board of Directors
Duties of Employee: As determined from time to time by the
President and/or Board of Directors
<PAGE>
EXHIBIT B
ADDITIONAL REIMBURSABLE EXPENSES
1. 40 hours of continuing professional education per year
2. Professional Association dues (AICPA and CSCPA)
3. Bookcliff Country Club Monthly Dues
4. Other expenses as determined from time to time by the President and/or
the Board of Directors
<PAGE>
EXHIBIT C
OUTLINE OF COMPENSATION
The Corporation shall pay the Employee a base salary of not less than
Sixty-Two Thousand Dollars ($62,000) per year or such larger amount as is
determined by the Compensation Committee of the Board of Directors, payable
bi-weekly.
May 20, 1998
VIA FACSIMILE
Mr. Willard Pease, Jr.
President
Pease Oil & Gas Company
751 Horizon Court, Suite 203
Grand Junction, CO 81506-8758
Re: - Letter Agreement
- Termination of Letter Agreements Dated
February 4, 1997 and January 16, 1998
Dear Mr. Pease:
Pursuant to our telephone conversation today, this correspondence shall
act to express the mutual understanding and intent of Pease Oil & Gas Company
("Pease") and National Energy Group, Inc. ("NEG") with respect to (i) the
purchase and sale of 100% of Pease's right, title and interest in and to certain
Prospects as more particularly described on Exhibit "A", attached hereto, and
any data, including seismic data relating thereto (the "Assets"), (ii)
termination of that certain Prospect Participation Letter Agreement by and
between Pease and NEG dated February 4, 1997, as amended (the "Prospect
Participation Agreement"), (iii) the amendment of that certain 3D Seismic Survey
Participation Agreement dated January 16, 1998 (the "Seismic Participation
Agreement") and (iv) an alternate unit well to be proposed by NEG within the
existing unit of the Schwing No. 1 and/or Schwing No. 2 well located in the East
Bayou Sorrel Prospect.
1. Purchase and Sale of the Assets; Termination of
the Prospect Participation and Amendment
of the Seismic Participation Agreement
(a) As of the Effective Date (hereinafter defined), the
Prospect Participation Agreement shall terminate and Pease shall sell,
transfer, convey and assign to NEG as may be necessary all of Pease's
right, title and interest in and to those certain Prospects described
on Exhibit "A" and any data, including any seismic data, in the
possession or within the control of Pease related thereto. With the
termination of the Prospect Agreement, all obligations and/or
liabilities related thereto as between the parties shall be
extinguished and of no further effect, except as provided in Paragraph
5 hereof.
(b) As of the Effective Date, the Seismic Participation
Agreement shall be amended to delete the Assets and to limit the terms
to apply solely to Pease's interest in the East Bayou Sorrel Prospect,
more particularly described in that certain Operating Agreement among
W&T Offshore, Inc., NEG, Pease, et al. dated December 15, 1995 (the
"JOA") incorporated herein by reference herein; provided that nothing
contained herein shall act to terminate Pease's continued participation
within the East Bayou Sorrel Prospect.
2. Non-Consent Waiver.
Pease specifically agrees that with respect to Article VI B. of the
JOA, Subsequent Operations, Pease shall not elect to invoke its right to become
a Non-Consenting Party (as defined therein) as to the next alternate unit well
proposed by NEG within the existing well units of the
<PAGE>
Schwing No. 1 well or Schwing No. 2 well located in the Contract Area described
in the JOA.
3. Purchase Price; Effective Date.
Each of Pease and NEG, respectively, agree to the sale and purchase of
the Assets at a purchase price equal to $750,000.00 less any and all outstanding
obligations owed by Pease to NEG as of April 30, 1998 (the "Effective Date"),
including but not limited to, obligations pursuant to the Prospect Participation
Agreement and/or the Seismic Participation Agreement (the "Purchase Price"). NEG
agrees to credit Pease for 100% of actual costs relating to the Assets purchased
and sold hereunder which have been paid by Pease to NEG from and after the
Effective Date, and an accounting summary of all obligations owed by Pease
and/or credits to Pease as described herein shall be delivered by NEG at the
Closing (hereinafter defined).
4. The Closing.
The closing shall occur at a mutually agreeable time prior to 12:00
P.M. CDT on or before May 29, 1998 (the "Closing"). At the Closing, any amount
owed by NEG to Pease (or Pease to NEG as the case may be) as provided herein
shall be payable in immediately available funds by wire transfer.
5. The Closing Statement; The Post-Closing Adjustment Statement.
(a) NEG estimates the net obligation of Pease due NEG
hereunder is approximately $700,000.00, and NEG agrees to provide Pease
a Closing Statement detailing such amounts owed on or before the
closing of business on Thursday, May 21, 1998.
(b) Within sixty (60) days following the Closing, NEG shall
provide Pease with a Post-Closing Adjustment Statement which shall
account for all obligations and/or credits attributable to Pease's
interest in the Assets which were outstanding as of the Effective Date,
but not paid or credited at the Closing. The Post-Closing Adjustment
Statement shall be conclusively deemed to be accurate and shall be
binding upon the parties hereto with respect to the Assets unless
written notice to the contrary is delivered to NEG within three (3)
days following receipt by Pease of the Post-Closing Adjustment
Statement; provided that nothing contained in the Closing Statement or
Post-Closing Adjustment Statement shall act to supersede or limit
Pease's right to accounting or audit procedures contained in (i) the
JOA pertaining to the East Bayou Sorrel Prospect or (ii) any other
Operating Agreement between NEG and Pease pertaining to any wells
drilled prior to the Effective Date on any of the Prospects described
as Assets herein.
(c) Within five (5) days following the parties' reconciliation
of the Post-Closing Adjustment Statement, the party owing any balance
pursuant thereto shall make payment thereof in immediately available
funds by wire transfer.
6. Relationship Following Closing; Non-Compete.
Pease and NEG, for themselves and on behalf of their successors and
assigns, agree to use their best efforts and cooperate with the other to
consummate the transactions contemplated herein that each may attain the
benefits of its bargain with the other. Accordingly, it is acknowledged and
agreed that, although not foreseen or contemplated as of the date hereof, either
or both at the reasonable request of the other shall do, execute, acknowledge
and deliver or cause to be delivered or done any such further acts, deeds,
assignment, transfers, conveyances, powers of attorney, and assurance as may be
necessary to carry out the terms and intent of this Letter Agreement (including
<PAGE>
cooperation in any litigation with respect to the Assets brought by any party
not a party to this Letter Agreement). Pease further agrees that in order for
NEG to obtain the benefits provided in this Letter Agreement, it will not
directly or indirectly, for itself or on behalf of any third party, for a period
of three (3) years following the Closing acquire any interest in lands, leases
or seismic data related to the Prospects on Exhibit "A" without the express
written consent of NEG; provided that Pease's continued participation in the
East Bayou Sorrel Prospect shall not be deemed to be a violation of this
"non-compete" provision.
7. Confidentiality.
Pease acknowledges and agrees that as a p arty to the JOA it has been
afforded access to and is in possession of certain non-public confidential
information concerning the Assets (the "Confidential Information") and the
dissemination of which to unauthorized parties could result in irreparable harm
to NEG. Therefore, Pease agrees that such Confidential Information shall not be
disclosed to any third party without the express written consent of NEG;
provided that this provision shall become inoperative as to any such portion of
the Confidential Information which (a) becomes generally available to the public
other than as a result of a disclosure by Pease or its representatives; (b) was
available on a non-confidential basis prior to its disclosure; (c) become
available on a non- confidential basis from a source other than NEG when Pease
reasonably believes such source is entitled to make the disclosure; (d) is
developed by or for Pease independent of Confidential Information made available
by NEG; (e) is subject to disclosure pursuant to the rules promulgated by the
Securities and Exchange Commission of the United States, the respective stock
exchanges upon which the parties are listed or other regulatory agency having
lawful jurisdiction, or (f) in the written opinion of counsel is required to be
disclosed. Except as provided for above, the obligation under this Letter
Agreement to preserve the confidentiality of the Confidential Information shall
terminate three (3) years following the Closing. Pease further agrees to return
to NEG at the Closing all Confidential Information pertaining to the Prospect
Participation Agreement and the Seismic Participation Agreement which Pease, its
employees, representatives and/or consultants have in their possession,
including any copies, notes, summaries, analyses or other material derived from
the Confidential Information.
8. Miscellaneous.
(a) This Letter Agreement, including the attached Exhibits,
contains the entire understanding of the parties hereto and supersedes
all prior agreements between the parties with respect to, and only with
respect to, the subject matter hereof. This Letter Agreement may be
amended or modified only by a written instrument duly executed by Pease
and NEG. THE VALIDITY AND CONSTRUCTION OF THIS LETTER AGREEMENT SHALL
BE GOVERNED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS.
(b) In the event of a dispute between the parties to this
Letter Agreement, the parties agree not to file any action or petition
in any court of law or equity for any relief, but to participate in
good faith in a minimum of four (4) hours of mediation in Dallas, Texas
with an attorney-mediator who has a minimum of ten (10) years of
experience in the oil and gas industry and who is trained and certified
by the American Arbitration Association, the United States Arbitration
and Mediation Service, or any comparable organization, and to abide by
the mediation procedures and decision of such organization. The parties
agree to equally bear the costs of the mediation and to proceed as
expeditiously as allowed by the rules of such organization chosen to
provide mediation services. In the event the parties cannot resolve
their dispute through mediation as described herein, the parties agree
to participate in binding arbitration and to proceed as expeditiously
as allowed pursuant to the
<PAGE>
rules of the American Arbitration Association or mutually agreeable
similar organization with an arbitrator or arbitrators having a minimum
of ten (10) years experience in the oil and gas industry. Such
arbitration shall be held in Dallas, Texas, shall be binding and
nonappealable and a judgment on the award to the prevailing party
(inclusive of reasonable attorney's fees and costs) may be entered in
any court having competent jurisdiction.
If this correspondence expresses our mutual understanding and
agreement, please execute and return by facsimile one copy of this Letter
Agreement to the undersigned not later than 5:00 p.m., CDT, Thursday, May 21,
1998, at which time this offer by NEG shall expire if not executed and delivered
to NEG by Pease.
Very truly yours,
National Energy Group, Inc.
By: /s/ C. L. Elsey
Chuck L. Elsey
Executive Vice President and
Chief Operating Officer
Accepted and Agreed
this 21 day of May, 1998
Pease Oil & Gas Company
By: /s/ Willard Pease, Jr.
Willard Pease, jr.
President
PDD:mjg
<PAGE>
EXHIBIT "A" attached to and made
a part of that certain LETTER AGREEMENT
by and between National Energy Group, Inc.
And Pease Oil and Gas Company
dated May 20, 1998.
PROSPECTS
Prospect Name Pease Participation Interest
Northwest Bayou Sorrel/Louisiana 3/16
Berry Bayou/Louisiana 3/16
Southeast Gueydan/Louisiana 1/8
West Grand Bayou/Louisiana 1/8
Tiger Bayou/Louisiana 1/8
South Tiger Bayou/Louisiana 1/8
Knowles/Texas 1/8
Robertsdale/Alabama 1/8
Mushroom/Texas 1/8
Nueces Offshore
(Mustang Island Exploration)/ Texas 1/8
Apple Springs/Texas 1/8
Panaco Agreement "deep rights"/Louisiana 14.0625%
AMENDED EMPLOYMENT AGREEMENT
THIS AGREEMENT is effective as of October 28, 1998 ("the "Effective
Date") by and between Pease Oil and Gas Company, a Nevada corporation
("Corporation") and Willard H. Pease, Jr.
("Employee").
The Corporation and Employee has employed Employee pursuant to the
terms of an Employment Agreement dated September 16, 1994. For consideration,
the receipt and sufficiency of which is acknowledged, the parties have agreed to
modify the agreement to provide as set forth in this Amended Employment
Agreement ("Amended Agreement").
The Parties hereby enter into this Amended Agreement (i) setting forth
their mutual promises and understandings and (ii) mutually acknowledging the
receipt and sufficiency of consideration to enter into this Amended Agreement as
of the Effective Date.
ARTICLE 1
EMPLOYMENT DUTIES AND RESPONSIBILITIES
Section 1.1. Employment. The Corporation shall employ the Employee as its
Manager of Operations. The Employee accepts such employment effective on the
Effective Date and agrees to abide by the Articles of Incorporation, Bylaws and
decisions of the Board of Directors of the Corporation.
Section 1.2. Duties and Responsibilities. The Employee is employed pursuant
to the terms of this Amended Agreement and agrees to render exclusive and
full-time services to the Corporation under this Amended Agreement. The Employee
shall be vested with authority to and shall, to the best of his ability, direct,
supervise and implement certain day-to-day operations of the Corporation. The
Employee shall perform such duties as (i) are specified by the President of the
Corporation and (ii) may be determined and assigned to him from time to time by
the Board of Directors of the Corporation. The Employee may not pursue any other
material business activities on his own behalf unless the Board of Directors in
a formal written statement expressly authorizes the Employee to do so.
Section 1.3. Working Facilities. The Employee shall be based in the Grand
Junction, Colorado metropolitan area where the Corporation shall provide
reasonable office facilities. The Employee agrees to travel to the extent
necessary to perform his duties hereunder. ^The Corporation shall provide
reasonable transportation to perform these duties.
Section 1.4. Vacations. The Employee shall be entitled to vacations
totaling at least two weeks per year. Each vacation shall be taken by the
Employee over a period meeting with the approval of the President or the Board
of Directors of the Corporation and no one vacation shall be so long as to
disturb the operations of the Corporation. Should the business of the
Corporation preclude the Employee from taking all vacation earned during a year,
then, with the consent of the President or the Board of Directors, the vacation
shall be accrued and available to be taken by the Employee in subsequent years.
If the Board of Directors does not consent to such accrual of vacation time, the
Corporation shall pay the Employee an airnount equal to the number of days of
unused vacation times the Employee's equivalent daily compensation.
pease\employment ag\pease-jr-emp.ag.wpd
<PAGE>
Section 1.5. Expenses.
A. Employee Reimbursed for Expenses. During the period of
employment pursuant to this Amended Agreement, the Employee will be
reimbursed for reasonable expenses incurred for the benefit of the
Corporation in accordance with the general policy of the Corporation as
adopted from time to time by the Corporation's Board of Directors, and
specifically approved beforehand by the Board of Directors. While
employed under this Amended Agreement, Employee shall be entitled to
use the Corporation automobile provided by the corporation for use by
Employee prior to the Effective Date .
B. Additional Expenses. In addition to such reimbursable
expenses, the Employee may incur in the course of the employment by the
Corporation certain other necessary expenses of the business which the
Employee will be required to pay personally but which the Corporation
shall be under no obligation to reimburse or otherwise compensate the
Employee, including, but not limited to, the cost of maintaining office
facilities in the Employee's home or similar items of reasonable and
necessary expense incurred by the Employee in the course of employment.
However, nothing in this Section shall prevent the Corporation from
assuming to pay or reimbursing the Employee for any such expense if the
Board of Directors so determines.
C. Employee Shall Account for Expenses to Corporation. With
respect to any expenses which are reimbursed by the Corporation to the
Employee, the Employee agrees to make an itemized accounting to the
Corporation (i) for proper accounting by the Corporation and (ii) in
detail sufficient to entitle the Corporation to an income tax deduction
for paid items if deductible.
Section 1.6. Review of Work. The Employee's performance shall a
all times be subject to review by the Board of Directors, in its sole discretion
ARTICLE 2
COMPENSATION
Section 2.1. Salary. Commencing effective the Effective Date, the
Corporation shall pay a salary to the Employee during the term of this Amended
Agreement at an annual rate of $80,000, bi-weekly, or such other amount as
determined from time to time by the Board of Directors.
Section 2.2. Death During Employment. In the event of the Employee's
death during the term of this Amended Agreement the Corporation shall pay to the
Employee's estate, bi-weekly, the compensation which otherwise would be payable
to the Employee for 60 days following the Employee's death at the rate of
compensation described in Section 2.1
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Section 2.3. Benefits. In addition to all other compensation, the
Employee shall be entitled to participate in any pension plans, profit sharing
plans, medical or dental reimbursement plans, group term or other life insurance
plans, medical or hospitalization insurance plans and any other group employee
benefit plan which may be established by the Corporation. Such participation
shall be in accordance with the terms of any such plan as adopted and maintained
by the Corporation.
Section 2.4. Life and Disability Insurance. The Corporation may obtain
for its own benefit such amounts of key executive term life insurance on the
life of the Employee as it may deem necessary or advisable. The proceeds of this
may be used to pay Corporation obligations under Sections 2.2 and 3.6 of this
contract; but the Corporation's obligations thereunder shall be absolute.
ARTICLE 3
TERM OF EMPLOYMENT AND TERMINATION
Section 3.1. Term. Employment under this Amended Agreement shall be "at
will" with no specific term and shall be in effect for a period until
termination in accordance with this Article 3 (the "Term").
Section 3.2. Termination by the Corporation Without Cause. The Board of
Directors, without cause, may terminate this Amended Agreement at any time upon
30 days written notice to the Employee, unless Section 3.7 applies in which case
this Section 3.2 shall be inapplicable. In such event, the Employee, if
requested by the Board of Directors, shall continue to render the services
required under this Amended Agreement for 30 days. Upon termination under this
Section 3.2, the Employee shall be paid $150,000 in a lump sum within 30 days of
termination. All outstanding stock options will be extended to the original
expiration date established at the date of grant.
Section 3.3. Termination by the Employee Without Cause. The Employee,
without cause, may terminate this Amended Agreement upon 90 days written notice
to the Corporation. In such event, the Employee shall, if requested by the
Corporation, continue to render the services required under this Amended
Agreement to the date identified in the Employee's written notice. The Employee
shall continue to be paid compensation at the rate set forth in Section 2.1 of
this Amended Agreement for at least 30 days and thereafter through the earlier
of (i) the date identified in the Employee's written notice or (ii) the date
through which the Employee furnishes services at the request of the Corporation,
and no further payments shall be made by the Corporation unless agreed to by the
Board of Directors.
Section 3.4. Termination by the Corporation With Cause. The Corporation
may terminate the Employee's employment for cause, which shall be limited to the
following: (a) the Employee's knowing and willful or reckless commission of an
act of gross misconduct which the Employee knows or reasonably should have known
at the time would be injurious to the Corporation; or (b) the Employee's refusal
to devote substantially all his time and efforts to his duties under this
Amended Agreement after the Board of Directors has notified the Employee in
writing of his noncompliance; or (c) the Employee's continued refusal, after
written notice from the Board of Directors to follow the specific instructions
of the Board of Directors. Termination pursuant to this subsection shall result
in
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no further compensation being due or payable to the Employee hereunder from and
as of the date of such termination.
Section 3.5. Termination Upon Death of Employee. Subject to Section 2.3 of
this Amended Agreement, this Amended Agreement shall be terminated in the event
of the Employee's death.
Section 3.6. Termination Upon Disability of Employee. The Corporation
may terminate the Employee's employment if, during the Term, the Employee
becomes physically or mentally disabled, whether totally or partially, so that
the Employee is unable substantially to perform his services under this Amended
Agreement (i) for a period of two consecutive months or (ii) for shorter periods
aggregating four months during any twelve month period, by written notice to the
Employee. Notwithstanding any such disability, the Corporation shall continue to
pay the Employee his full salary up to and including the date of such
termination and for 12 months thereafter in addition to any amounts payable to
Employee under any disability or similar insurance.
Section 3.7. Termination Upon Change of Control. If the Employee is
terminated as a direct or indirect result of either (i) actions taken by the
Board of Directors following the replacement of at least 40% of the members of
the Board of Directors with persons who are not also employees of the
Corporation in any 15 month period which were opposed by a majority of the
directors before the replacement, (ii) a shareholder or group of shareholders or
a person acting on behalf of shareholders increasing his, hers, their or its
ownership of the Corporation's outstanding stock by more than 10% within 24
months of the Employee's termination, or (iii) upon a merger, consolidation or
other business combination where the Corporation is not the surviving entity,
then the Employee shall be paid in a lump surn an amount equal to $150,000
within 30 days of termination. Further, all amounts then owed by Employee to the
Corporation shall be deemed to be paid in full and all outstanding stock options
shall become immediately exercisable. The Corporation shall within 10 business
days pay in full all amounts then owed to the Employee or any affiliates of the
Employee, including members of the family of Willard Pease, Jr., family
businesses or family partnerships. If the Corporation does not pay the amount
specified by this Section 3.7 on a timely basis, the unpaid amount shall bear
interest at ten percent per annum until paid and the Corporation shall pay all
costs and expenses, including attorney's fees, incurred by the Employee in
collecting all amounts owed under this Section 3.7.
Section 3.8. Resignation as Director. Upon any termination described in
Sections 3.2 through 3.7, Employee shall promptly resign as a Director of the
Corporation. Employee's right to compensation upon termination, as set forth in
sections 3.2 and 3.7 shall be subject to such resignation.
ARTICLE 4
DISCLOSURE OF INFORMATION
Section 4.1. Definitions.
4.1.1. As used herein, the term "proprietary information"
shall mean technical information and know-how concerning the
Corporation's oil and gas exploration, development,
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production and servicing business and its related equipment, books,
maps and records developed by or otherwise owned or controlled by the
Corporation.
4.1.2. As used herein, the term "trade secrets" shall mean any
proprietary information and any other non-public information used by
the Corporation, including such matters as geologic records, maps,
surveys, documents evidencing interests in real property, patented or
unpatented technology, supplier information, books, processes,
concepts, methods, formulae or technique know-how, customer or vendor
lists or information or development plans or strategy, owned or
controlled by the Corporation or otherwise subject to an obligation or
intent of the Corporation to maintain the confidentiality thereof which
is of a proprietary or secret nature and which is or may be applicable
to, or related to the business, equipment or services, present or
future, of the Corporation or the oil and gas exploration and
development business of the Corporation, or the contractual
relationships of the Corporation with customers or clients.
4.1.3. As used herein, the term "document" shall mean any
data, notes, drafts, manuals, blueprints, maps, notebooks, reports,
photographs, drawings, sketches or other records, in any tangible form
whatsoever, whether originals, copies, reproductions, or excerpts,
produced or obtained from the Corporation by the Employee or any other
representative of the Corporation which relates to trade secrets of the
Corporation.
4.1.4. As used herein, the term "Corporation invention" shall
mean any invention, discovery, improvement, or trade secret, whether
patentable or not and whether or not reduced to practice, conceived or
learned by the Employee either alone or jointly with others, while
employed by the Corporation, which relates to or results from the
actual or anticipated investigation, research, development, or
production of the Corporation, or which results to any extent from use
of the Corporation's facilities.
4.1.5. As used herein, the term "Corporation" shall mean not
only the Corporation as first defined above, but also the Corporation's
subsidiaries and all affiliates of the Corporation.
Section 4.2. Employee Shall Not Disclose Proprietary Information or
Trade Secrets. The Employee recognizes that the trade secrets of the
Corporation, as they may exist from time to time, are a valuable, special and
unique asset of the Corporation. The Employee will not, during or for a period
of 24 months after termination of the Employee's employment relationship under
this Amended Agreement, disclose or confirm the Corporation's trade secrets or
any part thereof to any person, firm, corporation, association or other entity
for any reason or purpose whatsoever, without the prior written authorization to
do so from the Corporation.
Further, all documents shall be property of the Corporation and the
Employee shall not remove these documents upon termination of employment with
the Corporation except pursuant to a specific authorization in writing from the
Board of Directors of the Corporation. The Employee agrees that any document
produced or obtained by the Employee while employed by the Corporation shall be
the sole and exclusive property of the Corporation. The Employee agrees to
return any such document to the
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<PAGE>
Corporation Immediately upon termination of employment with the Corporation, or
upon request of the Corporation.
In no event shall the Employee copy or remove any documents of any
person, Corporation or association with whom the Employee did not directly work
while an Employee of the Corporation.
The Employee recognizes and acknowledges that much of the information
and knowledge which he has received or will receive by virtue of his employment
with the Corporation is or will be proprietary information and trade secrets
which have unique, special value to the successful operation of the
Corporation's business. The Employee agrees not to disclose any proprietary
information or trade secrets to any other person for any purpose, for his own
direct or indirect benefit or the benefit of any other employer or affiliate
during the term of this Amended Agreement or for a period of 24 months
thereafter without the prior written consent of the Corporation.
The aforesaid noncompetition covenant shall remain in any effect at all
times while the Employee is in the employ of the Corporation and for a period of
24 months after termination of the Employee's relationship with the Corporation
in any capacity whatsoever, regardless of the reason for termination or
cessation of the Employee's relationship. The aforesaid covenant is intended to
be a reasonable restriction on the Employee. If all, or any portion of the
covenant is held unreasonable or unenforceable by a court or agency having valid
jurisdiction, the Employee expressly agrees to be bound by any lesser covenant
subsumed within the terms of such covenant that imposes the maximum duty
permitted by law, as if the resulting covenant were separately stated in and
made apart of this Article 4.
Section 4.3. Duty of Loyalty, Conflicts of Interest. The Employee
agrees that he will not, while employed by the Corporation and for a period of
24 months thereafter, be an employee or consultant, or assist in any way, or
work directly or indirectly on behalf of, any person, corporation, firm or other
entity engaged in, or proposing to engage in, any line of business which would
directly compete or conflict with the Corporation's business, without the prior
express written consent of the Corporation. Notwithstanding the foregoing,
however, the Corporation and the Employee acknowledge that at the present time,
the Employee individually owns various interests in certain oil and gas
properties in which the Corporation also owns interests and/or which are
operated by the Corporation; and the parties agree that in such circumstances,
where the Board of Directors is fully informed about and approves of the
Employee's individual interest in a business opportunity of the Corporation, it
shall not be considered a violation of this Section 4.3. The Employee agrees
that he will not use any assets of the Corporation for his own individual
projects and that he will not use any proprietary information to the
disadvantage of the Corporation. The Employee agrees that he will not interfere
with the right of the Corporation to do business with any person, corporation,
firm or other entity.
Section 4.4. Enforcement. The Employee acknowledges that monetary
damages would not adequately or fairly compensate the Corporation for breach of
any of the obligations of the Employee under Article 4 of this Amended Agreement
and agrees that in the event of any breach or threatened breach the Corporation
shall be entitled to seek appropriate injunctive relief from a court of
competent jurisdiction, in addition to any other relief or damages which may be
available.
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ARTICLE 5
MISCELLANEOUS
Section 5.1. Colorado Law. It is the intention of the parties hereto
that this Amended Agreement and its performance hereunder be construed in
accordance with and pursuant to the laws of the state of Colorado and that, in
any action, special proceedings, or other proceeding that may be brought arising
out of, in connection with, or by reason of this Amended Agreement, the law of
the state of Colorado shall be applicable and shall govern to the exclusion of
any forum, without regard to the jurisdiction in which any action or special
proceeding may be instituted.
Section 5.2. No Waiver. No provision of this Amended Agreement may be
waived except by an agreement in writing signed by the waiving party. A waiver
of any term or provision shall not be construed as a waiver of any other term or
provision.
Section 5.3. Amendment. This Amended Agreement may be amended, altered
or revoked at any time, in whole or in part, by filing with this Amended
Agreement a written instrument setting forth such changes, signed by all of the
parties.
Section 5.4. Effect of Agreement. The terms of this Amended Agreement
shall be binding upon and inure to the benefit of the Employee and the
Corporation and their heirs, personal representa tives, successors and assigns
to the extent that any such benefits survive or may be assigned under the terms
of this Amended Agreement.
Section 5.5. Construction. Throughout this Amended Agreement the singular
shall include the plural, the plural shall include the singular, and the
masculine and neuter shall include the feminine, wherever the context so
requires.
Section 5.6. Text to Control. The headings of articles and sections are
included solely for convenience or reference. If any conflicts between any
headings and the text of this Amended Agreement exists, the text shall control.
Section 5.7. Severability. If any provision of this Amended Agreement
is declared by any court of competent jurisdiction to be invalid for any reason,
such invalidity shall not affect the remaining provisions. On the contrary, such
remaining provisions shall be fully severable, and this Amended Agreement shall
be construed and enforced as if such invalid provisions never had been inserted
in the Amended Agreement.
Section 5.8. Complete Agreement. This Amended Agreement contains the
complete agreement concerning the employment arrangement between the Parties and
shall, as of the Effective Date hereto, supersede all other agreements between
the parties, whether oral or written. The parties acknowledge that neither of
them has made any representations with respect to the subject matter of this
Amended Agreement, including the execution and delivery hereof, except such
representations as are
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<PAGE>
specifically set forth herein, and each of the parties hereto acknowledges that
he or it has relied on his or its own judgment in entering into this Amended
Agreement. The parties hereto further acknowledge that any statement or
representation that may have heretofore been made by either of them to the other
are of no effect and that neither of them has relied thereon in connection with
his or its dealings with the other. Employee hereby waives and releases any
obligation by the Corporation under the original Employment Agreement and any
other claims which Employee might otherwise assert against the Corporation or
its officers or directors through the Effective Date except as set forth in this
Agreement.
Section 5.9. Binding Arbitration. Any controversy arising out of or
relating to this Amended Agreement or any modification or extension of this
Amended Agreement, including any claim for damages and/or rescission, shall be
settled by binding arbitration in Grand Junction, Colorado in accordance with
the Commercial Arbitration rules of the American Arbitration Association before
a panel of one arbitrator. The arbitrator sitting in any such controversy shall
have no power to alter or modify any express provisions of the Amended Agreement
or to render any award which by its terms effects any such alteration, or
modification. This section shall survive the termination of the Amended
Agreement.
Wherefore, the Parties have signed this Amended Agreement effective as
of the date first above written.
PEASE OIL AND GAS COMPANY,
a Nevada corporation
By _______________________________________
President
EMPLOYEE
------------------------------------------
Willard H. Pease, Jr.
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Section 5.10. General Release. Employee, on his own behalf, and on
behalf of his heirs and assigns, hereby fully and forever unconditionally
releases and discharges the Corporation, all of its past and present parent,
subsidiary, affiliated and related corporations, their predecessors, successors
and assigns, together with their divisions and departments, and all past or
present officers, directors, employees, insurers and agents of any of them,
(hereinafter referred to collectively as "Releasees"), of and from, and
covenants not to sue or assert against Releasees, for any purpose, all claims,
administrative complaints, demands, actions and causes of action, of every kind
and nature whatsoever, whether at law or in equity, arising from or in any way
related to my employment by the Corporation including the termination thereof,
based in whole or in part upon any act or omission concerning on or before the
date of this general release, whether negligent or intentional, without regard
to Employee's present actual knowledge of the act or omission, which Employee
may now have, or which Employee, or any person acting on his behalf may at any
future time have or claim to have, including specifically, but not by way of
limitation, unpaid wages, unpaid benefits, matters which may arise at common
law, such as breach of contract, express or implied, promissory estoppel,
wrongful discharge, tortious interference with contractual rights, infliction of
emotional distress, defamation, or under federal, state or local laws, such as
the Fair Labor Standards Act, the Employee Retirement Income Security Act, the
National Labor Relations Act, Title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act, the Rehabilitation Act of 1973, the Americans
with Disabilities Act, the Family and Medical Leave Act, the Pregnancy
Disability Act, the Equal Pay Act, and the Colorado Civil Rights Act, excepting
only retirement benefits described herein, COBRA rights, unemployment
compensation and worker's compensation. Employee warrants that he has not
assigned or transferred any right or claim described in this general release.
Employee expressly assumes all risk that the facts and law concerning this
general release may be other than as presently known to Employee, and
acknowledges that, in signing this general release, Employee is not relying on
any information provided by Releasees or upon Releasees to provide information
not known to Employee. Employee acknowledges that he has been advised to consult
an attorney regarding this release. This release shall be governed by and
construed in accordance with the laws of Colorado. In the event of any dispute
under this release, the prevailing party shall be entitled to recover all costs
and reasonable attorneys' fees incurred in connection therewith.
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SEVERANCE AND TERMINATION OF EMPLOYMENT AGREEMENT
THIS SEVERANCE AND TERMINATION OF EMPLOYMENT AGREEMENT is between Pease Oil
and Gas Company, a Nevada corporation ("Company") and Willard H. Pease, Jr.
("Employee"), shall be effective December 7, 1998 ("Effective Date"), and is
made with reference to the following agreed facts.
A. Employee has been employed as a full time employee of the Company
pursuant to an Amended Employment Agreement dated as of November 1, 1998 (the
"Amended Employment Agreement").
B. Pursuant to a change in the business of the Company, the Employee
shall not be employed by the Company after December 7, 1998.
C. The parties desire and intend to set forth the terms upon which the
employment under the Amended Employment Agreement shall be terminated.
FOR CONSIDERATION, the receipt and sufficiency of which is hereby
acknowledged, the Company and Employee agree as follows:
1. Termination of Employment. The Employee shall cease to be an Employee of
the Company as of the close of business on the Effective Date.
2. Severance Compensation. As set forth in Section 3.2 of the Amended
Employment Agreement, upon termination, the Company shall be obligated to pay a
total of $140,000 (the "Severance Compensation") to the Employee which payment
shall be made on or before December 17, 1999. Employee shall also be paid the
bi-weekly compensation, at the same rate as was paid while an employee, for the
period ending December 31, 1998. At the time the Company pays the Severance
Compensation, the company shall also pay to Employee an amount equal to three
weeks compensation at the rate in effect prior to the Effective Date, as payment
for Employee's unused vacation time. All required withholding and similar taxes
or deductions shall be withheld from the Severance Compensation and the other
payments described in the preceding two sentences.
3. Options. All outstanding stock purchase options previously granted to
Employee under Company employee option plans shall be deemed to be terminated,
and in replacement thereof, Employee shall be granted the following nonqualified
stock purchase warrants, each of which shall expire if not previously exercised,
on December 31, 2000:
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Exercise Price
Warrants Per Share
9,960 ..................................................... $ 8.30
4,000 ..................................................... $ 7.00
890 .................................................... $10.00
5,000 ..................................................... $29.70
10,000 ...................................................... $ 5.00
10,000 ...................................................... $27.50
39,850 Total Warrants
The form of, and terms governing, these warrants shall be as set forth in
Exhibit A attached hereto and incorporated herein by reference.
4. Option To Purchase Automobile. Until the date the Severance
Compensation is paid, the Employee shall have the right to purchase, for cash,
the 1994 Suburban automobile (vin No: 1GKFK16K6RJ755362) from the Company for
$8,000, its agreed value as of the Effective Date. If the Employee elects not to
purchase the automobile, he shall surrender the automobile to the Company in its
present condition at its Corporate Office on or before the close of Business on
December 17, 1998.
If Employee elects to purchase the automobile, he shall, on or before
December 17, 1998, obtain his own liability and property damage insurance
coverage for the vehicle in adequate amounts and shall cause the automobile to
be re-licensed in his name when payment is made. The Company shall deliver title
and other appropriate indicia of ownership once the automobile is fully paid.
The purchase price for the automobile may be netted against the amount of the
Severance Compensation described above, at Employee's election.
5. Future Consulting Services. For a period of nine months following
the date of termination, the Employee agrees to be available, on a reasonable
and mutually agreeable basis, to perform consulting services on an as-needed
basis for the Company or affiliates of the Company. It is specifically agreed
that there is no obligation in this Agreement for the Company to retain the
Employee on a consulting basis and any such future consulting services shall be
performed as an independent contractor. In the event the Company uses the
Employee as a consultant, the Company shall pay for such services on a day rate
basis equal to the lessor of $60.00 per hour or $480 per day. Any payments made
to Employee as a consultant shall not affect the obligations otherwise stated in
this Agreement.
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6. Termination of Amended Employment Agreement. With the specific
exception of Article 4 of the Amended Employment Agreement, which shall continue
to bind the Employee in its entirety after the Effective date of termination,
all other rights and obligations of the parties as set forth in the Amended
Employment Agreement hereby are terminated and shall be of no further effect and
shall be replaced by the obligations of the parties set forth in this Agreement.
Other than as set forth in this Agreement, the Company shall have no other
obligations whatsoever to the Employee.
7. Binding Arbitration. Any controversy arising out of or relating to
this Agreement or any modification or extension of this Agreement, including any
claim for damages and/or rescission, shall be settled by binding arbitration in
Grand Junction, Colorado in accordance with the Commercial Arbitration rules of
the American Arbitration Association before a panel of one arbitrator. The
arbitrator sitting in any such controversy shall have no power to alter or
modify any express provisions of the Agreement or to render any award which by
its terms effects any such alteration, or modification. This section shall
survive the termination of this Agreement.
8. General Release. Employee, on his own behalf, and on behalf of his
heirs and assigns, hereby fully and forever unconditionally releases and
discharges the Company, all of its past and present parent, subsidiary,
affiliated and related corporations, their predecessors, successors and assigns,
together with their divisions and departments, and all past or present officers,
directors, employees, insurers and agents of any of them (hereinafter referred
to collectively as "Releasees"), of and from and covenants not to sue or assert
against Releasees, for any purpose, all claims, administrative complaints,
demands, actions and causes of action, of every kind and nature whatsoever,
whether at law or in equity, arising from or in any way related to Employee's
employment by the Company, including the termination thereof, based in whole or
in part upon any act or omission occurring on or before the date of this general
release, whether negligent or intentional, without regard to Employee's present
actual knowledge of the act or omission, which Employee may now have, or which
Employee, or any person acting on his behalf may at any future time have or
claim to have, including specifically, but not by way of limitation, unpaid
wages, unpaid benefits, matters which may arise at common law, such as breach of
contract, express or implied, promissory estoppel, wrongful discharge, tortious
interference with contractual rights, infliction of emotional distress,
defamation, or under federal, state or local laws, such as the Fair Labor
Standards Act, the Employee Retirement Income Security Act, the National Labor
Relations Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination
in Employment Act, the Rehabilitation Act of 1973, the Americans with
Disabilities Act, the Family and Medical Leave Act, the Pregnancy Disability
Act, the Equal Pay Act, and the Colorado Civil Rights Act. Employee warrants
that he has not assigned or transferred any right or claim described in this
general release. Employee expressly assumes all risk that the facts and law
concerning this general release may be other than as presently known to
Employee, and acknowledges that, in signing this general release, Employee is
not relying on any information provided by Releasees or upon Releasees to
provide information not known to Employee. Employee acknowledges that he has
been advised to consult an attorney regarding this release, and that he has
consulted an attorney. This release shall be governed by and construed in
accordance with the laws of Colorado. In the event of any dispute
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under this release, the prevailing party shall be entitled to recover all costs
and reasonable attorneys' fees incurred in connection therewith.
The Company releases the Employee of and from and covenants not to sue
or assert against Employee, for any purpose, all claims, administrative
complaints, demands, actions and causes of action of every kind and nature
whatsoever, whether at law or in equity, arising from, or in any way related to,
Employee's employment by the Company, based in whole or in part upon any act or
omission occurring on or before the date of this Agreement, whether negligent or
intentional, which the Company may now have, or which the Company may at any
future time have or claim to have, for actions prior to the Effective Date of
which the Board of Directors was specifically aware on the Effective Date,
provided that this release of the Employee shall not apply to any claim under
federal or state securities or corporate laws, which are against officers and
directors of the Corporation, including Employee.
Notwithstanding the above, the Employee shall be entitled to
contribution or indemnity for third party claims to the same extent as any other
person who served as an officer or Director of the Company immediately prior to
the Effective Date.
9. Resignation as Director. Employee shall hereby resign as a director
of the Company as of the Effective Date, and Employee shall sign all written
Consents of Directors recording decisions of the Board of Directors made while
Employee served as a Director. Should Employee refuse or be unavailable to
formally sign any such Written Consent, the Company may deem the Signature of
Employee on this Agreement to be his signature on any Consent
10. Transfer of Assets. On the Effective Date of this agreement, the
Company shall transfer to the Employee the Assets described in a letter dated
November 1, 1998. Employee acknowledges that the Company shall treat the
estimated fair value of the assets as 1998 income to the Employee and shall
notify the appropriate taxing authorities. It is mutually agreed that the fair
value of the assets transferred is $500. Employee shall be responsible for
removing these assets, as well the personal assets listed in the November 1,
1998 letter, from the Company's office facility at his own expense.
11. Confidentiality. The Employee acknowledges that the Company is
pursuing various strategic alternatives, including the possibility of merger or
recapitalization. The Employee specifically agrees not to interfere, comment,
discuss or otherwise disclose such matters or any information related to the
Company's activities, past or present, to any individual or entity other than an
officer or director of the Company, unless it has been expressly agreed to in
writing by the Company or required by law. Further, the Employee and the Company
mutually agree that they will not in the future make any disparaging statements
concerning the other or their respective business. The terms of this Agreement
shall remain strictly confidential; provided however, that the Employee and the
Company may disclose such matters to members of their immediate family, bankers,
underwriters, financial advisors, accountants, attorneys and tax advisors, or as
may be required by law.
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12. Purchase of Other Company Assets. Employee agrees than an affiliate
of Employee, Pease Oil Partnership, will purchase all of the Company's right,
title and interest in and to the shut-in oil well and prospect known as the "LU
Sheep 2 S," located in central Wyoming for a purchase price of $2,500. Employee
shall cause his affiliate to pay the Company the purchase price for such
property on or before December 31, 1998, at which time the Company shall assign
and transfer to the purchaser all the Company's interest in the property. It is
specifically agreed that the transfer of the property is made without
representations or warranties by the Company and that the purchase of the
Company's interest in the property shall be made in an "as is" condition without
any reliance upon the Company or its management in making the purchase
determination.
13. Entire Agreement. This Agreement is the entire agreement between
the parties and supersedes all prior understandings or agreements with respect
to the matters referred to herein. This Agreement may not be altered or amended
except by a written agreement signed by the parties.
WHEREFORE, the parties have signed this Agreement on December __, 1998
with an Effective Date as indicated above.
PEASE OIL AND GAS COMPANY EMPLOYEE:
By ____________________________ __________________________________
Patrick J. Duncan, President Willard H. Pease, Jr.
WITNESSED:
By ____________________________
Virginia Cherry,
Assistant Corporate Secretary
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Patrick J. Duncan
December __, 1998
Page 1
[POG Letterhead]
December __, 1998
Mr. Patrick J. Duncan
[home address]
Re: Confirmation of Employment Contract
Dear Pat:
This letter is intended to reconfirm the existence of, and our mutual
obligations under, the Employment Agreement between you and Pease Oil and Gas
Company ("Company") dated as of December 27, 1994 ("Employment Agreement").
As you know, the Company is presently considering one or more potential
transactions in which the Company might be merged with or into another entity,
acquired directly or indirectly by another entity, or involved in another
similar type of transaction, all of which would require shareholder approval
(hereafter referred to as a "Merger Transaction").
In order to induce you to continue to serve as the interim President
and as a director of the Company through at least the completion of a Merger
Transaction, the Company, acting through the Executive Committee of the Board of
Directors, hereby reconfirms and acknowledges the Com pany's obligations to you
as set forth in the Employment Agreement.
The following clarifications and understandings apply to our respective
rights and obligations under the Employment Agreement:
1. Duties. Since November 2, 1998, you have served as the interim
President, reporting to the Executive Committee of the Board of Directors and
the Board of Directors. Your duties under the Employment Agreement have been
deemed to be revised accordingly.
2. Compensation. Your present level of compensation is $105,000
annually, payable at the same time as other employees of the Company are paid.
Exhibit C to the Employment Agreement is deemed to be revised to accurately
reflect your current level of compensation.
3. Termination Upon Change of Control. Under Section 3.7 of the
Employment Agreement, the Company is obligated to pay certain amounts to you if
you are terminated as a direct or indirect result of a change in control. The
Company and you, by signing below, hereby confirm that our respective rights and
obligations as set forth in Section 3.7 are in full force and effect. Further,
we hereby agree that if you do not choose to be employed by any successor entity
following a Merger Transaction, then the Company's obligations to you under
Section 3.7 of the Employment Agreement shall apply. Furthermore, the Company
hereby confirms and agrees that all amounts
pease\employment ag\duncan reconfirm.ag.wpd
<PAGE>
Patrick J. Duncan
December __, 1998
Page 2
which will be owed to you under Section 3.7 shall be paid to you in cash at the
time of closing of any Merger Transaction.
4. Reaffirm Employment Agreement. The Executive Committee of the Board
of Directors expects that clarification of the Company's obligation to you under
the Employment Agreement will provide additional incentive for you to continue
to serve as the interim President through the completion of a Merger
Transactions. While it is not our understanding that this clarification amends
or changes our respective rights or obligations as they presently exist, by
signing below, the Company and you mutually agree that the Employment Agreement
is in full force and effect and that our respective rights and obligations shall
include the understandings and acknowledgments set forth in this letter.
Please sign and return the extra copy of this letter in the place
indicated below to acknowledge your understanding and agreement of the matters
set forth in this letter.
Sincerely,
PEASE OIL AND GAS COMPANY
By _______________________________
William F. Warnick, Chairman
The matters set forth above are understood and agreed to:
- ---------------------------------------
Patrick J. Duncan
pease\employment ag\duncan reconfirm.ag.wpd
September 4, 1998
Pease Oil and Gas Co.
751 Horizon Center, Suite 203
P.O. Box 60219
Grand Junction, CO 81506-8758
Attention: William F. Warnick, Chairman
RE: Engagement of San Jacinto Securities, Inc.
Dear Sirs:
Representatives of San Jacinto Securities, Inc. ("SJS") and Pease Oil and Gas
Co. (the "Company"), have discussed on a confidential basis, the Company's
short-term and long-term financial and business objectives, goals and needs and
the financial advisory and investment banking services (collectively,
"Investment Banking Services") which SJS can provide to the Company. More
specifically, the Company has requested that SJS assist the Company in locating
a party or parties for the purpose of acquiring the Company or merging with the
Company, such party called hereinafter a "Candidate". At this time, neither the
Company or SJS can determine the nature or form of any possible transaction or
transactions between the Company and a Candidate or Candidates, and, for
purposes of this letter (this "Agreement"), any transaction with or between a
Candidate will be referred to generically as a "Transaction".
Accordingly, this Agreement will confirm and set forth the following terms and
conditions under which SJS will render Investment Banking Services to the
Company based on its understanding of the Company's current intentions:
1. Engagement. The Company will engage SJS as its exclusive financial advisor
for the purpose of providing Investment Banking Services with respect to a
possible transaction between the Company and a Candidate. In addition, during
the term of its engagement, SJS will provide such other Investment Banking
Services as the officers of the Company may reasonably request. For purposes
hereof the term "Company" shall include any subsidiary or affiliate of the
Company.
2. General Services. SJS along with the management of the Company will develop a
strategy for the Company identifying specific corporate objectives, financial
needs and companies or other parties who are Candidates for a Transaction with
the Company.
3. Transaction Candidates. After a suitable Candidate has been identified, SJS
will assist the Company in evaluating such Candidate and, if requested by the
Company, will make contact with appropriate parties regarding such Candidate and
assist in negotiations.
4. Compensation. The Company agrees to pay SJS an initial financial advisory fee
of $150,000, payable as follows:
<PAGE>
1. $50,000 upon signing of this Agreement;
2. $50,000 on or before October 1, 1998; and
3. $50,000 on or before October 20, 1998.
The amount of such fee shall be non-refundable except as provided in paragraph 9
below and shall be credited against the amount of any Transaction fee owing
hereunder. In the event the Company enters into a Transaction as contemplated
herein with any Candidate during the term hereof, SJS shall be entitled at
closing thereof to an amount of cash equal to three and one half percent (3
1/2%) of the total value of such Transaction. For purposes hereof, the total
value of the Transaction shall include the value of all cash, securities or
other property given by a Candidate or Candidates for assets or securities of
the Company. The Company also agrees to reimburse SJS for its reasonable out of
pocket expenses.
5. Identification of Transaction Candidates. SJS will identify parties and
companies which are Candidates for the Company. Before or within thirty (30)
days following the identification of any such Candidate, SJS will confirm the
identification of such Candidate by letter to the Company and such Candidate
shall be deemed to be an identified Candidate ("Identified Candidate") within
the terms of this letter. In the event the Company enters into a Transaction
with any Identified Candidate within one (1) year following the expiration of
this engagement, SJS will be entitled to a fee determined in accordance with
paragraph 4 above.
6. Excepted Candidates. Within three (3) days of the date hereof, the Company
may identify in writing to SJS, a list of Candidates which shall be excepted
Candidates under this Agreement. In the event the Company enters into a
Transaction with an excepted Candidate during the term hereof, SJS shall not be
entitled to a Transaction fee, although SJS will still assist in negotiations
with such Candidate and provide Investment Banking Services with respect to the
Transaction as requested by the Company.
7. Refinancing. In the event the Company is able to obtain additional financing
or refinancing through its own initiative during the term hereof, SJS at the
Company's request will assist the Company with respect to such financing but
will not be entitled to a Transaction fee.
8. Due Diligence Investigation. From and after the date of execution and
delivery of this Agreement, the Company will continue to afford SJS and its
agents, attorneys and accountants reasonable access to the business records and
properties of the Company and will furnish to SJS all information concerning its
business for the purpose of enabling SJS to make such financial, accounting,
legal or other investigations deemed necessary or appropriate by SJS.
9. Early Termination of Agreement. This Agreement may be terminated with or
without cause by the Company or SJS at any time, without liability or continuing
obligation by either party to the other with the exception of fees earned or
expenses incurred by SJS; provided, however that if SJS elects to terminate this
Agreement it shall refund to the Company a portion of the initial financial
advisory fee determined by multiplying $150,000 by the ratio of the number of
days the Agreement was in effect to 180 days.
10. Subsequent Agreement. At the time the scope of SJS's investment Banking
Services becomes
<PAGE>
definitive, the Company and SJS may enter into an appropriate agreement in form
and substance satisfactory to SJS and the Company. Neither the foregoing
sentence nor any such additional agreement shall affect SJS's rights hereunder
or the enforceability of this Agreement except to the extent specifically
provided herein.
11. Disavowal of Agency. In no event shall SJS or any of its principals or
employees be deemed to be an agent or employee of the Company and shall not hold
themselves out as such. While SJS may assist the Company in the negotiation of
final agreements, the terms and conditions of such final agreements, including
all representations, warranties, covenants and conditions to closing, shall be
the sole responsibility of the Company, its officers and directors.
12. Confidentiality. Except as otherwise is agreed to by the Company or as is
required by law or is necessary to complete its engagement hereunder, SJS will
keep confidential all information which is supplied by the Company and which has
not previously entered the public domain, and will not use any such information
for its own benefit except in connection with the matters undertaken pursuant to
the terms of this engagement. At the termination of this agreement, upon the
request of the Company, SJS shall return all information, and copies thereof,
furnished by the Company.
13. Reliance Upon Information. SJS has and will rely without independent
verification on all information supplied by the Company. In addition, SJS may
and will rely on public information and information supplied by Candidates
without independent verification thereof unless the Company requests such
verification.
14. Indemnification. THE COMPANY AGREES TO INDEMNIFY AND HOLD SJS HARMLESS
AGAINST AND FROM ANY AND ALL LOSSES, CLAIMS, DAMAGES OR LIABILITIES, JOIN OR
SEVERAL, TO WHICH SJS MAY BECOME SUBJECT IN CONNECTION WITH THE TRANSACTIONS
REFERRED TO HEREIN UNDER ANY OF THE FEDERAL SECURITIES LAWS, UNDER ANY OTHER
STATUTE, AT COMMON LAW OR OTHERWISE, AND TO REIMBURSE SJS FOR ANY LEGAL OR OTHER
EXPENSES (INCLUDING THE COST OF ANY INVESTIGATION AND PREPARATION) INCURRED BY
SJS ARISING OUT OF OR IN CONNECTION WITH ANY ACTION OR CLAIM IN CONNECTION
THEREWITH, WHETHER OR NOT RESULTING IN ANY LIABILITY; PROVIDED, HOWEVER, THAT
THE COMPANY SHALL NOT BE LIABLE IN ANY SUCH CASE TO THE EXTENT THAT ANY SUCH
LOSS, CLAIM, DAMAGE OR LIABILITY IS FOUND IN A FINAL JUDGMENT BY A COURT TO HAVE
RESULTED FROM SJS'S GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR BAD FAITH IN
PERFORMING SUCH SERVICES. THE INDEMNITY AGREEMENT IN THIS PARAGRAPH SHALL EXTEND
UPON THE SAME TERMS AND CONDITIONS TO THE OFFICERS, DIRECTORS, EMPLOYEES AND
AGENTS OF SJS AND TO EACH PERSON, IF ANY, WHO MAY BE DEEMED TO CONTROL SJS.
15. Governing Law. This letter and the engagement resulting herefrom shall be
governed by and construed under the laws of the State of Texas.
16. Term. This Agreement shall continue in effect for a term of one hundred and
eighty (180) days from the date of the Company's acceptance hereof unless
earlier terminated under paragraph 9, above ore replaced by a subsequent
agreement.
<PAGE>
If the foregoing correctly sets forth our understanding, please sign and return
the enclosed copy of this Agreement. The second copy is for your files.
SAN JACINTO SECURITIES, INC.
by____________________________
Kenneth R. Etheredge, President
Accepted and Agreed to this _____ day of __________________, 1998.
PEASE OIL AND GAS CO.
by______________________________
SUBSIDIARIES
OF
PEASE OIL AND GAS COMPANY
Jurisdiction of
Name of Subsidiary Incorporation or Organization
Pease Oil Field Services, Inc. . . . . .. . . . . Colorado
Pease Oil Field Supply, Inc. . . . . . .. . . . . Colorado
Pease Operating Company, Inc. . . . . . . . . . Colorado
Loveland Gas Processing Company, Ltd. . . . . . Colorado
Original on Netherland, Sewell & Associates, Inc. Letterhead
CONSENT OF NETHERLAND SEWELL AND ASSOCIATES, INC.
As oil and gas consultants, Netherland Sewell and Associates, Inc.
hereby consent to: (a) the use of our reserve report dated March 16, 1999
entitled "Estimate of Reserves and Future Revenue to the Pease Oil and Gas
Company Interest in Certain Oil and Gas Properties Located In Louisiana and
Texas as of January 1, 1999"; and (b) all references to our firm included in or
made a part of Pease Oil and Gas Company's Annual Report on Form 10-KSB to be
filed with the Securities and Exchange Commission on or about March 31, 1999.
NETHERLAND SEWELL AND ASSOCIATES, INC.
By: /s/ Danny D. Simmons
---------------------------------------
Danny D. Simmons
Senior Vice President
Houston, Texas
Date:March 30, 1999
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT'S CONSENT
We consent to the incorporation by reference in the Registration Statements of
Pease Oil and Gas Company on Forms S-3 (SEC File No. 333-31921 and 333-44305
with effective dates of August 22, 1997 and April 23, 1998, respectively) of our
report dated March 5, 1999 on our audits of the consolidated financial
statements of Pease Oil and Gas Company as of December 31, 1998, and for the
years ended December 31, 1998 and 1997, which report is included in this Annual
Report of Pease Oil and Gas Company on Form 10-KSB.
/s/ HEIN + ASSOCIATES LLP
Denver, Colorado
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,049,582
<SECURITIES> 0
<RECEIVABLES> 434,105
<ALLOWANCES> 13,645
<INVENTORY> 0
<CURRENT-ASSETS> 1,740,729
<PP&E> 19,650,749
<DEPRECIATION> 13,883,174
<TOTAL-ASSETS> 7,912,971
<CURRENT-LIABILITIES> 638,841
<BONDS> 2,270,713
0
1,073
<COMMON> 160,106
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,980,869
<SALES> 2,888,011
<TOTAL-REVENUES> 2,916,982
<CGS> 1,867,699
<TOTAL-COSTS> 1,867,699
<OTHER-EXPENSES> 1,587,013
<LOSS-PROVISION> 7,592,771
<INTEREST-EXPENSE> 399,218
<INCOME-PRETAX> (10,627,471)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,627,471)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,694,965)
<EPS-PRIMARY> (7.99)
<EPS-DILUTED> (7.99)
</TABLE>
