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, 1999
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)
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 $2,146,959.
As of March 30, 2000 the issuer had 1,731,398 shares of its $0.10 par value
Common Stock issued and outstanding. Based upon the closing sale price of
$0.4375 per share on March 30, 2000, the aggregate market value of the common
stock, the Registrant's only class of voting stock, held by non-affiliates was
$726,000.
Transitional Small Business Issuer Disclosure Format Yes ____ No X
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TABLE OF CONTENTS
PART I Page
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . 1
History and Overview . . . . . . . . . . . 1
Recent Developments. . . . . . . . . . . . 1
Business Strategy. . . . . . . . . . . . . 2
Operations. . . . . . . . . . . . . . . . . 3
Competition. . . . . . . . . . . . . . . . 3
Markets. . . . . . . . . . . . . . . . . . 3
Regulations. . . . . . . . . . . . . . . . 4
Operational Hazards and Insurance. . . . . 5
Business Risks . . . . . . . . . . . . . . 5
Administration. . . . . . . . . . . . . . . 11
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . 12
Principal Oil and Gas Interests. . . . . . 12
Gulf Coast Properties and Prospects. . . . 12
Rocky Mountain Properties. . . . . . . . . 13
Title to Properties. . . . . . . . . . . . 13
Estimated Proved Reserves. . . . . . . . . 13
Net Quantities of Oil and Gas Produced . 14
Drilling Activity. . . . . . . . . . . . . 15
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . 16
Market Information. . . . . . . . . . . . . . 16
Stockholders. . . . . . . . . . . . . . . . . 16
Dividends. . . . . . . . . . . . . . . . . . 16
Recent Sales of Unregistered Securities . 17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. . . . . . . . . 18
Liquidity and Capital Resources . . . . . . .. 18
Results of Operations. . . . . . . . 19
Other Matters. . . . . . . . . . . . 24
ITEM 7. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . 25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . 43
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. . . . . . . 43
ITEM 10. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 45
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 46
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . .48
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . .49
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PART I
ITEM 1 - BUSINESS
HISTORY AND OVERVIEW
Pease was incorporated in the state of Nevada on September 11, 1968 to engage in
the oil and gas acquisition, development and production business. Prior to 1993,
Pease conducted business primarily in Western Colorado and Eastern Utah. In
August 1993, Pease commenced operating in the Denver-Julesburg Basin ("DJ
Basin") of northeastern Colorado through an acquisition which substantially
expanded Pease's operations. In the years following the acquisition, Pease
invested several million dollars in an effort to exploit the assets acquired and
experienced marginal success. Pease 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, Pease
sold substantially all of its Rocky Mountain oil and gas assets for
approximately $3.2 million. Accordingly, Pease now maintains only non-operated
interests in three core areas in southern Louisiana and Texas. These assets are
discussed more thoroughly below under the caption "Properties and Prospects."
RECENT DEVELOPMENTS:
Carpatsky Merger - In response to historically poor financial results stemming
from a series of dry holes and other factors, Pease began in August 1998 to
vigorously pursue a merger candidate in order to, among other things, increase
Pease's asset base and improve the chances of financing future opportunities. On
September 1, 1999, we signed an Agreement and Plan of Merger ("Merger
Agreement") with Carpatsky Petroleum, Inc. ("Carpatsky"), a publicly held
company traded on the Alberta Stock Exchange under the symbol "KPY". Carpatsky
is engaged in production and development of oil, gas and condensate in the
Republic of Ukraine. The transaction is still conditioned upon, among other
things, regulatory and shareholder approvals. Pursuant to the terms of the
proposed merger transaction, Pease will issue approximately 44.96 million shares
of common stock and 102.41 million shares of a newly designated preferred stock
to acquire all the outstanding stock of Carpatsky. In addition, all of Pease's
currently outstanding Series B Preferred Stock will be exchanged for
approximately 8.9 million shares of common stock at the close of the
transaction. All holders of the Series B Preferred stock have agreed that no
more dividends shall be paid on their holdings if the contemplated transaction
with Carpatsky is ultimately consummated. They have also agreed not to sell or
convert any outstanding shares of the Series B Preferred until the contemplated
transaction with Carpatsky is either completed or abandoned.
The Carpatsky assets consist of interests held in two separate fields: 1.) the
Rudovsko-Chervonozavodskoye natural gas and condensate field (the "RC" field)
located in the Poltava District of Eastern Ukraine; and 2.) the Bitkov-
Babchensky oil field (the "Bitkov field") located in the Ivano-Frankns'k
District of southwest Ukraine. Common to the oil and gas industry in many
foreign countries, Carpatsky does not own an interest in any real property. But
rather Carpatsky's rights and obligations are governed by and structured through
joint ownership or joint venture arrangements.
Bellwether Investment in Carpatsky - In December 1999, Bellwether Exploration
Company ("Bellwether") purchased 95.45 million shares of a newly issued class of
Carpatsky preferred shares and warrants to purchase 12.5 million Carpatsky
common shares for one year at an exercise price of US$0.125 per share. The
purchase price for the preferred shares and warrants was US$4.0 million. The
preferred shares are convertible into 50 million common shares of Carpatsky.
Bellwether is an independent oil and gas company based in Houston, Texas.
Bellwether's common stock is traded in the NASDAQ stock market under the symbol
"BELW."
The preferred shares vote as a class with the common shares of Carpatsky on all
matters submitted to shareholders, including the election of directors. The
preferred shares issued to Bellwether constitute a majority of the total number
of votes which may be cast by shareholders. Therefore, Bellwether will control
all matters voted on by Carpatsky stockholders which require a majority vote,
and will be able to veto any other matters voted on by Carpatsky's shareholders.
Mr. J.P. Bryan and Dr. Jack Birks, both of whom are members of Bellwether's
board of directors, were appointed to Carpatsky's board of directors in
connection with the purchase of preferred stock by Bellwether. Additionally,
three Canadian residents were appointed by Bellwether to Carpatsky's board of
directors on a temporary basis. Mr. Bryan also became Carpatsky's Chief
Executive Officer.
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In the re-domestication and merger, the Bellwether preferred shares will be
converted into 102.41 million shares of preferred stock of the newly combined
company. This preferred stock will vote as a class with our common stock, and
will entitle Bellwether to cast a majority of the votes submitted to the
stockholders of the newly combined entity, including the election of directors.
Bellwether will therefore control all matters voted on by our stockholders after
the merger.
In addition, Messrs. Bryan, Davis and Sledge and Dr. Birks will become members
of our board of directors and Mr. Bryan will be our chief executive officer.
Details of the Merger - The description of the Merger Agreement set forth in
this section is a summary of the material provisions of the Merger Agreement and
is qualified in its entirety by reference to the Merger Agreement, as amended.
Essentially, the Merger Agreement that Pease and Carpatsky have entered into
provides that:
1. Carpatsky will continue and redomesticate in the State of Delaware and
thereby become a Delaware corporation;
2. concurrently with redomestication, a wholly-owned subsidiary of Pease that
will be created specifically for this transaction, will be merged with and into
Carpatsky;
3. we will change our name to "Radiant Energy, Inc.";
4. we will amend our Articles of Incorporation to increase the number of shares
of common stock and preferred stock we are allowed to issue;
5. All of the outstanding Pease Series B Convertible Preferred Stock will be
exchanged for 8,865,665 shares of Pease common stock;
6. Carpatsky common stockholders will receive 44,959,557 shares of Radiant
Energy common stock and 102,410,000 shares of Radiant Energy preferred stock in
exchange for all outstanding Carpatsky shares. This number will be reduced to
reflect the number of shares, if any, for which stockholders seek appraisal
rights;
7. warrants and options entitling holders to purchase Carpatsky shares shall be
adjusted to permit holders to acquire 17,448,263 shares of Radiant Energy common
stock, exercisable at $0.35 per share.
The merger is subject to the satisfaction of a number of conditions, including
regulatory approval and the approval by stockholders of both Pease and
Carpatsky.
BUSINESS STRATEGY
Since 1997, we have generally participated as a minority, non-operating interest
holder in oil and natural gas drilling projects with industry partners. Although
we have not operated our properties or originated any exploration prospects, we
have actively participated in evaluating opportunities presented by our industry
partners. In addition to pursuing and completing the merger with Carpatsky, our
current and future business strategy will focus on expanding our reserve base
and future cash flows by continuing to develop the reserves within our proven
properties, exploiting select exploration opportunities in the Gulf Coast Region
and pursuing growth through acquisitions of companies or properties that have
proved reserves with developmental potential. For the foreseeable future, our
developmental activities, exploration efforts and resources will be focused on
our 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 Vermillion Parish, Louisiana, operated by
Amerada Hess; and
3. The Formosa, Texana and Ganado 3-D seismic exploration prospects,
encompassing 130,000 acres in and around Jackson County, Texas, operated by
Parallel Petroleum.
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OPERATIONS
As of December 31, 1999, we had varying ownership interests in 10 gross (.8 net)
non-operated wells located in Southern Louisiana and Texas.
The following table presents oil and gas reserve information within our major
operating areas (onshore Louisiana and Texas) as of December 31, 1999:
Net Proved Reserves
Bbls Mcf BOE (6:1)
334,000 1,359,000 561,000
We are a non-operator in the oil and natural gas prospects we pursue in the Gulf
Coast region.
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. We
compete with a number of other companies, including large oil and gas companies
and other independent operators with greater financial resources and with more
experience. Many other oil and gas companies in the industry have financial
resources, personnel, and facilities substantially greater than ours. There can
be no assurance that Pease will be able to compete effectively with these other
entities.
MARKETS
Overview - The three principal products which we currently produce and market
(through our operating partners) are crude oil, natural gas and natural gas
liquids. We do not currently use commodity futures contracts and price swaps in
sales or marketing of natural gas and crude oil.
Crude Oil - Oil produced from our properties is generally transported by truck,
barge or pipeline to unaffiliated third-party purchasers at the prevailing field
price. Currently, the primary purchaser of our proportionate share of crude oil
is Plains Marketing, L.P. which buys over 80% of our current crude oil
production. The contracts are month-to-month and subject to change. The market
for our crude oil is competitive and therefore we do not believe that the loss
of one of our primary purchasers would have a material adverse effect on our
business because other arrangements could be made to market our crude oil
products. We do not anticipate problems in selling future oil production because
purchases are made based on current market conditions and pricing. Oil prices
are subject to volatility due to several factors beyond our 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 - We sell, through our operating partners, the natural gas
production at the wellhead. We generally sell to various pipeline purchasers or
natural gas marketing companies. The property operators sell the natural gas and
pass the revenue on to us when it is received. Currently, National Energy Group,
Inc. and Amerada Hess Corporation sell and distribute substantially all of our
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 we receive 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 we have 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 our
operations may be subject.
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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, we sell oil produced from our properties at unregulated
market prices which historically have been volatile.
Federal Regulation of Sales and Transportation of Natural Gas - The
transportation and sale of natural gas in interstate commerce was regulated
until 1993 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, gas sales are no longer regulated.
The transportation and resale in interstate commerce of natural gas we produce
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 we produce currently does not have any
material direct impact on us, such regulation does have a material impact on the
market for our natural gas production and the price we receive for our natural
gas production. Adverse changes in the regulation affecting our gas markets
could have a material impact on us.
Commencing in the mid-1980s 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.
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 which we produce and sell.
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. We are not able to predict what will be enacted and thus what effect,
if any, such proposals would ultimately have on us.
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 we have 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 Pease's properties.
Also in recent years, pressure has increased in states where we have 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 drilling activities on our properties.
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. However, environmental assessments have not been performed on
all of our properties. To date, expenditures for environmental control
facilities and for remediation have
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not been significant in relation to our 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 oil and gas producers. 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 our
operating costs, as well as the oil and gas industry in general.
We believe that our 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 our method of operations than other
similar companies in the industry. Although we do not believe our 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
our capital expenditures, earnings and competitive position, the extent of which
we are presently unable to assess. We are not aware of any environmental
degradation which exists, or the obligation for remediation of which would arise
under applicable state or federal environmental laws. We do not maintain a fund
for environmental or other similar costs. We would pay any such costs or
expenses out of operating capital.
OPERATIONAL HAZARDS AND INSURANCE
Our 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.
We maintain insurance of various types to cover its operations. Our insurance
does not cover every potential risk associated with the drilling and production
of oil and gas. In particular, coverage is not available for certain types of
environmental hazards. The occurrence of a significant uninsured adverse event
could have a material adverse effect on our financial condition and results of
operations. Moreover, no assurance can be given that we will be able to maintain
adequate insurance in the future at reasonable rates.
BUSINESS RISKS
Our business is subject to a number of risks which should be considered by our
stockholders and others who may read this report, including the following risk
factors, as well as the other information we have included or referenced.
Pease has generated operating losses for each of the last three years and has an
accumulated deficit of $33.5 million. The auditors have issued a qualified audit
report as of the most recent year end.
We incurred the following losses from operations:
1. $15.4 million for the year ended December 31, 1997;
2. $10.4 million for the year ended December 31, 1998; and
3. $0.2 million for the year ended December 31, 1999.
At December 31, 1999 we had positive working capital of $922,105. However, our
auditors' report for the financial statements as of December 31, 1999 is
qualified as to whether our company has sufficient operating capital to enable
us to continue as a going concern.
We Are Not Currently Replacing All of Our Existing Reserves.
Oil and gas reserves which are being produced are depleting assets. Our future
cash flow and income are highly dependent on our ability to find or acquire
additional reserves to replace those being currently produced. We are not adding
reserves at present at the same pace at which they are being produced. Without
adding additional reserves in the future, our oil and gas reserves and
production will continue to decline.
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Our Revenue Is Dependent Upon a Limited Number of Producing Wells.
Approximately 85% of our oil and gas production is currently accounted for by
three wells at East Bayou Sorrel operated by National Energy Group, Inc. A
significant curtailment or loss of production from any one of these wells would
have a material adverse effect on our future operating results and financial
condition.
We are likely to require additional financing. Failure to receive financing
could jeopardize our changes for future growth.
We anticipate that approximately $200,000 to as much as $1.2 million will be
required to develop our interests in our Gulf Coast properties through the end
of the first quarter of 2001. In addition, our outstanding $2.8 million in
convertible debentures will become payable at maturity in April 2001, and we may
become obligated to pay quarterly dividends on our outstanding Series B
Convertible Preferred Stock if the proposed merger with Carpatsky is abandoned.
These anticipated expenditures and obligations together are likely to exceed our
available cash resources during 2000 and early 2001.
Our planned merger with Carpatsky Petroleum, Inc. may not be completed.
We previously have announced our intention to merge with Carpatsky Petroleum,
Inc., whose principal assets consist of rights to oil and natural gas to be
produced in two oil and natural gas fields in Ukraine where Carpatsky has
agreements with entities affiliated with the Ukrainian government. Due to delays
in completing the merger and to difficulties which Carpatsky has experienced in
establishing the nature of its rights to the oil and natural gas which is
expected to be produced from the two properties, Pease may terminate the merger
agreement, or the merger might not be completed for other reasons. If we are
unable to complete the merger with Carpatsky, the expected diversification of
our natural resource properties will not be achieved. Also, we will receive no
benefit from the efforts of our management and expenses we have incurred in
pursuing this merger.
The holders of our outstanding non-voting Series B Convertible Preferred Stock,
who have agreed to convert the outstanding preferred stock into common stock in
connection with the proposed merger with Carpatsky would have the right to
convert the outstanding Series B Preferred Stock into common stock which will
equal over 90% of our common stock, thus severely diluting our existing common
stockholders. We previously announced in September 1998 that we would seek a
partner with which to combine our oil and natural gas business to benefit our
stockholders and debenture holders. If we are unable to complete the combination
with Carpatsky, we will consider seeking another merger partner.
Whether or not we complete our merger with Carpatsky, we will need to seek
additional financing. Additional financing may be difficult to raise.
We expect the following sources for operating capital through the first
quarter of 2001:
A. Our cash assets, which shall be approximately $1.0 million at the
end of March 2000; and
B. Future operating cash flow from our existing oil and natural gas
production, which we estimate will be in excess of $350,000 per
quarter during the remainder of 2000.
To the extent that these sources are insufficient to meet our anticipated cash
requirements, we would be required to seek equity or debt financing, and we
presently have no anticipated source of financing. If we are unable to secure
additional financing, we may have to:
1. Forfeit our interest in development or exploratory wells which may be drilled
by various operators in the oil and gas properties in which we have an interest
in the Gulf Coast; 2. Assign our interest in drilling prospects to other
participants on such terms as we can negotiate, if any; 3. Sell our interest in
one or more of our existing properties; 4. Attempt to restructure the terms of
our Series B Preferred Stock and outstanding convertible debt; and/or 5. Default
on the provisions of Series B Preferred Stock and convertible debentures if a
restructuring is necessary yet unsuccessful.
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It is important to remember:
a.) Developing proved undeveloped oil and natural gas properties requires
substantial capital; b.) Any capital resources which are available may not be
available on terms that are advantageous to us; c.) If we issue additional
equity or other securities to raise capital, the ownership interests for
existing stockholders will be diluted; and d.) Any additional securities issued
to raise capital may have better rights, preferences or privileges than common
stock held by our existing stockholders.
If we complete our merger with Carpatsky, we will be subject to a number of
risks relating to Carpatsky's ownership interest in oil and natural gas
properties in Ukraine.
We expect that most of the future oil and gas production following a merger with
Carpatsky would be from operations in Ukraine. The success of operations in
Ukraine would depend on the ability of the merged company to maintain the
relationships with local development partners in Ukraine, the political and
economic stability of Ukraine, export and transportation tariffs, local and
national tax requirements and exercise of foreign government sovereignty over
the exploration area. No assurance can be given that operations in Ukraine would
be profitable. Generally, the risks of operations in Ukraine will include the
following:
1. Risk of political and economic instability of Ukraine
The form of government and economic institutions in the Ukraine have been
created relatively recently and may be subject to a greater risk of political
and economic instability or change than in countries where such institutions
have been in existence for longer periods of time. The government of Ukraine,
through wholly or majority owned regional oil and gas companies, is an essential
participant in the establishment of the arrangements defining each exploration
and development project, including Carpatsky's two projects. These arrangements,
therefore, may be subject to changes in the event of changes in government
institutions, government personnel or political power and the development of new
administrative policies and practices.
2. New market economy of Ukraine
The infrastructures, labor pools, sources of supply and legal and social
institutions in Ukraine are not equivalent to those found in connection with
projects in North America. Moreover, the regulatory regime governing oil and gas
operations (including environmental regulations) has been recently promulgated,
and there is no enforcement history or established practice available to aid the
combined company in evaluating how the regulatory regime will affect operations.
The procedures for obtaining permits and approvals are cumbersome, and officials
have wide discretion in acting on applications and requests. Each of these
factors may result in a lower level of predictability and a higher risk of
frustration of expectations.
3. Currency risk in Ukraine
The merged company would be exposed to the risk of foreign currency exchange
losses in connection with operations in Ukraine by holding cash and receivables
denominated in foreign currencies during periods in which a strengthening United
States dollar may be experienced or by having or incurring liabilities
denominated in foreign currencies during periods in which a weakening United
States dollar may be experienced.
4. There are risks in producing and monetizing oil and gas produced in
Ukraine.
All of Carpatsky's interests in oil and natural gas reserves are in the
Republic of Ukraine. To date, Carpatsky's gas production has been sold to state
enterprises and private companies within Ukraine. Only partial payment for sales
to state enterprises has been received. To address this situation the merged
company would attempt to transport natural gas produced from Carpatsky's
properties for sale in Western Europe which would help assure that full payment
for gas is timely received. In addition, the merged company would face other
risks in commercializing production of Carpatsky's natural gas reserves,
including the following:
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a.) Regulations applicable to foreign companies in the oil and gas
business in Ukraine;
b.) Competition in Ukraine;
c.) Limited access to transportation facilities for natural gas within
Ukraine and for export;
d.) Differences of oil and natural gas prices in Ukraine from
prevailing world prices for these commodities;
e.) Use of local resources to develop oil and natural gas reserves in
Ukraine;
f.) The possibility that Ukraine may require produced oil and natural
gas to be sold domestically;
g.) Currency exchange fluctuations;
h.) Restriction on repatriation of capital and profits;
i.) Confiscatory changes in Ukraine's tax regime; and
j.) Non-payment for gas sold and lack of reasonable rights to seek
redress.
Carpatsky does not speculate in foreign currencies, does not presently
maintain significant foreign currency cash balances, and has not engaged in any
currency hedging transactions. Dividends or distributions from Ukrainian
ventures may be received in hryvna, and there is no assurance that the merged
company would be able to convert such currency into United States dollars. Even
where convertibility is available, applicable exchange rates may not reflect a
parity in purchasing power. Fluctuations of exchange rates could result in a
devaluation of hryvna held by the merger company.
5. Business disputes must be resolved in a foreign jurisdiction
ln the event of a future dispute in connection with Ukraine operations, the
merged company would be subject to the exclusive jurisdiction of foreign courts
or may not be successful in subjecting foreign persons to the jurisdiction of
the courts of the United States or enforcing U.S. judgments in such other
jurisdictions. We may also be hindered or prevented from enforcing rights with
respect to a governmental instrumentality.
6. Carpatsky must complete the licensing process to its largest field and
receive a development license to produce reserves once exploration activities
are complete
Carpatsky currently conducts operation in its RC field property under a
joint activity agreement between Carpatsky and Ukrnafta, the holder of the
license. Carpatsky is not named as a licensee on the exploration license granted
by the Ukranian government to explore the RC field, nor is the joint activity
agreement referenced in the exploration license. Under current Ukranian law,
being named on the license or having the joint activity agreement referenced in
the license may be important to Carpatsky's rights under the joint activity
agreement. It may be difficult to enforce rights in the Ukraine under the
contract which governs the joint activities agreement. For this reason, many
western banks and government agencies will not make loans to develop resources
where the borrower is not a party to the license or the agreement with the
borrower is not referenced in the license.
The present exploration license must be converted into a development license
once all exploration is completed when full scale commercial production
commences. We can give no assurance that a development license can be obtained,
although Carpatsky expects that the license will be converted as a matter of
course. Ukranian law regarding natural resources is not fully developed, and
there is little precedent regarding the conversion from an exploration to a
development license, or the conditions which might be imposed on such
conversion. Failure to receive a development license, or the imposition of
material adverse conditions to the receipt of a development license, would have
a material adverse effect on the merged company.
Most of the Carpatsky proved reserves are undeveloped and there is a risk that
some of them may not be recovered.
Approximately 86% of Carpatsky's estimated proved oil reserves, 89% of estimated
proved natural gas reserves and 87% of estimated discounted future net revenue
at December 31, 1999 were proved undeveloped reserves. Exploitation of such
reserves will require drilling and completing new wells and related development
activity. We can give no assurance that future development operations by the
merged company would be successful. A substantial portion of the reserves could
be economically unrecoverable for various reasons, notwithstanding the expected
presence of hydrocarbons. In such event the inherent value of the reserves would
be substantially reduced.
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<PAGE>
Bellwether will control the merged company.
Following the merger as presently proposed, Bellwether would own approximately
102.41 million shares of convertible preferred stock of the merged company.
These shares would be entitled to vote as a class with common stock. In
addition, if additional shares of voting stock are issued, the merged company
would be required to also make a dividend to Bellwether of a like number of
additional shares of preferred stock. As a result, Bellwether would have the
right to vote approximately 53.4% of the votes entitled to be voted by
stockholders of the merged company.
We will continue to be subject to the risk of volatile oil and natural gas
prices.
Prices available for future production of oil and natural gas will determine
many aspects of our, and the merged company's, future financial viability,
including:
1. Revenue;
2. Results of operations, profitability and growth; and
3. The carrying value of oil and natural gas reserves acquired or developed.
Historically, markets for oil and natural gas have been volatile and the
volatility may continue or recur in the future. Various factors beyond our
control will effect the prices of oil and natural gas, including:
a. the worldwide and domestic supplies of oil and natural gas;
b. the ability of members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production
controls;
c. political instability or armed conflict in oil or natural gas
producing regions;
d. the price and level of foreign imports;
e. the level of consumer demand;
f. the price, availability and acceptance of alternative fuels;
g. the availability of pipeline capacity;
h. weather conditions;
i. domestic and foreign government regulations and taxes; and
j. the overall local and world economic environment.
Any significant decline in the price of oil or natural gas will adversely affect
us and could require an impairment in the carrying value of any reserves which
we hold or may develop in the future.
We will not control our oil and gas properties; therefore we will continue to be
dependent upon the various operators of our domestic properties and upon our
joint venture partners in the Ukrainian properties to explore and develop those
prospects.
We are not presently the operator of any of our oil or natural gas prospects in
the Gulf Coast area. Carpatsky is involved in making operating and marketing
decisions through its 50% participation in the management committees of each
venture, although it is not the operator. These arrangements are expected to
continue following the merger. Thus, if the merger is completed, we will be
unable to control material aspects of commercialization of our principal
domestic assets and we will be dependent upon the expertise, diligence and
financial condition of the operators of those properties. Our financial
condition and ability to contribute capital to the budgets of Carpatsky's two
Ukrainian ventures will determine our level of authority on the management
committees.
We will experience drilling and operating risks.
Oil and natural gas drilling activities are subject to many risks, including the
risk that no commercially productive reservoirs will be encountered. We can make
no assurance that wells in which we will have an interest will be productive or
that we will recover all or any portion of our drilling or other exploratory
costs. Drilling for oil or natural gas may involve unprofitable efforts, not
only from dry wells but from wells that are productive but do not produce
sufficient net revenue to return a profit after drilling, operating and other
costs. The costs of drilling, completing and operating wells is often uncertain.
Our drilling operations may be curtailed, delayed or canceled as a result of
numerous factors, many of which are beyond our control, including by way of
illustration the following:
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<PAGE>
1. Economic conditions;
2. Title problems in the U.S.;
3. Compliance with governmental requirements;
4. Weather conditions; and
5. Shortages and delays in labor, equipment, services or supplies.
Our future drilling activities may not be successful and, if unsuccessful, such
failure may have a material adverse affect on our future results of operations
and ability to participate in other projects.
Our operations are also subject to hazards and risks inherent in drilling for
and producing and transporting oil and natural gas, including, by way of
illustration, such hazards as:
Fires; Natural disasters;
Explosions; Encountering formations with abnormal pressures;
Blowouts; Cratering;
Pipeline ruptures; Spills; and
Power shortages; Equipment failures
Any of these types of hazards and risks can result in the loss of hydrocarbons,
environmental pollution, personal injury claims and other damages to property.
As protection against such operating hazards, we intend to maintain insurance
coverage against some, but not all of these potential risks. We also may elect
to self insure in circumstances in which we believe that the cost of insurance,
although available, is excessive relative to the risks presented. The occurrence
of an event that is not covered, or not fully covered, by third party insurance
could have a material adverse affect on our business, financial condition and
results of operations.
We must continue to comply with significant amounts of governmental regulation.
Domestic oil and natural gas operations are subject to extensive federal, state
and local laws and regulations relating to the exploration for, and development,
production and transportation of, oil and natural gas, including safety matters,
which may change from time to time in response to economic conditions. Matters
subject to regulation by domestic federal, state and local authorities include:
Permits for drilling operations;
Construction of processing facility
Reports concerning operations;
Road and pipeline construction;
Unitization and pooling of properties;
The spacing of wells;
Environmental protection Taxation;
Customs regulations Production rates; and
Worker safety regulations
We can give no assurance that delays will not be encountered in the preparation
or approvals of such requirements or that the results of such regulations will
not require us to alter our drilling and development plans. Any delays in
obtaining approvals or material alterations to our drilling and development
plans could have a material adverse effect on our operations. From time to time
regulatory agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and natural gas below actual production
capacity in order to conserve supplies of oil and natural gas. We believe that
we are and will continue to be in substantial compliance with all applicable
laws and regulations. We are unable to predict the ultimate cost of compliance
with changes in these requirements or their effect on our operations.
Significant expenditures may be required to comply with governmental laws and
regulations and may have a material adverse affect on our financial condition
and future results of operations.
Carpatsky's Ukranian oil and gas operations will also be subject to Ukrainian
laws and regulations which are in various states of development.
We must comply with environmental regulations.
We must operate exploratory and other oil and natural gas wells in compliance
with complex and changing environmental laws and regulations adopted by
government authorities. The implementation of new, or the
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<PAGE>
modification of existing, laws and regulations could have a material adverse
affect on properties in which we may have an interest. Discharge of oil, natural
gas or other pollutants in the air, soil or water may give rise to significant
liabilities to governmental bodies and third parties and may require us to incur
substantial costs of remediation. We may be required to agree to indemnify
sellers of properties we purchase against certain liabilities for environmental
claims associated with those properties. We can give no assurance that existing
environmental laws or regulations, as currently interpreted, or as they may be
reinterpreted in the future, or future laws or regulations will not materially
adversely affect our results of operations and financial conditions.
There is a risk that our estimates of proved reserves and future net revenue are
inaccurate.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond our control. The reserve
data included in this report represent only estimates. In addition, the
historical and projected estimates of future net revenue from proved reserves
and the present value thereof are based upon certain assumptions about future
production levels, commodity prices and operating costs that may prove to be
incorrect over time. In particular, estimates of crude oil and natural gas
reserves, future net revenue from proved reserves and the discounted present
value thereof for the Pease crude oil and natural gas properties described in
this report are based on the assumptions that such properties are developed in
accordance with their proposed development programs and that future crude oil
prices remain the same as crude oil prices at December 31, 1999, with respect to
production attributable to our interests in our properties.
Our corporate charter limits director liability.
Our Articles of Incorporation as amended provide, as permitted by Nevada law,
that a director shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
with certain exceptions. These provisions may discourage stockholders from
bringing suit against a director for breach of fiduciary duty and may reduce the
likelihood of derivative litigation brought by stockholders against directors.
In addition, the Articles of Incorporation and Bylaws provide for mandatory
indemnification of directors and officers to the fullest extent permitted by
Nevada law.
The market price for our common stock is likely to be volatile and the market
for our common stock may not be liquid.
If our operating results should be below the expectations of investors or
analysts in one or more future periods, it is likely that the price of the
common stock would be materially adversely affected. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly effected market prices of equity securities of many energy
companies, particularly emerging and new companies. General market fluctuations
may also adversely affect the market price of the common stock.
ADMINISTRATION
Office Facilities - We currently rent approximately 3,400 square feet in an
office facility in Grand Junction, Colorado. The rental rate is $2,400 per month
through May 31, 2000 when the present lease will expire.
Employees - As of December 31, 1999, we had four full time and one part time
employees. None are covered by a collective bargaining agreement. We consider
that our relations with our employees is satisfactory.
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<PAGE>
ITEM 2 - PROPERTIES
PRINCIPAL OIL AND GAS INTERESTS
Developed Acreage - Our producing properties as of December 31, 1999 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>
East Bayou Sorrel Louisiana 3 .27 - - 368 33
South Lake Arthur Louisiana - - 1 .20 349 73
Maurice Louisiana - - 2 .14 196 14
Austin Bayou Texas 1 .02 2 .04 505 11
Ganado Texas - - 1 .13 116 15
--- ---- --- --- ------ ------
Grand Total 4 .29 6 .51 1,534 146
=== === === === ===== =====
</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 our fractional working
interests multiplied by the number of wells or number of acres.
Substantially all of our producing oil and gas properties are located on leases
held by us for as long as production is maintained.
Undeveloped Acreage - Our 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, 1999 is as follows:
Undeveloped Acreage
Prospect Description State Gross Net
- -------------------- ----- ------- ----
East Bayou Sorrel Louisiana 90 9(1)
Maurice Prospect Louisiana 894 80(2)
Parallel 3-D Program-Leases Texas 11,575 1,446(3)
Austin Bayou Texas 694 15(4)
---- ----------
Totals: 13,253 1,550
====== ======
- -------------------------
(1) Substantially all of these leases will expire in 2001 unless production
has been obtained. (2) A majority of these leases will expire in 2000 unless
production has been obtained. (3) 601 net acres will expire in 2000, 829 net
acres will expire in 2001, and 16 net acres will expire in 2002 unless
production is obtained. (4) Substantially all of these leases will expire in
2000 unless production has been obtained. Note: The Parallel 3-D Program
Lease Options have expired.
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. We believe 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 Pease
currently participates as a non-operating, minority interest partner are
described below.
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<PAGE>
East Bayou Sorrel - During 1997, Pease acquired a working interest and an after
prospect payout ("APPO") 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 February 2000, the
production from the three producing wells in this field represents approximately
85% of Pease's net daily production (per BOE). The production is being drawn
from the CIBC haz 2 and CIBC 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. The prospect "paid out" effective November 15,
1999. Accordingly, our working interest has increased from 8.9% to 15.6%
subsequent to that date as a result of owning the APPO.
Maurice Field - In 1997, Pease joined Davis Petroleum and AHC to drill a
discovery well at Maurice Field, Vermilion Parish, Louisiana. Since then two
additional wells have been drilled and completed, of which one well was lost in
late 1999 due to downhole mechanical problems. A 3-D survey is currently being
interpreted and additional wells are expected to be drilled in the future in
order to develop the field. As of February 2000, the producing wells represented
approximately 15% of our net daily production (per BOE) and are being drawn from
the Marg tex and Camerina sand formations. Our working interests in this field
range from 6.9% to 8.4%
Formosa, Texana and Ganado 3-D Exploration Prospects - During 1997, Pease
secured a 12.5% working interest in three specific on-shore upper Gulf Coast 3-D
seismic survey projects located in and around Jackson County, Texas. The 3-D
survey covers over 200 square miles (approximately 130,000 acres). The surveys
on the three projects are completed and the data is currently being interpreted
and integrated with known geology. Parallel Petroleum of Midland, Texas is the
designated operator for these prospect areas. Five wells were drilled on this
acreage in 1999 of which four were dry.
Rocky Mountain Properties
During 1998, we sold all of our Rocky Mountain oil and gas assets. Accordingly,
our only remaining reserves, revenues and future cash flows are now limited to
Gulf Coast region properties.
Title to Properties
Only a limited perfunctory title examination is conducted at the time we acquire
interests in oil and gas leases. This practice is customary in the oil and gas
industry. Prior to the commencement of drilling operations, a thorough title
examination is conducted. We believe that title to our properties is good and
defensible in accordance with standards generally accepted in the oil and gas
industry, subject to such exceptions, 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. We do not believe that any of these
burdens will materially interfere with our use of the properties.
Estimated Proved Reserves
Our oil and gas reserve and reserve value information is included in 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
Pease's "proved" oil and gas reserves and the standardized measure of discounted
future net cash flows. The estimated proved reserves information 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 set forth elsewhere
in this proxy statement and prospectus.
We have 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.
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<PAGE>
All of our oil and gas reserves are located in the Continental United States.
The table below sets forth our estimated quantities of proved reserves, and the
present value of estimated future net revenues discounted by 10% per year using
prices we were receiving at the end of each of the two fiscal years ending 1997
and 1998 on a non-escalated basis.
Year Ended December 31,
1999 1998
-------- ----------
Estimated Proved Oil Reserves (Bbls) 334,000 275,000
Estimated Proved Gas Reserves (Mcf) 1,359,000 1,368,000
Estimated Future Net Revenues $ 8,156,700 $ 4,054,000
Present Value of Estimated Future Net Revenues $ 6,269,700 $ 2,951,000
Prices used to determined reserves:
Oil (per Bbl) $ 24.91 $ 10.15
Gas (per Mcf) $ 2.77 $ 2.43
NET QUANTITIES OF OIL AND GAS PRODUCED
Our 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,
1999 1998
---------- --------------
Oil (Bbls)
Gulf Coast 74,000 58,000
Rocky Mtns. - 51,000
--------------- ------------
Total 74,000 109,000
=========== ===========
Gas (Mcf)
Gulf Coast 337,000 320,000
Rocky Mtns - 230,000
--------------- ------------
Total 337,000 550,000
========== ============
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:
<TABLE>
<CAPTION>
Average
Year Ended .................. Average Sales Price Production
December 31 .................. Oil (Bbls) Gas (Mcf) Per BOE Cost Per BOE
- ------------------------------ ------ ----- ------ -----
1999:
<S> <C> <C> <C> <C>
Gulf Coast ............. $ 17.80 $ 2.46 $ 16.48 $ 3.11
Rocky Mtns ............. N/A N/A N/A N/A
1998:
Gulf Coast ............. $ 12.19 $ 2.22 $ 12.73 $ 2.17
Rocky Mtns ............. $ 12.11 $ 1.39 $ 10.50 $ 9.04
Combined Avg ............ $ 12.18 $ 1.87 $ 11.74 $ 5.22
</TABLE>
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<PAGE>
DRILLING ACTIVITY
The following table summarizes our 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,
1999 1998
--------------- ---------------
Wells Drilled Gross Net Gross Net
Exploratory
Oil - - 1 .09
Gas 3 .27 4 .14
Non-productive 4 .50 3 .32
------ ------ ----- -------
Total 7 .77 8 .55
====== ====== ====== =======
Development
Oil - - - -
Gas - - - -
Non-productive - - - -
-------- ------- ------ --------
Total - - - -
======== ======== ====== ========
ITEM 3 - LEGAL PROCEEDINGS
We 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, 1999 and
as of the date of this report, we were not involved in any litigation which we
believe could have a materially adverse effect on our financial condition or
results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our Security holders during the
fourth quarter ended December 31, 1999.
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<PAGE>
Part II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pease common stock is traded on the OTC Bulletin Board market under the symbol
"WPOG." Until January 14, 1999, the Pease common stock was traded in the Nasdaq
Small Cap Market. The following table sets forth the high and low reported
closing prices per share of Pease common stock for the quarterly periods
indicated, which correspond to the fiscal quarters for financial reporting
purposes.
Pease Common Stock
High Low
1998:
First quarter .................. 19.69 8.44
Second quarter ................. 13.75 6.56
Third quarter .................. 7.50 1.25
Fourth quarter ................. 3.13 0.81
1999:
First quarter .................. 1.00 0.41
Second quarter ................. 0.70 0.41
Third quarter .................. 0.63 0.44
Fourth quarter .............. 0.45 0.25
Note: Adjusted to give effect to a 10 into 1 reverse stock split in the fourth
quarter of 1998.
Stockholders - As of January 1, 2000, we had at least 635 round-lot registered
holders of our common stock and 10 holders of our Series B Preferred stock.
Dividends - We have not paid cash dividends on our Common Stock in the past and
do not anticipate doing so in the foreseeable future. We are precluded from
paying dividends on our Common Stock so long as any dividends on the Preferred
Stock are in arrears.
Under our 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 Pease'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.
We have 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 our election, 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 do we expect these securities to be publicly traded in the
future.
In connection with the contemplated merger with Carpatsky, the Preferred
stockholders have signed Agreements Not to Sell or Convert Securities which,
among other things, stated that Pease's obligation to accrue and pay additional
dividends on the Series B Preferred stock shall be deferred from the date that
an Agreement and Plan of Merger with Carpatsky is signed. Therefore, dividends
were accrued and paid to the Preferred stockholders through the close of
business on September 1, 1999. If the merger with Carpatsky is consummated,
there will be no further dividends accrued or paid. If the merger is not
consummated, Pease shall at that time accrue and pay dividends for the period
from September 1, 1999 through the date on which the merger is abandoned.
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
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<PAGE>
determined by resolution of Pease's Board of Directors. The issuance of
Preferred Stock may have the effect of delaying or preventing a change in
control of Pease and may have an adverse effect on the rights of the holders of
Common Stock.
Recent Sales of Unregistered Securities - Pease 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, 1999 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 January 28, 1999 we issued 16,209 shares of our 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
Pease for resale by the holders in Registration No. 333-44305. We
relied upon Section 3(a)(9) of the Securities Act of 1933, as
amended, in claiming exemption from the registration requirements
of the Securities Act for issuance of the securities upon
conversion.
2. On March 1, 1999 we 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
Pease for resale by the holders in Registration No. 333-44305. We
relied upon Section 3(a)(9) of the Securities Act of 1933, as
amended, in claiming exemption from the registration requirements
of the Securities Act for issuance of the securities upon
conversion.
3. On March 23, 1999 we 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
Pease for resale by the holders in Registration No. 333-44305. We
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 September 24, 1999, we issued a total of 42,700 shares to five
of our directors for compensation of services in lieu of cash. The
services were provided between January 1, 1997 and August 31, 1999.
For financial statement reporting purposes, the issuance was
recorded at $67,333 (or $1.58 per share) representing the average
market value of Pease's stock on the various dates the services
were rendered. 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.
In connection with the issuance of the above noted securities, we 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 Pease 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 30, 2000 there were outstanding 105,828 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 price at the
time of conversion. Based on such price on March 30, 2000, the outstanding
Series B Preferred Stock would have been convertible into approximately 16.6
million shares. Our Articles of Incorporation authorize a total of up to
4,000,000 shares of common stock, of which 1,731,398 were issued and outstanding
on March 31, 2000. We are 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.
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<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity, Capital Expenditures and Capital Resources
At December 31, 1999, our cash balance was $724,354 with a positive working
capital position of $922,105, compared to a cash balance of $1,049,582 and a
positive working capital position of $1,101,888 of December 31, 1998. The change
in our cash balance is summarized as follows:
Cash balance at December 31, 1998 $ 1,049,582
Sources of Cash:
Cash provided by operating activities 739,290
Proceeds from the sale of property and equipment 101,005
Proceeds from the redemption of certificate of deposit 70,000
--------------
Total Sources of Cash 1,959,877
Uses of Cash:
Capital expenditures for oil and gas activities (931,689)
Series B Preferred Stock dividends (244,653)
Purchase and retirement of Series B Preferred Stocks (51,313)
Repayment of long term debt (5,853)
Capital expenditure for office equipment (2,015)
Total uses of cash (1,235,523)
Cash balance at December 31, 1999 $ 724,354
============
The costs incurred in 1999 for oil and gas activities are summarized as follows
(the difference between the total incurred, as illustrated in the following
table, and the total amount cash used in 1999, relates to the changes in
accounts payable at December 31, 1998 and December 31, 1999).
<TABLE>
<CAPTION>
PROGRAM OPERATOR
NEGX Parallel AHC Other Total %
Category:
<S> <C> <C> <C> <C> <C> <C>
Exploratory Dry Holes .......... $ -- $163,960 $ -- $ -- $163,960 18%
Programs .................... 2,310 130,097 -- -- 132,407 15%
Successful efforts .............. -- 58,603 250,897 1,515 311,015 34%
Capitalized Interest ............ -- -- -- 278,250 278,250 30%
Other Exploration Costs ......... -- -- -- 23,803 23,803 3%
-------- -------- --------
Total Exploration Costs . $ 2,310 $352,660 $250,897 $303,568 $909,435 100%
========== ======== ======== ======== ======== =====
% of Exploration Costs .. Nil 39% 28% 33% 100%
</TABLE>
Our current oil and gas assets consist of the following:
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, NEG 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 a majority of Pease's
current production, the bankruptcy petition might adversely effect future
development or operation of the field; however, Pease does not expect that its
interest in the field or production from currently existing wells will be
affected.
Pease does have an unsecured claim in the bankruptcy proceeding for various
amounts which Pease believes were overpaid to NEG as operator in connection with
the drilling and operating of certain wells. Collection of
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<PAGE>
these amounts may be delayed or may not occur, pending disposition of NEG's
reorganization proceeding. The total claim is approximately $60,000. However, no
amount has been recorded in the financial statements as of December 31, 1999.
Although we are non-operator in all of these areas, and therefore do not control
the timing of any development or exploration activities, we currently expect the
expenditures that will be proposed for these areas by the respective operators
through the first quarter of 2001 to be within the following ranges:
Estimated Investment
Area Minimum Maximum
East Bayou Sorrel Area $ - $ 400,000
Formosa, Texana, and Ganado Prospects 150,000 300,000
Maurice Prospect 50,000 500,000
----------- -------------
Total $ 200,000 $ 1,200,000
========= ===========
Given the range of potential capital requirements through the first quarter of
2001, our current and anticipated cash position may not be sufficient to cover
the future working capital and exploration obligations. We have 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), we have been unable to attract
additional equity capital. For example, using our recent common stock price of
$0.43, and applying the applicable discount of 25%, should all the holders of
the Series B Preferred Stock elect to convert into common stock, we would be
required to issue approximately 16.6 million shares in the conversion. This
would represent approximately 90% of the then outstanding common shares.
Presently, we have only 4.0 million shares of common stock authorized and are
obligated under the terms of the Preferred Stock Agreement to seek approval of
additional authorized shares at our next meeting of stockholders to allow for
conversion should the Preferred stockholders choose to do so. However, it cannot
be determined at this time whether or not additional common shares will be
authorized by the common shareholders and if not, what the consequences may be.
In September 1998, Pease engaged San Jacinto Securities, Inc. ("SJS"), an
investment banking firm located in Dallas, Texas, to assist us in pursuing
various strategic alternatives. Their efforts have focused primarily on seeking
a potential merger candidate for us. As previously stated, on September 1, 1999
the Merger Agreement was executed by Pease and Carpatsky. 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
consummate.
If the contemplated merger with Carpatsky cannot be consummated within a
reasonable period of time, and under reasonable terms, then we may have to seek
additional financing. However, our 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 our 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, we 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
Our largest source of operating revenue is from the sale of produced oil,
natural gas, and natural gas liquids. Therefore, the level of our revenues and
earnings are affected by prices at which natural gas, oil and natural gas
-19-
<PAGE>
liquids are sold. Therefore, our operating results for any prior period are not
necessarily indicative of future operating results because of the fluctuations
in natural gas, oil and natural gas liquid prices and the lack of predictability
of those fluctuations as well as changes in production levels.
Total Revenue
Total Revenue from all operations was as follows:
For the Year Ended December 31,
1999 1998
------------------------------------
Amount % Amount %
Oil and gas sales ...................... $2,144,057 100% $2,359,905 81%
Gas plant, services and supply ......... -- -- 528,106 18%
Well administration and other income ... 2,902 Nil 28,971 1%
---------- --- ---------- -----
Total revenue ..................... $2,146,959 100% $2,916,982 100%
========== ===== ========== =====
The decrease in total revenue, along with any known trends or changes that
effect revenue on a line-by-line basis, are discussed in the following
paragraphs under their respective captions.
Oil and Gas
Operating statistics for oil and gas production for the periods presented are as
follows:
For the Year Ended December 31,
1999 1998
-------------- ----------------
Production:
Oil (Bbls)
Rocky Mtns. - 51,000
Gulf Coast 74,000 58,000
Gas (Mcf)
Rocky Mtns. - 230,000
Gulf Coast 337,000 320,000
BOE (6:1)
Rocky Mtns. - 89,000
Gulf Coast 130,000 112,000
Average Collected Price:
Oil (per Bbl)
Rocky Mtns. $ - $ 12.11
Gulf Coast $ 17.80 $ 12.19
Gas (per Mcf)
Rocky Mtns. $ - $ 1.39
Gulf Coast $ 2.46 $ 2.22
Per BOE (6:1)
Rocky Mtns. $ - $ 10.50
Gulf Coast $ 16.48 $ 12.73
Operating Margins:
Rocky Mtns:
Revenue -
Rocky Mtns. Oil $ - $ 612,370
Rocky Mtns. Gas - 321,333
------------------- -------------
- 933,703
Costs - (806,224)
------------------- --------------
Operating Margin $ - $ 127,479
================== =============
Operating Margin Percent - 14%
-20-
<PAGE>
For the Year Ended December 31,
1999 1998
------------ ------------
Gulf Coast:
Revenue -
Gulf Coast - Oil $ 1,316,142 $ 715,699
Gulf Coast - Gas 827,915 710,503
------------- -------------
2,144,057 1,426,202
Costs (404,897) (243,339)
-------------- -------------
Operating Margin $ 1,739,160 $ 1,182,863
=========== =============
Operating Margin Percent 81% 83%
Production Costs per BOE before DD&A:
Rocky Mtn Region $ - $ 9.04
Gulf Coast Region 3.11 2.17
Change in Revenue Attributable to Total Revenue:
Production (832,081)
Price 613,787
Total Decrease in Revenue $ (218,294)
===============
Change in Revenue for Gulf Coast ONLY:
Production $ 223,485
Price 494,370
--------------
Total Increase in Gulf Coast Revenue $ 717,855
=============
Substantially, all of our current oil and gas production is now generated from
four of the ten wells in which we hold a working interest. Of the four main
producing wells, three are operated by NEG, and the other one is operated by
AHC. All these wells are deep, high pressure, water driven reservoirs that are
inherently laden with geologic, geophysical, and mechanical risks and
uncertainties. The unexpected loss of any one of these wells would have a
material negative impact on our estimated reserves, future production and future
cash flows.
Gas Plant, Service and Supply
As previously discussed, we sold these assets in 1998. However, the historical
operating results excluding depreciation and amortization for 1998 are as
follows:
Amount
Revenue $ 271,932
Costs (295,789)
------------
Net Operating Income (Loss) $ (23,857)
============
Consulting Arrangement - Related Party
In March 1996 Pease entered into a three-year consulting agreement with Beta
Capital Group, Inc. ("Beta") located in Newport Beach, California. Beta's
chairman, Steve Antry, has been a director of Pease since August 1996. The
consulting agreement, which ended in February 1999, provided for minimum monthly
cash payments of $17,500 plus reimbursement for out-of-pocket expenses.
During 1997, Pease 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. Pease 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. Stephen Fischer, an independent
contractor for Beta, is also a member of our Board of Directors.
-21-
<PAGE>
General and Administrative
General and Administrative ("G&A") expenses decreased $741,000 in 1999 when
compared to 1998 which is summarized as follows:
$ 397,000 Reduction of payroll as a result of eliminating executive
and administrative positions
150,000 Fee paid in 1998 to San Jacinto Securities
144,000 Legal and accounting
110,000 Consulting
44,000 Travel
31,000 All other, net
(135,000) Costs associated with pursuing the merger with Carpatsky
$ 741,000 Net decrease between the periods presented
Pease capitalized $23,804 and $236,931 of costs associated with the Gulf Coast
exploration activities in 1999 and 1998, respectively, that would have been
expensed as G&A costs under the successful efforts method of accounting for oil
and gas activities.
We have taken steps to significantly reduce future G&A costs, and we expect
"core" G&A costs in 2000 to be between $40,000 to $60,000 per month. However, we
expect additional amounts (aggregating $50,000 to $75,000) will be incurred in
connection with the efforts to consummate the merger transaction with Carpatsky.
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
1999 1998
------------- ------------
Oil and Gas Properties - Gulf Coast $ 985,113 1,639,125
Oil and Gas Properties - Rocky Mountains - 275,137
Gas Plant, Service and Supply Operations - 273,345
Furniture and Fixtures 22,402 53,485
Non-Compete Agreements - -
-------------- -----------
Total $1,007,515 $ 2,241,092
=========== ============
DD&A per BOE for oil and gas properties $ 7.57 $ 9.52
============== ============
DD&A for the oil and gas properties is computed based on one full cost pool
using the total estimated reserves at the end of each period presented and prior
to applying the ceiling test discussed below under "Impairment Expense." The
estimated portion of DD&A for the Rocky Mountains and the Gulf Coast are
illustrated here for analysis purposes only. Total DD&A for the oil and gas
properties decreased in 1999 when compared to 1998 principally as a result of
the impairment charges recognized in 1998 significantly reduced the net value of
full cost pool being amortized in 1999.
Interest Expense
Total interest incurred, and its allocation, for the periods presented is as
follows:
For the Year Ended December 31,
1999 1998
------------ ------------
Interest paid or accrued $ 280,425 $ 369,919
Amortization of debt discount 138,236 341,767
Amortization of debt issuance costs 219,337 540,510
------------ -------------
Total interest incurred 637,998 1,252,196
Interest capitalized (278,250) (852,978)
------------ -------------
Interest expense $ 359,748 $ 399,218
============ ============
The lower interest incurred in 1999 is substantially attributed to the reduction
of outstanding debt during the third quarter of 1998. In connection with the
sale of the Rocky Mountain assets, we paid down $1.2 million (or 30%) of the
outstanding convertible debentures in September 1998, thereby reducing the
outstanding principal from
-22-
<PAGE>
$4.0 million to $2.8 million. At the same time, we charged to interest expense
$396,742, representing 30% of the unamortized debt discount and debt issuance
costs associated with that debt.
Impairment - Oil and Gas Properties
We use the full cost method of accounting for our 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 Pease's proved reserves. Establishing a direct
cause-and-effect relationship between costs incurred and specific reserves
discovered, which is the premise under the successful efforts accounting method,
is not relevant to the full cost concept. However, the costs accumulated in our
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 periodically by a
charge to impairment. Accordingly, in 1998 we incurred an 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 decline of oil prices (a declining commodity price will in effect
lower the "ceiling" of the full cost pool). No impairment charge was incurred in
1999 since our ceiling was greater than our net accumulated costs.
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.
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; 3) any dividends in arrears; and 4) any imputed
dividends attributable to the beneficial conversion feature. Accordingly, the
net loss applicable to common stockholders includes the following charges
associated with the Series B preferred stock that was issued on December 31,
1997:
For the Year Ended December 31,
1999 1998
-------------- ---------
Dividends declared $ 177,817 $ 278,026
Dividends in arrears 87,707 -
Non-cash imputed dividend charge - 1,789,468
-------------- ------------
Total $ 265,524 $ 2,067,494
=========== ===========
The Series B preferred stock is convertible into common stock at a conversion
price equal to a 25% discount to the average trading price of the common stock
prior to conversion. This discount started at 12% in April 1998 and increased
periodically until it topped out at 25%. This discount is considered a
"beneficial conversion feature." The additional non-cash imputed dividend charge
represents the intrinsic value of the discount applicable through the period
presented. No additional non-cash dividend charges have been or will be incurred
subsequent to December 31, 1998.
In connection with an agreement signed by the Preferred Stockholders and
associated with the contemplated merger with Carpatsky, we have not accrued or
paid any dividends to the Series B Preferred Stockholders subsequent to
September 1, 1999. However, the amount that we would be obligated to pay should
the merger be abandoned has been included in the calculation of net loss per
share as "Dividends in arrears".
-23-
<PAGE>
OTHER MATTERS
Disclosure Regarding Forward-Looking Statements
This report on Form 10-QSB includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
facts included in this report, including, without limitation, statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding Pease's contemplated merger, financial position, reserve
quantities, plans and objectives of Pease's management for future operations and
capital expenditures, and statements regarding the planned Carpatsky
transactions and the Carpatsky assets are forward-looking statements and the
assumptions upon which such forward-looking statements are based are believed to
be reasonable. We 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 our control.
Such risks and uncertainties 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 contemplated merger not be
consummated, our ability to generate additional capital to complete our 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; U.S. and
foreign government regulation; environmental matters; implications to Carpatsky
from conducting its operations in Ukraine and related political and geographical
risks; financial condition of the other companies participating in the
exploration, development and production of oil and gas programs; and other
matters beyond our control. In addition, since all of the prospects in the Gulf
Coast are currently operated by another party, we 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 Pease or persons
acting on our behalf subsequent to the date of this report are expressly
qualified in their entirety by this disclosure.
-24-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report. . . . . . . . . . . . . . . 26
Consolidated Balance Sheet - December 31, 1999 . . . . . 27
Consolidated Statements of Operations -
For the Years Ended December 31, 1999 and 1998. . . . . . . . 28
Consolidated Statements of Stockholders' Equity -
For the Years Ended December 31,1999 and 1998. . . . . . . ... 29
Consolidated Statements of Cash Flows -
For the Years Ended December 31, 1999 and 1998. . . . . . . 30-31
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 32-42
-25-
<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, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1999 and 1998. 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, 1999, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998
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
historically incurred net operating losses resulting in an accumulated deficit
of $33.5 million as of December 31, 1999. These conditions and other 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.
HEIN + ASSOCIATES LLP
Denver, Colorado
February 18, 2000
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1999
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C>
Cash and equivalents ..................................................... $ 724,354
Trade receivables, net of allowance for bad debts of $15,621 ............. 402,847
Prepaid expenses and other ............................................... 76,349
------------
Total current assets ................................... 1,203,550
OIL AND GAS PROPERTIES, at cost (full cost method):
Unevaluated properties ................................................... 2,281,732
Costs being amortized .................................................... 18,278,461
Total oil and gas properties ................................ 20,560,193
Less accumulated amortization ............................................ (14,868,287)
Net oil and gas properties .................................. 5,691,906
OTHER ASSETS:
Debt issuance costs, net of accumulated amortization of $464,846 ......... 184,315
Office equipment and vehicles, net of accumulated depreciation of $176,013 54,198
Deposits and other ....................................................... 7,493
------------
Total other assets .......................................... 246,006
------------
TOTAL ASSETS ................................................................... $ 7,141,462
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ................................... $ 6,352
Accounts payable, trade ................................................ 140,554
Accrued expenses ....................................................... 134,539
Total current liabilities ................................. 281,445
LONG-TERM DEBT, less current maturities: ..................................... 2,506,218
COMMITMENTS AND CONTINGENCIES (Notes 3 and 5)
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share, 2,000,000 shares
authorized,105,828 shares of Series B 5% PIK Cumulative Convertible
Preferred
Stock issued and outstanding (liquidation preference of $5,379,107) 1,058
Common Stock, par value $.10 per share, 4,000,000 shares authorized,
1,731,398 shares issued and outstanding ........................... 173,140
Additional paid-in capital ............................................. 37,636,191
Accumulated deficit .................................................... (33,456,590)
Total stockholders' equity ................................ 4,353,799
===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-27-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999 and 1998
1999 1998
------------- -----------
REVENUE:
Oil and gas sales ...................... $ 2,144,057 $ 2,359,905
Gas plant, service and supply .......... -- 528,106
Well administration and other .......... 2,902 28,971
------------ ------------
Total revenue ............. 2,146,959 2,916,982
------------ ------------
EXPENSES:
Oil and gas production costs ........... 404,897 1,049,563
Gas plant, service and supply .......... -- 571,013
Consulting expense-related party ....... 37,750 247,123
General and administrative ............. 845,526 1,587,013
Depreciation, depletion and amortization 1,007,515 2,241,092
Impairment expense:
Oil and gas properties ......... -- 7,278,818
Assets held for sale ........... -- 313,953
------------ ------------
Total expenses ............ 2,295,688 13.288,575
------------ ------------
LOSS FROM OPERATIONS ......................... (148,729) (10,371,593)
OTHER INCOME (EXPENSES):
Interest expense ....................... (359,748) (399,218)
Interest income ........................ 42,235 139,785
Gain (Loss) on sale of assets .......... 968 3,555
------------ ------------
NET LOSS ..................................... $ (465,274) $(10,627,471)
============ ============
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ... $ (730,798) $(12,694,965)
============ ============
NET LOSS PER COMMON SHARE .................... $ (0.43) $ (7.99)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING ............................ 1,684,000 1,588,000
============= ================
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999 and 1998
<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> <C> <C>
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
Purchase and retirement of Series B preferred stock (825) (8) -- -- (51,305) -- (51,313)
Issuance of common stock for:
Services of Directors in lieu of cash ......... -- -- 42,700 4,270 63,063 -- 67,333
Conversion of Series B preferred stock ........ (683) (7) 87,636 8,764 (8,757) -- --
Series B preferred stock dividends ................ -- -- -- -- (177,816) -- (177,816)
Net Loss .......................................... -- -- -- -- -- (465,274) (465,274)
--------- -------- ----------- ----------- ------------
BALANCES, December 31, 1999 ....................... 105,828 $ 1,058 1,731,398 173,140 $ 37,636,191 $(33,456,590) $ 4,353,799
======= ======= ========== ======== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss .......................................................... $ (465,274) $(10,627,471)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization ............. 1,007,515 2,241,092
Amortization of debt discount and issuance costs ..... 357,573 396,742
Bad debt expense ..................................... 23,710 --
Impairment expense:
Assets held for sale .......................... -- 313,953
Oil and gas properties ........................ -- 7,278,818
Loss (Gain) on sale of assets ........................ (968) (3,555)
Issuance of common stock for services ................ 29,747 --
Other ................................................ -- 12,255
------------ ------------
Cash flows before working capital adjustments . 952,303 (388,166)
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade receivables ............................. (6,097) 336,974
Inventory ..................................... -- 385,091
Prepaid expenses and other .................... 24,338 8,292
Increase (decrease) in:
Accounts payable .............................. (147,647) (40,673)
Accrued expenses .............................. (83,607) (512,971)
------------ ------------
Net cash provided by (used in) operating activities .. 739,290 (211,453)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant and equipment ............ (933,704) (7,364,232)
Redemption of certificate of deposit .............................. 70,000 25,000
Proceeds from sale of property, plant and equipment ............... 101,005 3,823,286
------------ ------------
Net cash provided by (used in) investing activities .. (762,699) (3,515,946)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants .............. -- 938
Series B preferred stock dividends ................................ (244,653) (210,941)
Repayment of long-term debt ....................................... (5,853) (1,207,805)
Offering costs .................................................... -- (146,765)
Purchase and retirement of Series B preferred stock ............... (51,313) (206,250)
------------ ------------
Net cash provided by (used in) financing activities .. (301,819) (1,770,823)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS ......................... (325,228) (5,498,222)
CASH AND EQUIVALENTS, beginning of year ................................. 1,049,582 6,547,804
------------ ------------
CASH AND EQUIVALENTS, end of year ....................................... $ 724,354 $ 1,049,582
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .............................................. $ 280,425 $ 400,309
============ ============
Cash paid for income taxes .......................................... $ -- $ --
============ ============
</TABLE>
-30-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
<S> <C> <C>
Debt incurred for purchase of vehicles ...................... $ -- $ 32,610
Increase (decrease) in payables for:
Oil and gas properties ................................. (22,246) (1,002,353)
Offering costs ......................................... -- (146,765)
Series B preferred stock dividends ..................... (67,085) 67,085
Capitalized portion of amortized debt issuance/discount costs -- 485,534
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-31-
<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, 1999 the principal business of Pease
Oil and Gas Company ("Pease") is to participate as a non-operating, minority
interest owner in exploration, development, production and sale of oil,
natural gas and natural gas liquids. Pease 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, Pease's gas processing plant and the oilfield service and
supply businesses were sold. Pease conducted its operations through the
following wholly-owned subsidiaries: Loveland Gas Processing Company, Ltd.;
Pease Oil Field Services, Inc.; Pease Oil Field Supply, Inc.; and Pease
Operating Company, Inc. All the subsidiaries are currently inactive.
Continuing Operations - Pease has historically incurred net operating losses
resulting in an accumulated deficit of $33.5 million as of December 31,
1999. As a result of the continuing losses, Pease's stockholders' equity has
been reduced to approximately $4.3 million. At December 31, 1999, 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 Pease'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. Pease may be required to redeem the
Series B Preferred stock on December 31, 2002 at a price equal to the
liquidation preference. Alternatively, Pease 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, Pease 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, Pease 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, Pease will also be required to pay off convertible debentures
with a current outstanding balance of $2,782,500. During 1998 and into 1999,
Pease has taken several steps to reduce general and administrative costs and
management believes Pease will be able to generate positive operating cash
flows in 2000. Management believes capital requirements for 2000 will be
between $200,000 and $1,200,000. Accordingly, management believes that
existing working capital, plus cash expected to be generated from operating
activities will be sufficient to meet commitments for capital expenditures
and other obligations of Pease through at least the first quarter of 2001.
However, should the existing working capital not be sufficient to meet
future obligations, Pease 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.
During 1998, in response to a series of dry holes and other factors that
contributed to the historically poor financial results, Pease restructured
its management and began to vigorously pursue a merger candidate. Pease's
Board of Directors believed that a merger would, among other things,
increase Pease's asset base and improve the chances of financing future
opportunities. As a result of these efforts, Pease signed an Agreement and
Plan of Merger ("Merger Agreement") on September 1, 1999 (and amended in
December 1999) with Carpatsky Petroleum, Inc. ("Carpatsky"), a publicly held
company traded on the Alberta Stock Exchange under the symbol "KPY."
Carpatsky is engaged in production and development of oil, gas and
condensate in the Republic of Ukraine with proven reserves much greater than
Pease's. The transaction is still conditioned upon, among other things,
regulatory and shareholder approvals. Pursuant to the terms of the proposed
merger transaction, Pease will issue approximately 44.96 million shares of
common stock plus 102.41 million shares of a newly designated preferred
stock to acquire all the outstanding stock of Carpatsky. In addition, all of
Pease's currently outstanding Series B Preferred Stock will be exchanged for
approximately 8.9 million shares of common stock at the close of the
transaction. All holders of the Series B Preferred Stock have agreed that
dividends subsequent to September 2000 shall not be paid on their holdings
if the contemplated transaction with Carpatsky is ultimately consummated.
They have also agreed not to sell or convert any outstanding shares of the
Series B Preferred until the contemplated transaction with Carpatsky is
either completed or abandoned. The Merger Agreement contemplates an
"opt-out" break-up fee of $250,000 payable by the defaulting party to the
merger. If this merger occurs, Carpatsky will have control of Pease as Pease
will have only one of the expected seven board of director positions. It is
expected current management will also be replaced.
-32-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation - The accompanying financial statements include
the accounts of Pease and its wholly-owned subsidiaries. All material
intercompany transactions and accounts have been eliminated in
consolidation.
Cash and Equivalents - Pease considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Oil and Gas Properties - Pease's oil and gas producing activities are
accounted for using the full cost method of accounting. Pease 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, 1999 and 1998, capital expenditures include internal costs of $23,804
and $236,931, respectively. Proceeds from sales of oil and gas properties
are credited to the full cost pool with no gain or loss 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 - Pease 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
Depreciation expense related to property, plant and equipment amounted to
$22,402 and $326,830 for the years ended December 31, 1999 and 1998,
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.
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.
-33-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Pease'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 - Pease recognizes revenues for oil and gas sales upon
delivery to the purchaser. Revenues from oil field services were recognized
as the services are performed. Oil field supply and equipment sales were
recognized when the goods were 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 ("SFAS") No. 128, Earnings Per Share, which requires disclosure of
basic and diluted earnings per share ("EPS"). Basic EPS excludes dilution
for potential common shares and is computed by dividing the net 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. Basic and diluted EPS
are the same in 1999 and 1998 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 Pease'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 - Pease 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 excess, if any, of the quoted market price of
Pease'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. SFAS No. 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 and pro forma information be provided as to the fair value
effects of transactions with employees. Fair value is generally determined
under an option pricing model using the criteria set forth in SFAS No. 123.
2. ASSETS DIVESTITURE:
During the fourth quarter of 1997, Pease's Board of Directors determined
that Pease'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, Pease evaluated these assets in 1997 for
impairment and reduced the net carrying value to the estimated fair value.
These assets were sold during 1998 for cash proceeds of $3,054,000 and an
additional payment of $100,000 was received in April 1999.
-34-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognized an impairment charge in 1998 of $313,953, to account
for the difference between the net realizable value estimated in 1997 and
the actual amount realized in 1998. The results of operations during 1998,
exclusive of the impairment charge, related to the Rocky Mountain assets are
as follows:
1998
Revenues $ 1,488,843
Operating costs and expenses (1,394,141)
Depreciation and amortization (549,816)
---------------
Loss from operations $ (455,114)
==============
3. DEBT FINANCING ARRANGEMENTS:
Long-Term Debt - Long-term debt at December 31, 1999 consists of the
following:
Convertible debentures, interest at 10%,
due April 2001, unsecured $ 2,782,500
Less unamortized discount (292,450)
----------------
Net carrying value 2,490,050
Note payable to bank, interest at 8.5%,
monthly payments of $669, due March 2003,
collateralized by a vehicle 22,520
Total long-term debt 2,512,570
Less current maturities (6,352)
Long-term debt, less current maturities $ 2,506,218
=============
Aggregate maturities of long-term debt excluding the unamortized non-cash
discount, are as follows:
Year Ending December 31:
2000 $ 6,352
2001 2,789,396
2002 7,505
2003 1,767
-----------------
Total $ 2,805,020
=================
Convertible Debentures and Consulting Agreement - In March 1996, Pease 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 provided for minimum monthly cash payments of $17,500. In addition to cash
compensation, Pease agreed to grant warrants to purchase 100,000 shares of
Pease's common stock. The exercise price of the warrants is $7.50 per share and
they expire in March 2001.
In April 1996, Pease, 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 Pease'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 Pease 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 has been 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 Pease.
The debentures are convertible, at the holder's option, into Pease's common
stock for $30.00 per share and may be redeemed by Pease, in whole or in part, at
a premium to the original principal amount. During the year ended
-35-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, Pease
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.
4. INCOME TAXES:
Deferred tax assets (there are no deferred tax liabilities) as of December
31, 1999 are comprised of the following:
1999
Long-term Assets:
Net operating loss carryforwards $ 9,646,000
Property, plant and equipment 968,000
Tax credit carryforwards 294,000
Percentage depletion carryforwards 160,000
Other 8,000
---------------
Total 11,076,000
Less valuation allowance (11,076,000)
Net long-term asset $ -
================
During the years ended December 31, 1999 and 1998, Pease increased the
valuation allowance by $1,525,000 and $3,050,000, respectively, primarily due to
an increase in the net operating loss carryforwards which are not considered to
be realizable. Pease 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, 1999, Pease had net operating loss carryforwards for income
tax purposes of approximately $24 million, which expire primarily in 2008
through 2019. Some of these net operating losses are subject 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 or the merger
with Carpatsky is consummated. Additionally, Pease 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 an
employment agreement with Pease's current President/CFO and formally reaffirmed
that commitment in 1999. The agreement may be terminated by the officer upon 90
days notice or by Pease without cause upon 30 days notice. In the event of a
termination by Pease without cause, Pease would be required to pay the officer
one year's salary. If the termination occurs following a change in control,
which includes a merger, Pease would be required to make a lump sum payment
equivalent to two year's salary.
Profit Sharing Plan - Pease 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 Pease's contributions are discretionary and
amounted to $3,862 and $5,401 for the years ended December 31, 1999 and 1998,
respectively.
Environmental - Pease 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 Pease
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.
-36-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bankruptcy of Third Party Operator - In December 1998, NEG 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 a majority of Pease's current production, the bankruptcy
petition might adversely effect future development or operation of the field;
however, Pease does not expect that its interest in the field or production from
currently existing wells will be affected.
Pease does have an unsecured claim in the bankruptcy proceeding for various
amounts which Pease believes were overpaid to the operator in connection with
the drilling of existing wells. Collection of these amounts may be delayed or
may not occur, pending disposition of NEG's reorganization proceeding. The total
claim is approximately $60,000. However, no amount has been recorded in the
financial statements as of December 31, 1999.
Contingencies - Pease 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. Pease 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
Pease 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, Pease 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 Pease'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 and therefore expired on August 13, 1999.
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"). Pease has authority to issue
up to 145,300 shares of Series B Preferred Stock. On December 31, 1997, Pease
issued 113,333 shares of Series B Preferred Stock for $5,666,650. The Series B
Preferred Stock is convertible into common stock at a conversion price equal to
a 25% discount to the average trading price of the common stock prior to
conversion. This discount started at 12% in April 1998 and increased
periodically until it topped out at 25%. The discount was being accounted for as
an additional dividend on the Series B Preferred Stock which was recognized as a
charge to earnings applicable to common stockholders in 1998. The Series B
Preferred Stock provides for a liquidation preference of $50 per share and the
holders are entitled to dividends at $2.50 per annum, payable quarterly in cash
or additional shares of Series B Preferred Stock at the option of Pease.
However, in connection with the contemplated merger with Carpatsky, the
Preferred stockholders have signed Agreements Not to Sell or Convert Securities
which, among other things, stated that Pease's obligation to accrue and pay
additional dividends on the Series B Preferred stock shall be deferred from the
date that an Agreement and Plan of Merger with Carpatsky is signed. Therefore,
dividends were accrued and paid to the Preferred stockholders through the close
of business on September 1, 1999. If the merger with Carpatsky is consummated,
there will be no further dividends paid. If the merger is not consummated, Pease
shall be obligated at that time to accrue and pay dividends for the period from
September 1, 1999 through the date on which the merger is abandoned. For
financial statement presentation purposes, however, the preferred dividends for
September 1, 1999 to December 31, 1999 have been deducted in determining net
loss applicable to common stockholders as if such amounts were required to be
paid.
Beginning in June 1999, Pease 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, Pease is required to
redeem the Series B Preferred Stock on December 31, 2002 at a price equal to the
Liquidation Preference.
In connection with the issuance of this preferred stock, Pease agreed to issue
warrants to the placement agent for 32,380 shares of common stock at $17.50 per
share.
-37-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK BASED COMPENSATION:
Stock Option Plans - Pease's shareholders have approved the following stock
option plans that authorize an aggregate of 185,732 shares 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 Pease'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, 1999 and 1998:
1999 1998
-------------------- -----------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
Of Shares Price f Shares Price
Outstanding, beginning of year .... 71,030 $ 13.85 118,880 $ 19.61
Canceled ................. (6,250) -- (46,350) 21.36
Expired .................. -- 13.75 (1,500) 29.40
Repriced ................. -- (20,000) 26.90
Granted .................. -- -- 20,000 11.25
Exercised ................ -- -- -- --
-------- -------
Outstanding, end of year .......... 64,780 $ 13.86 71,030 $ 13.85
======== ========
For all options granted, the market price of Pease's common stock on the date of
grant was 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 $ 7.77 22,265
2001 10.00 18.10 12.80 10,015
2002 5.00 29.70 18.35 32,500
--------- --------
$ 13.86 64,780
========= ========
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, 1999 and 1998:
-38-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1999 1998
----------------------- ----------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
Of Shares Price Of Shares Price
<S> <C> <C> <C> <C>
Outstanding, beginning of year ......... 570,071 $ 40.87 587,790 $ 43.11
Granted to former officers
and directors for severance ...... -- -- 39,850 14.88
Expired ............................ (339,546) 57.61 (57,444) 45.81
Exercised .......................... -- -- (125) 7.50
-------- -------- -------
Outstanding, end of year ............... 230,525 $ 16.21 570,071 $ 40.87
======== ======== ======== =======
</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
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
---------
$ 16.21 230,525
========
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,
1999 1998
----------- -------------
Net loss applicable to common stockholders:
As reported $ (730,798) $ (12,694,965)
Pro forma (730,798) (16,507,036)
Net loss per common share:
As reported $ (0.43) $ (7.99)
Pro forma (0.43) (8.29)
The weighted average fair value of options and warrants granted to employees
for the year ended December 31, 1998 was $2.24. No options or warrants were
granted in 1999. The fair value of each employee option and warrant granted in
1998 was estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Year Ended December 31,
1999 1998
---------------- ---------------
Expected volatility N/A 80.0%
Risk-free interest rate N/A 5.6%
Expected dividends N/A -
Expected terms (in years) N/A 2.2
-39-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999, 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 Pease's accounts receivable at December 31, 1999,
resulted 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
our 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, Pease 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 Pease have been insignificant.
For the years ended December 31, 1999 and 1998, the Company had oil sales
to a single customer which accounted for 46% and 20% of total revenues,
respectively.
At December 31, 1999, substantially all of Pease'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, Pease 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 Pease'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. The assets acquired from
this acquisition account for 77% of Pease's proved reserves at December 31,
1999.
Full Cost Amortization Expense - Amortization expense amounted to $946,822
and $1,914,262 for the years ended December 31, 1999 and 1998, respectively.
Amortization expense per equivalent units of oil and gas produced amounted to
$7.64 and $9.52 for the years ended December 31, 1999 and 1998 respectively.
Natural gas is converted to equivalent units of oil on the basis of six Mcf of
gas to one equivalent barrel of oil.
Unevaluated Oil and Gas Properties - At December 31, 1999, unevaluated oil
and gas properties consist of the following:
Unproved acquisition costs $ 960,810
Geologic and geophysical costs 925,770
Interest and other costs 395,152
-------------
$ 2,281,732
All unevaluated costs were incurred during 1997, 1998 and 1999 and
management expects that planned activities will enable the evaluation of
substantially all of these costs by the end of 2000.
-40-
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalization of Interest - For the years ended December 31, 1999 and 1998,
the Company capitalized interest costs of $278,250 and $854,483, respectively,
related to unevaluated oil and gas properties and other exploration activities.
Full Cost Ceiling - During 1998, Pease 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 was
substantially attributed to the expiration of certain previously unevaluated
leases, the collapse of oil prices during that period and dry holes. No
impairment charge has been recognized in 1999 since the ceiling is substantially
higher at December 31, 1999 as a result of increased oil prices and additional
discoveries and extensions of the Company's oil and gas reserves.
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, 1999 and 1998:
1999 1998
-------------- -------------
Lease acquisition costs $ 76,912 $ -
Development costs 239,276 13,468
Exploration costs 593,247 6,799,382
-------------- -------------
Total $ 909,435 $ 6,812,850
============== =============
Results of Operations from Oil and Gas Producing Activities - Results of
operations from oil and gas producing activities (excluding well administration
fees, general and administrative expenses, and interest expense) for the years
ended December 31, 1999 and 1998 are presented below.
1999 1998
-------------------- ---------------------
Oil and gas sales $ 2,144,057 $ 2,359,905
Production costs (404,897) (1,049,563)
Amortization expense (1,007,515) (1,914,262)
Impairment expense - (7,278,818)
------------------- ------------------
Results of operations from
oil/gas producing activities $ 731,645 $ ( 7,882,738)
==================== -================
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 Pease's
consulting petroleum engineers, Netherland, Sewell & Associates, Inc. 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. The following
table presents estimates of our net proved oil and gas reserves, and changes
therein for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---------------------- -----------------------
Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf)
<S> <C> <C> <C> <C>
Proved reserves, beginning of year ............... 275,000 1,368,000 1,085,000 4,535,000
Purchase of minerals in place ................. -- -- -- --
Sale of minerals in place ..................... -- -- (725,000) (2,848,000)
Extensions, discoveries, and
other additions .......................... 130,000 330,000 129,000 517,000
Revisions of previous estimates ............... 3,000 (2,000) (105,000) (286,000)
Production .................................... (74,000) (337,000) (109,000) (550,000)
---------- ---------- ---------- ----------
Proved reserves, end of year ..................... 334,000 1,359,000 275,000 1,368,000
========== ========== ========== ==========
Proved developed reserves, beg. of year .......... 261,000 920,000 930,000 3,833,000
========== ========== ========== ==========
Proved developed reserves, end of year ........... 310,000 648,000 261,000 920,000
========== ========== ========== ==========
</TABLE>
The downward revisions of "previous estimates" in 1998 were primarily
attributable to previously recorded undeveloped reserves were removed as a
result of drilling dry holes. The upward revisions of "extensions, discoveries
and other additions" in both 1998 and 1999 were primarily attributable to
significant extensions of the estimated ultimate recoveries of oil and gas at
the East Bayou Sorrel Field.
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. We have 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 and the utilization of net operating loss
carryforwards. 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 our 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, 1999 and 1998 based
on the standardized measure prescribed in Statement of Financial Accounting
Standards No. 69.
<TABLE>
<CAPTION>
1999 1998
--------------- --------------
<S> <C> <C>
Future cash inflows $ 12,080,000 $ 6,117,000
Future production costs (3,089,100) (1,519,000)
Future development costs (834,200) (544,000)
Future income tax expense - -
--------------- --------------
Future net cash flows 8,156,700 4,054,000
10% annual discount for estimated timing of cash flow (1,887,000) (1,103,000)
--------------- --------------
Standardized Measure of Discounted Future Net Cash Flows $ 6,269,700 $ 2,951,000
============== =============
</TABLE>
Average prices used to estimate the reserves:
<TABLE>
<S> <C> <C>
Oil (per bbl) $ 24.91 $ 10.15
Gas (per Mcf) $ 2.77 $ 2.43
</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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Standardized measure, beginning of year ............. $ 2,951,000 $ 9,678,000
Sale of oil and gas produced, net of production costs (1,739,000) (1,310,000)
Sale of minerals in place ........................... -- (5,109,000)
Net changes in prices and production costs .......... 2,504,000 (1,031,000)
Net changes in estimated development costs .......... (245,000) 907,000
Revisions of previous quantity estimates ............ (267,000) (2,874,000)
Discoveries, extensions, and other additions ........ 2,771,000 1,722,000
Accretion of discount ............................... 295,000 968,000
----------- -----------
Standardized Measure, end of year ................... $ 6,270,000 $ 2,951,000
=========== ===========
</TABLE>
-41-
<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 Pease, the principal offices and positions with Pease held
by each person and the date such person became a director or executive officer
of Pease. The executive officers of Pease 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 Pease are as follows:
Served as
Name Age Position With Pease Director Since
- -------------------------- ------------------------------------------------
Patrick J. Duncan 37 President, Chief Financial Officer, 1995
and Director (Term Expires 2000)
Steve A. Antry 44 Director (Term Expires 2001) 1996
Stephen L. Fischer 41 Director (Term Expires 2001) 1997
Homer C. Osborne (2) 70 Director (Term Expires 2001) 1994
James C. Ruane (1)(2) 65 Director (Term Expires 2001) 1980
Clemons F. Walker (2) 60 Director (Term Expires 1999) 1996
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee.
Pease's Board of Directors held 7 meetings during 1999. All were actual
meetings at which all directors attended except for Steve A. Antry, William F.
Warnick and Stephen L. Fischer who missed one meeting and James C. Ruane who
missed two meetings.
Pease has an audit committee, consisting of James C. Ruane which did not
meet in 1999. The functions of the audit committee are to review financial
statements, meet with Pease's independent auditors and address accounting
matters or questions raised by the auditors.
Pease has a compensation committee consisting of James C. Ruane, Homer C.
Osborne, and Clemons F. Walker, which did not meet in 1999. 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 Pease.
Patrick J. Duncan has been our President since November 1998, our Chief
Financial Officer since September 1994, and our Treasurer since March 1996. In
addition to managing the day-do-day activities of Pease, Mr. Duncan is
responsible for all the financial, accounting and administrative reporting and
compliance required by his individual job
-42-
<PAGE>
titles. Mr. Duncan was an Audit Manager with HEIN + ASSOCIATES LLP, Certified
Public Accountants, from 1991 until joining Pease as our 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 the founder, President and Chairman of the Board of
Directors of Beta Oil and Gas, Inc., a publicly held entity. In addition, Mr.
Antry founded Beta Capital Group, Inc., a financial consulting firm in November
1992, and was its President through June 1997. Beta Capital Group, Inc.
specializes in selecting and working with emerging oil and gas exploration
companies which have production and drilling prospects strategic for rapid
growth yet also need capital and market support to achieve that growth. Mr.
Antry remains Chairman of the Board of Directors of Beta Capital Group, Inc. but
resigned as its President to devote his full attention to Beta Oil and Gas.
Before forming Beta Capital Group, Inc., Mr. Antry was an officer of Benton Oil
& Gas company, from 1989 through 1992, ultimately becoming President of a wholly
owned subsidiary. Before Benton, Mr. Antry was a Marketing Director for Swift
Energy from 1987 through 1989. Mr. Antry began working in the oil fields in
Oklahoma in 1974. He has served in various exploration management capacities
with different companies, including Warren Drilling Company, as Vice President
of Exploration and Nerco Oil and Gas, a division of Pacific Power and Light,
where he served as Western Regional Land Manager. Mr. Antry is a member of the
International Petroleum Association of America "IPAA", serving on the Capital
Markets Committee and has B.B.A. and M.B.A. degrees from Texas Christian
University.
Stephen L. Fischer is the Vice President of Capital Markets of Beta Oil and
Gas, Inc., a publicly held entity, and has been Vice President of Beta Capital
Group, Inc. since March 1996. From April 1996 through March 1998 he was also a
registered representative of Signal Securities, Inc., a registered
broker-dealer. Between 1991 and before joining Beta Capital Group, Inc. 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.
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 formerly owned and operated Goodall's Charter Bus Service,
Inc., a bus chartering business representing Grey Line in the San Diego area,
from 1958 to 2000 when he sold the company. Mr. Ruane has been an oil and gas
investor for over 20 years and is currently enjoying retirement.
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.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and
directors, and persons who own more than ten percent of our 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 us 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 Pease during our fiscal year ended December
31, 1999, and Forms 5 and amendments thereto furnished to us 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 no person who was a director and
beneficial owner of more than 10% of Pease's outstanding Common Stock during
such fiscal year filed late reports on Forms 3 and 4.
-43-
<PAGE>
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 Annual Stock Underlying
Position ......................... Year Salary Bonus Compensation Awards Options/SARs(#)
- ---------------------------------- ---- -------- --------- ------------- ------ -------------------
<S> <C> <C>
Patrick J. Duncan ................ 1999 $ 97,957 None None None None
President and CFO (3) ........ 1998 $104,370 None None None None
1997 $ 79,791 $5,000 None None 24,500
Willard H. Pease, Jr .............
Former President and ......... 1998 $108,303 $25,000 $ 150,000(1) None None
Chief Executive Officer(1) ... 1997 $ 93,270 $5,000 None None 25,000
J.N. Burkhalter
Former V.P. Engineering ...... 1998 None None None None None
and Production (2) ........... 1997 $ 84,790 None $ 138,050(2) None 3,500
</TABLE>
(1) In December 1998 Mr. Pease's employment with us was terminated. In
accordance with his amended employment agreement, Mr. Pease
received a cash payment of $150,000 for severance.
(2) Effective January 1, 1998, Mr. Burkhalter resigned his position as
our V.P. of Engineering and Production in light of our 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 in monthly installments through August 2000. This severance
was granted by us, in part, pursuant to the terms of an employment
agreement dated December 27, 1994.
(3) Mr. Duncan was appointed by the Board of Directors as our President
to succeed Mr. Pease. No additional amounts have been shown as
Other Annual Compensation because the aggregate incremental cost to
us for personal benefits provided to Mr. Duncan did not exceed the
lesser of $50,000 or 10% of his annual salary in any given year.
Option Grants in the Last Fiscal Year
There were no grants of stock options to the Named Executive Officers pursuant
to Pease's Stock Option Plans during the fiscal year ended December 31, 1999.
Aggregated Option Exercises in the Last Fiscal Year and the Fiscal Year-End
Option Values
Set forth below is information with respect to the unexercised options to
purchase Pease's Common Stock held by Named Executive Officers at December 31,
1999. No options were exercised during fiscal 1999.
-44-
<PAGE>
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
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
</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, 1999) by the closing sales of Pease'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, 1999.
Employment Contract
We reaffirmed the Employment Agreement of Patrick J. Duncan as Pease'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,
we are obligated to pay Mr. Duncan one to two year's salary.
Compensation of Directors
Directors who are employees or otherwise receive compensation from us 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. Historically, all fees are paid in
the form of Pease restricted common stock but future fees may be paid in cash
and/or common stock.
ITEM 11- SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of Pease's common stock, its only class of outstanding voting
securities as of January 1, 2000, by (i) each of Pease's directors and officers,
and (ii) each person or entity who is known to Pease to own beneficially more
than 5% of the outstanding common stock with the address of each such person or
entity. Beneficial owners listed have sole voting and investment power with
respect to the shares unless otherwise indicated.
SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS
Name and Address of Amount and Nature of
Officer or Director Beneficial Ownership(1) Percent of Class(12)
- --------------------- ---------------------- -----------------
Steve Allen Antry 60,496 Shares (2) 3.39%
Patrick J. Duncan 36,564 Shares (3) 2.07%
Stephen L. Fischer 30,115 Shares (4) 1.72%
Homer C. Osborne 14,657 Shares (5) 0.84%
James C. Ruane 31,761 Shares (6) 1.83%
Clemons F. Walker 31,357 Shares (7) 1.80%
--------------------------- ------
All Officers and Directors as a
group (six persons) 204,950 Shares (8) 10.99%
Kayne Anderson, et al.
1800 Avenue of the Stars
Second Floor
Los Angeles, CA 90067 4,984,820 Shares (9)(10) 74.22%
-45-
<PAGE>
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 3,350,971 Shares (9)(11) 65.93%
Howard Amster IRA
111 East Kilbourn Ave.
Milwaukee, WI 53202 83,744 Shares (9) 4.62%
The Madav IX Foundation
1750 Euclid Avenue
Cleveland, OH 44115 167,549 Shares (9) 8.82%
Ramat Securities, Ltd.
23811 Chagrin Blvd., Suite 200
Beachwood, OH 44122 27,227 Shares (9) 1.55%
Tamar Securities, Inc.
23811 Chagrin Blvd., Suite 200
Beachwood, OH 44122 251,323 Shares (9) 12.68%
Security Ownership of Series B
Preferred Stockholders
as a Group (10 entities) 8,865,664 Shares (9)(12) 83.66%(13)
- ---------------------
(1) Shares are owned directly and beneficially unless stated otherwise.
(2) Includes 8,100 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 1,564 shares owned directly by Mr. Duncan, 35,000 shares underlying
presently exercisable options.
(4) Includes 8,295 shares owned directly by Mr. Fischer, 400 shares owned by his
wife, 750 shares underlying presently exercisable options and 20,670 shares
underlying presently exercisable warrants.
(5) Includes 10,376 shares owned directly by Mr. Osborne and 4,281 shares
underlying presently exercisable options.
(6) Includes 26,597 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, 3,483 shares underlying presently exercisable options.
(7) Includes 16,335 shares owned directly by Mr. Walker, 14,272 shares
underlying presently exercisable warrants, and 750 shares underlying presently
exercisable options.
(8) Includes 72,123 shares owned, directly or indirectly, 45,014 shares
underlying presently exercisable options, 87,813 shares underlying presently
exercisable warrants.
(9) Percentages shown for the 10 beneficial owners of the Series B preferred
stock assume that all the outstanding preferred stock is exchanged for 8,865,665
shares of common stock pursuant to the terms associated with the contempated
merger with Carpatsky. However, the conversion provisions of our Articles of
Incorporation applicable to the Series B preferred stock provide for a
conversion price based on a 25% discount to the reported sales price of the
common stock immediately prior to conversion. Accordingly, absent the agreed
upon terms associated with the merger and using the reported sales price at
March 30, 2000, the 105,828 presently outstanding preferred shares would be
convertible into over 16.1 million shares of common stock. Therefore, if the
merger with Carpatsky is abandoned, the beneficial ownership of the preferred
stockholders as a class could be more than illustrated in this table.
-46-
<PAGE>
(10) The preferred stock is held by four entities which are effectively
controlled by Kayne Anderson Investment Management, Inc., a Nevada corporation,
a registered investment advisor. The entities which directly own the stock are
Arbco Associates, L.P., Kayne Anderson Non-Tradition Investments, L.P., Offense
Group Associates, L.P. and Opportunity Associates, L.P.
(11) 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 to two large unaffiliated
institutional investors.
(12) We are presently authorized to issue up to 4.0 million shares of common
stock, an insufficient number of authorized shares for conversion of all
outstanding Series B preferred stock into common stock.
ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with Beta Capital Group, Inc.-
In March 1996 we entered into a three-year consulting agreement with Beta
Capital Group, Inc. ("Beta"). Beta's president, Steve Antry, has been a director
of Pease since August 1996. The consulting agreement with Beta provides for
minimum monthly cash payments of $17,500 plus reimbursement for out-of-pocket
expenses. We 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 we paid
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 we granted Beta warrants to
purchase 100,000 shares of Pease 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 Pease and 20,670 to Mr. Stephen Fischer, a current director of Pease
(Mr. Fischer is also a principal of Beta). In March 1997, we granted Beta
warrants to purchase an additional 10,000 shares of Pease 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 our Board of Directors established an Executive Committee designed
to manage the significant aspects of our 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. The Executive
Committee was dissolved by unanimous vote of the Board of Directors on April 26,
1999 at the request of Mr. Duncan and Mr. Antry because they did not feel the
Executive Committee was being utilized and any significant transactions were
already being addressed by the full Board. Mr. Warnick resigned as director and
Chairman of the Board on September 10, 1999.
Transactions with Former Officers- On December 7, 1998, Mr. Willard H. Pease,
Jr.'s employment with us 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 our V.P. of
Engineering and Production in light of our anticipated sale of the Rocky
Mountain assets. In connection with this resignation, we entered into a
Retirement,
-47-
<PAGE>
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.
PART IV
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Ex. No. Description and Method of Filing
3.1 Articles of Incorporation (5)
3.2 Certificate of Amendment to the Articles of Incorporation filed on
June 23, 1993 (5)
3.3 Certificate of Amendment to the Articles of Incorporation filed on
June 29, 1993 (5)
3.4 Plan of Recapitalization (5)
3.5 Certificate of Amendment to the Articles of Incorporation filed on
July 5, 1994 (5)
3.6 Certificate of Amendment to the Articles of Incorporation filed on
December 19, 1994 (5)
3.7 Certificate of Amendment to Article IV of the Articles of Incorporation
as filed with the Nevada Secretary of State, increasing the authorized
shares of common stock of Registrant to 40,000,000 shares, $0.10 par
value, incorporated by reference to Exhibit 3(i) of the Registrant's
Form 8-K dated June 11, 1997 (6)
3.8 Certificate of Change in Number of Authorized Shares of Common Stock
dated November 18, 1998 (5)
3.9 Bylaws as amended and restated (5)
4.1 Agreement and Plan of Merger dated August 31, 1999 (9)
4.2 First Amendment to Agreement and Plan of Merger dated December 30,
1999 (10)
4.3 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(7)
10.1 1993 Stock Option Plan (5)
10.2 1994 Employee Stock Option Plan (5)
10.3 Employment Agreement effective December 27, 1994 between Pease Oil and
Gas Company and Patrick J. Duncan.
10.4 Agreement between Beta Capital Group, Inc., and Pease Oil and Gas
Company dated March 9, 1996 (2)
10.5 Form of Warrants issued to Beta Capital Group, Inc.(3)
10.6 1996 Stock Option Plan (3)
10.7 1997 Long Term Incentive Option Plan (4)
10.8 Preferred Stock Investment Agreement dated December 31, 1997 (7)
10.9 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 (4)
10.10 Retirement, Severance and Termination of Employment Agreement from
James N. Burkhalter dated 1/1/98 (4)
10.11 Severance and Termination of Employment Agreement effective December 7,
1998 between Willard H. Pease, Jr. and Pease Oil and Gas Company.(5)
10.12 Confirmation of Employment Contract effective January 11, 1998 between
Patrick J. Duncan and Pease Oil and Gas Company.(5)
10.13 Engagement Letter of San Jacinto Securities, Inc. dated September 4,
1998 with Pease Oil and Gas Company (5)
23.1 Consent of Netherland, Sewell & Associates, Inc., Consulting Petroleum
Engineers.
27.1 Financial Data Schedule.
- ---------------
-48-
<PAGE>
Footnotes for Exhibits:
(1) Incorporated by reference to the Registrant's annual Report on Form
10-KSB for the fiscal year ended December 31, 1994.
(2) Incorporated by reference to the Registrant's annual Report on Form
10-KSB for the fiscal year ended December 31, 1995.
(3) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996.
(4) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997.
(5) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998.
(6) Incorporated by reference to Exhibit 3(i) to Registrant's Form 8-K
filed June 11, 1997.
(7) Incorporated by reference to Exhibits 3.2 or 10.1 to Registrant's
Form 8-K filed January 13, 1998.
(8) Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K
filed March 9, 1998.
(9) Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K
dated September 13, 1999.
(10) Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K
dated December 31, 1999.
(b) Reports on Form 8-K: Pease filed the following reports on Form 8-K for the
period October 1, 1999 through the date of this report:
Item Reported Date Financial Statements
------------- ------------------------- ----------------------
(1) 5,7 January 13, 2000 None - Not Applicable
-49-
<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: April 13, 2000 By: /s/ Patrick J. Duncan
----------------------------------------
Patrick J. Duncan
President, Chief Financial Officer
And Principal Accounting Officer
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: April 13, 2000 By: /s/ Patrick J. Duncan
----------------------------------------
Patrick J. Duncan
President, Chief Financial Officer
Date: April 13, 2000 By: /s/ Steve A. Antry
----------------------------------------
Steve A. Antry, Director
Date: April 13, 2000 By: /s/ Stephen L. Fischer
----------------------------------------
Stephen L. Fischer, Director
Date: April 13, 2000 By: /s/ Homer C. Osborne
----------------------------------------
Homer C. Osborne, Director
Date: April 13, 2000 By: /s/ James C. Ruane
----------------------------------------
James C. Ruane, Director
Date: April 13, 2000 By: /s/ Clemons F. Walker
----------------------------------------
Clemons F. Walker, Director
-50-
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,
<PAGE>
the Corporation shall pay the 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.
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
<PAGE>
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.
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
<PAGE>
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 Employee. 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
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
<PAGE>
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 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
<PAGE>
association with whom the Employee did not directly work while an Employee of
the Corpora tion.
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
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.
<PAGE>
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 representa tives, 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.
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
<PAGE>
other are of no effect and that neither of them has relied thereon in connection
with his or its dealings with the other.
This Agreement is effective as of the date first above written.
BOARD OF DIRECTORS: PEASE OIL AND GAS COMPANY,
a Nevada corporation
By:
EMPLOYEE:
Patrick J. Duncan
<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
EXHIBIT B
ADDITIONAL REIMBURSABLE EXPENSES
1. 40 hours of continuing professional education per year
2. P ro f e s s i o nal 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
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.
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 February 21, 2000 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, 2000"; 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 April 13, 2000.
NETHERLAND SEWELL AND ASSOCIATES, INC.
By: /s/ Danny D. Simmons
Danny D. Simmons
Senior Vice President
Houston, Texas
Date: April 13, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 724,354
<SECURITIES> 0
<RECEIVABLES> 418,468
<ALLOWANCES> 15,621
<INVENTORY> 0
<CURRENT-ASSETS> 1,203,550
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0
1,058
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</TABLE>
