- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
Commission File Number 0-6580
[GRAPHIC OMITTED]
PEASE OIL AND GAS COMPANY (Exact
name of small business issuer as specified in its
charter)
Nevada 87-0285520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
751 Horizon Court, Suite 203
Grand Junction, Colorado 81506
(Address of principal executive offices)
(970) 245-5917
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
As of May 12, 2000 the registrant had 1,731,398 shares of its $0.10 par
value Common Stock issued and outstanding.
Transitional Small Business Issuer Disclosure Format (check one):
Yes ____ No X
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<PAGE>
TABLE OF CONTENTS
PAGE
NUMBER
PART I - Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 3
Consolidated Statements of Operations For the Three Months
Ended March 31, 2000 and 1999 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows For the Three Months
Ended March 31, 2000 and 1999 . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . .6-7
Item 2. Management's Discussion and Analysis . . . . . . . . . 8
Liquidity, Capital Expenditures and Capital Resources 8
Results of Operations . . . . . . . . . . . . . . . . . . .10
Overview . . . . . . . . . . . . . . . . . . . . . . . . . 10
Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . 10
Consulting Arrangement - Related Party . . . . . . . . . . .11
General and Administrative . . . . . . . . . . . . . . . 11
Depreciation, Depletion and Amortization . . . . . . . . . 11
Interest Expense . . . . . . . . . . . . . . . . . . . . .12
Impairment Expense - Oil and Gas Properties. . . . . . .12
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . .12
Disclosure Regarding Forward-Looking Statements . . . . 12
PART II - Other Information . . . . . . . . . . . . . . . . . . . . . . 13
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities . . . . . . . . . . . . . . . . .13
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . .13
Item 4. Submission of Matters to a Vote of Security Holders . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . .13
PART III - Signatures . . . . . . . . . . . . . . . . . . . . . . . . . .14
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<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Cash and equivalents ........................... $ 909,426 $ 724,354
Trade receivables, net ......................... 537,498 402,847
Prepaid expenses and other ..................... 71,735 76,349
------------ ------------
Total current assets ...................... 1,518,659 1,203,550
------------ ------------
OIL AND GAS PROPERTIES, at cost (full cost method):
Unevaluated properties ......................... 2,370,527 2,281,732
Costs being amortized .......................... 18,383,965 18,278,461
------------ ------------
Total oil and gas properties .............. 20,754,492 20,560,193
Less accumulated amortization .................. (15,115,115) (14,868,287)
------------ ------------
Net oil and gas properties ................ 5,639,377 5,691,906
------------ ------------
OTHER ASSETS:
Debt issuance costs, net ....................... 149,756 184,315
Office equipment and vehicles, net ............. 49,269 54,198
Deposits and other ............................. 4,995 7,493
------------ ------------
Total other assets ...................... 204,020 246,006
------------ ------------
TOTAL ASSETS ...................................... $ 7,362,056 $ 7,141,462
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ........... $ 4,764 $ 6,352
Accounts payable, trade ........................ 206,821 140,554
Accrued expenses ............................... 105,412 134,539
------------ ------------
Total current liabilities ................ 316,997 281,445
------------ ------------
LONG-TERM DEBT, less current maturities: .......... 2,561,286 2,506,218
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.01 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 $5,445,248 at
March 31, 2000) ......................... 1,058 1,058
Common Stock, par value $0.10 per share, 4,000,000
shares authorized, 1,731,398 shares issued and
outstanding ..................................... 173,140 173,140
Additional paid-in capital ...................... 37,636,191 37,636,191
Accumulated deficit ............................. (33,326,616) (33,456,590)
------------ ------------
Total stockholders' equity ................ 4,483,773 4,353,799
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $ 7,362,056 $ 7,141,462
============ ============
</TABLE>
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For The Three Months
Ended March 31,
2000 1999
REVENUE:
<S> <C> <C>
Oil and gas sales ............................. $ 798,998 $ 411,794
------------ ------------
OPERATING COSTS AND EXPENSES:
Oil and gas production costs .................. 163,078 84,476
Consulting arrangement-related party .......... -- 37,750
General and administrative .................... 173,367 179,660
Depreciation, depletion and amortization ...... 251,757 263,375
------------ ------------
Total operating costs and expenses 588,202 565,261
------------ ------------
INCOME (LOSS) FROM OPERATIONS .................... 210,796 (153,467)
OTHER INCOME (EXPENSES):
Interest and other income ..................... 9,224 11,397
Interest expense .............................. (90,046) (89,930)
------------ ------------
NET INCOME (LOSS) ................................ $ 129,974 $ (232,000)
============ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON
STOCKHOLDERS .................................. $ 63,833 $ (298,346)
============ ============
BASIC:
Earnings (Loss) Per Share ..................... $ 0.04 $ (0.18)
Weighted Average Shares Outstanding ........... 1,731,398 1,626,100
DILUTED:
Earnings (Loss) Per Share ..................... $ 0.01 $ (0.18)
Weighted Average Shares Outstanding ........... 18,325,891 1,626,100
</TABLE>
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For The Three Months
Ended March 31,
2000 1999
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) ................................................. $ 129,974 $ (232,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, depletion and amortization ................. 251,757 263,375
Amortization of debt discount and issuance costs ......... 89,394 89,393
----------- -----------
Cash flows before working capital adjustments 471,125 120,768
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade receivables ............................ (134,651) 159,219
Prepaid expenses and other assets ............ (7,888) (8,231)
Increase (decrease) in:
Accounts payable ............................. 22,251 6,794
Accrued expenses ............................. (29,127) (46,034)
----------- -----------
Net cash provided by (used in) operating activities ...... 321,710 232,516
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant and equipment ............ (150,283) (294,455)
Proceeds from redemption of CD .................................... 15,000 --
Proceeds from sale of property and equipment ...................... -- 72,250
----------- -----------
Net cash provided by (used in) investing activities ............ (135,283) (222,205)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ....................................... (1,355) (1,469)
Payment of Series B Preferred Stock Dividends ..................... -- (67,085)
Purchase and retirement of Series B Preferred Stock ............... -- (31,000)
----------- -----------
Net cash provided by (used in) financing activities ............ (1,355) (99,554)
----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS ......................... 185,072 (89,243)
CASH AND EQUIVALENTS, beginning of period ........................... 724,354 1,049,582
----------- -----------
CASH AND EQUIVALENTS, end of period ................................. $ 909,426 $ 960,339
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest ............................................ $ 70,787 $ 70,672
=========== ===========
Cash paid for income taxes ........................................ $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Increase (Decrease) in payables for oil & gas exploration
activities ................................................ $ 44,016 $ 40,359
</TABLE>
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. They do not include all information and notes required by
generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there has been no material change in the
information disclosed in the notes to consolidated financial statements included
in our Annual Report on Form 10-KSB for the year ended December 31, 1999. In our
opinion, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
periods presented are not necessarily indicative of the results that may be
expected for the full year.
The accounting policies we followed are set forth in Note 1 to our financial
statements in Form 10-KSB for the year ended December 31, 1999. We suggest that
these financial statements be read in conjunction with the financial statements
and notes included in the Form 10-KSB.
Note 2 - Dividends and Earnings (Loss) Per Common Share:
We have adopted SFAS No. 128 titled "Earnings Per Share". Accordingly, "Basic"
earnings (loss) per share ("EPS") is computed by dividing income (loss)
available to common stockholders (the "numerator") by the weighted-average
number of common shares outstanding (the "denominator") during the periods
presented.
The net income (loss) available to common stockholders is determined by
including any dividends accruing to the benefit of the preferred stockholders to
the net income (loss). The dividends included for this calculation include: 1)
paid dividends; 2) accrued but unpaid dividends; and 3) any dividends in
arrears. Accordingly, the net loss available to common stockholders includes the
following charges associated with the Series B preferred stock.
For the Three Months Ended March 31,
2000 1999
----------- ----------------
Dividends declared and paid $ - $ 66,346
Dividends in arrears 66,141 -
----------- ----------------
Total $ 66,141 $ 66,346
=========== =================
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, should the merger be abandoned the amount that we
would be obligated to pay for the periods presented has been included in the
calculation of net income per share as "Dividends in arrears".
Computing the "Diluted" EPS for the three months ended March 31, 2000 is similar
to the Basic EPS except for: a.) the numerator is adjusted to add back the
$66,141 of convertible preferred stock dividends in arrears; and b.) the
denominator is increased to include the number of additional common shares that
would have been outstanding assuming the preferred stock had been converted into
16,594,493 shares of common stock on January 1, 2000. This assumption presumes
the preferred stock would have been converted into common stock in accordance
with its original terms of a 25% discount to the reported closing market price.
The market price used for purposes of this calculation was as of March 31, 2000.
Our Articles of Incorporation only authorize the issuance of up to 4.0 million
shares, of which 1,731,398 are currently issued and outstanding. Accordingly,
the "Diluted" EPS is only a hypothetical computation since we would be required
to obtain shareholder approval for any shares to be issued beyond 4.0 million.
Pursuant to the terms of our proposed merger with Carpatsky Petroleum, Inc.
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<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
("Carpatsky") which is more thoroughly discussed in our Annual Report on Form
10-KSB, our Preferred Stockholders have agreed to exchange all the outstanding
Preferred Shares for 8,865,665 shares of Common stock when and if the merger is
ultimately consummated.
"Diluted" EPS for the three months ended March 31, 1999 is identical to the
"Basic" EPS for the same period since the affects of including any potential
common shares would have been antidilutive.
Note 3 - Comprehensive Income:
There are no components of comprehensive income which have been excluded from
net income and, therefore, no separate statement of comprehensive income has
been presented.
-7-
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity, Capital Expenditures and Capital Resources
At March 31, 2000, our cash balance was $909,426 with a positive working capital
position of $1,201,662, compared to a cash balance of $724,354 and a positive
working capital position of $922,105 at December 31, 1999. The change in our
cash balance is summarized as follows:
Cash balance at December 31, 1999 $ 724,354
Sources of Cash:
Cash provided by operating activities 321,710
Proceeds from the redemption of certificate of deposit 15,000
Total sources of cash 336,710
Uses of Cash:
Capital expenditures for exploration activities (150,283)
Repayment of long term debt (1,355)
Total uses of cash (151,638)
-----------
Cash balance at March 31, 2000 $ 909,426
============
As a result of oil prices averaging almost $28.00 per barrel during the first
quarter of 2000, we were able to generate positive cash flow from operations of
$321,710. This enabled us to improve both our cash and overall working capital
position. As far as our uses of cash, the following table illustrates the costs
incurred for our exploration activities (the difference between the total cash
paid for exploration activities in the above table and the amount illustrated
below, relates to the net increase in accounts payable for those activities
between December 31, 1999 and March 31, 2000):
<TABLE>
<CAPTION>
PROGRAM OPERATOR Internal
NEG Parallel AHC Costs Total %
Category:
<S> <C> <C> <C> <C> <C> <C>
Productive Efforts ............ $ -- $ 1,170 $ 61,040 $ -- $ 62,210 32%
-------- -------- -------- --------
Exploratory Dry Holes ........ -- 32,192 -- -- 32,192 17%
-------- -------- -------- --------
Land, G&G Costs on Seismic
Programs .................. 5,690 19,612 -- -- 25,302 13%
-------- -------- -------- --------
Capitalized Interest ......... -- 69,182 -- -- 69,182 36%
-------- -------- -------- --------
Other Exploration Costs ...... -- -- -- 5,413 5,413 2%
-------- -------- --------
Total Exploration Costs $ 5,690 $122,156 $ 61,040 $ 5,413 $194,299 100%
======== ======== ======== ======== ======== ========
Percent ............... 3% 63% 31% 3% 100%
</TABLE>
A description of the areas we have an oil and gas interest in are more
thoroughly discussed in our 1999 Annual Report on Form 10-KSB. There have been
no significant changes in our areas of operation since the date of that report.
Since we are a non-operator in all of the areas in which we hold an oil and gas
interest, we do not necessarily control the timing of any development or
exploration activities and therefore have little control over the corresponding
required cash outlays. However, we currently expect the expenditures that will
be proposed by the respective operators of our core areas to be within the
following ranges through the first quarter of 2001:
-8-
<PAGE>
<TABLE>
<CAPTION>
Estimated Investment
Area Operator Minimum Maximum
<S> <C> <C>
East Bayou Sorrel National Energy Group, Inc. $ - $ 400,000
("NEG")
Formosa, Texana, and Ganado Parallel Petroleum Corporation 150,000 300,000
("Parallel")
Maurice Prospect Amerada Hess Corporation 50,000 500,000
("AHC") ---------- ------------
Total $ 200,000 $ 1,200,000
========= ===========
</TABLE>
In addition to the potential capital necessary for our exploration activities,
in April 2001 our convertible debentures with a current outstanding balance of
$2,782,500 will become due and payable. Accordingly, given the range of
potential capital requirements through the first part of next year (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, we 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. In exchange for their services, SJS was
paid a $150,000 non-refundable cash fee in 1999 (which was expensed for
financial statement reporting purposes) and will receive an additional 3% of the
merger value in excess of $5.0 million should it close. On September 1, 1999 we
entered into a Merger Agreement with Carpatsky Petroleum, Inc. ("Carpatsky"), a
company whose primary oil and gas assets are located in the Republic of Ukraine.
The potential merger with Carpatsky and a description of Carpatsky's assets, are
more thoroughly discussed in our 1999 Annual Report on Form 10-KSB. We entered
into the merger agreement with Carpatsky in order to, among other things,
increase and diversify our asset base and improve the chances of financing
future opportunities.
If the contemplated merger with Carpatsky cannot be consummated within a
reasonable period of time, or is otherwise abandoned 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.
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<PAGE>
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
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.
Oil and Gas
Operating statistics for oil and gas production for the periods presented are as
follows:
For the Three Months
Ended March 31,
2000 1999
--------- -----------
Production:
Oil (Bbls) ...................... 23,072 18,171
Gas (Mcf) ....................... 52,397 107,356
BOE (6:1) ....................... 31,805 36,064
Average Collected Price:
Oil (per Bbl) ................... $ 27.93 $ 10.87
Gas (per Mcf) ................... 2.95 2.00
Per BOE (6:1) ................... 25.12 11.42
Operating Margins:
Revenue -
Oil ................ $ 644,497 $ 197,534
Gas ................ 154,501 214,260
--------- ---------
Total Revenue 798,998 411,794
Costs
Lifting Costs ..... (73,799) (44,087)
Production taxes .. (89,279) (40,389)
--------- ---------
Total Costs . (163,078) (84,476)
--------- ---------
Operating Margin ............ $ 635,920 $ 327,318
========= =========
Operating Margin Percent .... 80% 79%
Production Costs per BOE before DD&A $ 5.13 $ 2.34
========= =========
Change in Revenue Attributable to:
Production .................. $ (56,409)
Price ....................... 443,613
---------
Total Increase in Revenue ........... $ 387,204
=========
The decrease in gas production between the periods presented is primarily
attributed to the Maurice Field operations (operated by AHC) where: a.) we have
experienced the natural decline of production inherent in oil and gas
operations; and b.) the loss of one well in September 1999 due to down-hole
mechanical problems. Absent any unforeseen negative circumstances or additional
discoveries, we expect gas production for the remainder of 2000 to be
approximately 50% of what it was in 1999.
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<PAGE>
Production costs per BOE have increased during the periods presented due to: 1.)
a substantial portion of the production taxes is based on revenue (vs. the
volume produced), and 2.) increased water production at the East Bayou Sorrel
facility has significantly increased the lifting costs for the three wells
currently producing there. We expect the production costs to remain at
approximately $5.00 per BOE for the remainder of 2000.
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.
Consulting Arrangement - Related Party
In March 1996 we 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. Stephen
Fischer, an independent contractor for Beta, is also a member of our Board of
Directors. Messrs. Antry and Fischer are also principals of Beta Oil & Gas,
Inc., a publicly held oil and gas company.
General and Administrative
General and administrative ("G&A") expenses decreased only $6,293 during the
first quarter of 2000 when compared to the same period in 1999. However, the
costs in 2000 include $47,088 incurred in connection with the contemplated
merger with Carpatsky.
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 $50,000 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 Three Months Ended March 31
2000 1999
------------ -------------
Oil and Gas Properties $ 246,828 $ 257,091
Furniture and Fixtures 4,929 6,284
----------- --------------
Total $ 251,757 $ 263,375
========= ===========
DD&A for the oil and gas properties,
per BOE: $ 7.76 $ 7.13
============ ==============
DD&A for the oil and gas properties is computed based on one full cost pool
using the total estimated reserves at the end of each period presented and prior
to applying the ceiling test discussed later in this section under "Impairment
Expense".
-11-
<PAGE>
Interest Expense
Total interest incurred, and its allocation, for the periods presented is as
follows:
For the Three Months Ended March 31
2000 1999
------------ -------------
Interest paid or accrued ...................... $ 69,832 $ 69,147
Amortization of debt discount ................. 54,834 54,834
Amortization of debt issuance costs ........... 34,562 34,559
--------- ---------
Total interest incurred .............. 159,228 158,540
Interest capitalized for exploration activities (69,182) (68,610)
Interest expense ................ $ 90,046 $ 89,930
========= =========
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). No charge for impairment has been recognized during the periods
presented because our ceiling is in excess of the costs accumulated in our full
cost pool.
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.
-12-
<PAGE>
PART II - OTHER INFORMATION
Item 1 - 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 March 31, 2000 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.
Recent Sales of Unregistered Securities - We have not issued or sold any
unregistered securities during the three months ended March 31, 2000 or through
the date of this report.
Item 3. Defaults Upon Senior Securities
(a) There has been no material default in the payment of principal, interest, or
any other material default, with respect to any indebtedness of the small
business issuer during the period covered by this report.
(b) There has been no material default in the payment of dividends for any class
of preferred stock during the period covered by this report. However, on March
31, 2000 there were 105,828 outstanding shares of Series B Preferred Stock held
by 10 holders. The Series B Preferred Stock is convertible into common stock at
a 25% discount from the reported closing market price at the time of conversion.
Based on such price on March 31, 2000, the outstanding Series B Preferred Stock
would have been convertible into approximately 16.6 million common shares. Our
Articles of Incorporation authorize a total of up to 4,000,000 shares of common
stock, of which 1,731,398 are currently issued and outstanding. 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. In connection with the contemplated merger with Carpatsky, all
of the preferred stockholders have agreed that as long as the merger is being
pursued that they will: a.) not convert any preferred shares into common; b.)
not receive any dividends subsequent to September 1, 1999; and c.) will exchange
all the outstanding preferred stock for 8,865,665 shares of common if the merger
is ultimately consummated.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the period
covered by this report.
Item 5. Other Information
There is no information reportable under this item for the period covered by
this report.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
(1) Exhibit 27, "Financial Data Schedule" - for the quarter
ended March 31, 2000.
(b) Reports on Form 8-K: Pease filed the following reports on Form 8-K for
the period January 1, 2000 through the date of this report:
Item Reported Date Financial Statements
------------- ------------------ ----------------------
(1) 5,7 January 13, 2000 None - Not Applicable
-13-
<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: May 15, 2000 By: /s/ Patrick J. Duncan
Patrick J. Duncan
President, Chief Financial Officer
and Principal Accounting Officer
-14-
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