As filed with the Securities and Exchange Commission on January 21, 2000
SEC File No. 333-_____
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
PEASE OIL AND GAS COMPANY
----------------------------------------------
(Name of registrant as specified in its charter)
Nevada 1311 87-0285520
------------------------------ --------------------------- ------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
751 Horizon Court, Suite 203
P.O. Box 60219
Grand Junction, Colorado 81506-8758
(970) 245-5917
----------------------------------------------------------------
(Address, including ZIP Code, and telephone number,
including area code, of registrant's principal executive offices)
Copies to:
Alan W. Peryam, Esq. Peter A. Basilevsky, Esq.
Alan W. Peryam, LLC Satterlee Stephens Burke & Burke LLP
1120 Lincoln Street, Suite 1000 230 Park Avenue, Room 1130
Denver, Colorado 80203-2138 New York, New York 10169
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities To Be Registered Registered Per Unit Offering Price Fee
- --------------------------- ------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value ....... 53,825,222(1) $0.359375(3) $19,343,459(1) $5,106.67
Preferred Stock, $0.001 par value .... 102,410,000(2) $0.359375(4) $10,393,479(2)(4) $2,743.88
----------- -------- ---------- --------
Total ....................... -- -- $29,736,918 $7,850.55
===================================================================================================================
</TABLE>
(1) Represents: (a) the maximum number of shares of Pease common stock
issuable in connection with the merger in exchange for shares of
Carpatsky common shares (44,959,557 shares) and (b) Pease common stock
into which Pease preferred stock is exchangeable (8,865,665 shares).
(2) Includes 28,920,984 shares of common stock of Pease which may be
issued from time to time upon conversion of the preferred stock and an
indeterminate number of shares issuable pursuant to anti-dilution
provisions of the preferred stock.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Rule 457(c) adopted under the
Securities Act based on the market price of Registrant's common shares
to be issued in the merger.
(4) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Rule 457(c) adopted under the
Securities Act based on the market price of Registrant's common shares
into which the preferred stock is convertible.
Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the SEC, acting pursuant to said Section 8(a), may
determine.
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Carpatsky Petroleum Inc. Pease Oil and Gas Company
[logo] [logo]
SPECIAL MEETINGS OF STOCKHOLDERS
MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
The boards of directors of Carpatsky Petroleum Inc. and Pease Oil and Gas
Company have unanimously approved a merger in which Carpatsky Petroleum Inc.
will become a wholly-owned subsidiary of Pease Oil and Gas Company. The combined
company will be named Radiant Energy, Inc., and is expected to benefit from the
complementary strengths of Carpatsky and Pease.
In the merger, each share of Carpatsky common stock will be converted into
.57842 shares of Radiant Energy common stock and each share of Carpatsky
preferred stock will be converted into 1.07292 shares of Radiant Energy
preferred stock. The merger will not change the aggregate number of shares held
by Pease stockholders before the merger. Pease stockholders' ownership
percentage of the total shares outstanding after the merger will decrease.
Former shareholders of Carpatsky will own Radiant Energy common and preferred
stock equivalent to approximately 87.5% of Radiant Energy. Pease stockholders
will own Radiant Energy common stock equivalent to approximately 12.5% of
Radiant Energy.
Shareholders of Carpatsky are being asked, at Carpatsky's special meeting
of shareholders, to approve:
o continuing and redomesticating Carpatsky as a Delaware corporation,
and
o merging Carpatsky with a subsidiary of Pease.
have agreed to vote for the redomestication and merger provided that all
conditions to the closing of the merger are satisfied.
Carpatsky's board of directors has unanimously approved redomesticating the
corporation in Delaware, the merger agreement and the merger and declared them
advisable and recommends that shareholders vote to approve these proposals.
Stockholders of Pease are being asked, at Pease's special meeting of
stockholders, to approve:
o issuance of approximately 44.96 million shares of common stock and
102.41 million shares of preferred stock to holders of Carpatsky
common and preferred stock pursuant to the terms of the merger
agreement;
o issuance of approximately 8.87 million shares of common stock in
exchange for all outstanding Pease Series B preferred stock;
o a proposal to amend and restate Pease's articles of incorporation
which would change the name of Pease Oil and Gas Company to "Radiant
Energy, Inc." and increase the authorized stock to 150,000,000 shares
of common stock and 200,000,000 shares of preferred stock; and
o election of seven directors, only one of whom was a director of Pease
before the merger.
In connection with the merger agreement, holders of all outstanding Series
Neither the SEC nor any state securities commission has approved or disapproved
Pease Oil and Gas Company common stock or preferred stock to be issued in the
merger or determined if this joint proxy statement and prospectus is accurate or
adequate. No securities commission or similar authority in Canada has in any way
passed on the merits of the securities offered hereunder and any representation
to the contrary is an offense. The required vote to approve the special
resolution authorizing the continuance and redomestication of Carpatsky in
Delaware is two-thirds of the shares of Carpatsky common stock and preferred
stock, voting together as a class, represented at the meeting and voting on the
special resolution. Not voting at the meeting, failing to submit a proxy card,
or abstaining from voting at the meeting does not have the effect of voting
against the continuance and redomestication.
This proxy statement and prospectus is dated ____________, 2000 and is first
being mailed to stockholders on or about ______________, 2000.
2
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[Inside front cover of prospectus]
WHERE YOU CAN FIND MORE INFORMATION
Available Information
Pease files annual, quarterly and special reports, as well as registration
and proxy statements and other information, with the SEC. You may read and copy
any document filed with the SEC by Pease, including this registration statement
on Form S-4 and exhibits, at the Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549 or at the SEC's regional offices located at 7 World
Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can get further
information from the SEC's Public Reference Room by calling 1-800-SEC-0330. The
SEC also maintains a Web site at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding companies like Pease
that are filed electronically with the SEC.
Carpatsky files annual audited and quarterly unaudited financial statements
as well as Information Circulars relating to shareholder meetings (and other
information and reports where required) with the Alberta Securities Commission,
Fourth Floor, 300-5th Avenue S.W., Calgary AB T2P 3C4. You may read and copy
documents maintained by the Securities Commission in its Public Files at the
aforesaid address. Information filed electronically may also be obtained at
www.SEDAR.com.
This proxy statement and prospectus is part of a registration statement on
Form S-4 filed by Pease with the SEC under the Securities Act of 1933 with
respect to this offering of common and preferred stock. This proxy statement and
prospectus, which is a part of the registration statement on Form S-4, does not
contain all of the information filed with the SEC. For a fuller understanding of
this offering, you may wish to see the complete registration statement on Form
S-4 that may be obtained from the locations described above
FORWARD-LOOKING STATEMENTS
Some statements contained in this proxy statement and prospectus that are
not statements of historical facts are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, among others, statements regarding:
o The availability of capital resources;
o Whether we will be able to maintain and develop our oil and gas
properties in Ukraine and successfully market oil and gas produced;
o Whether we are successful in exploring for oil and natural gas in
other areas; and o Volatility in oil and natural gas prices in the
United States and throughout Europe.
Forward-looking statements are subject to factors that could cause actual
results to differ materially from future results expressed or implied by
forward-looking statements. Factors that may affect such forward-looking
statements include, but are not limited to: the contemplated merger not being
consummated, Radiant Energy's ability to generate additional capital to complete
its planned drilling and exploration activities; risks inherent in oil and gas
acquisitions, exploration, drilling, development and production; price
volatility of oil and gas; competition; shortages of labor, equipment, services
and supplies; U.S. and foreign government regulation; environmental matters;
implications to Radiant Energy 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 the control of Radiant Energy. All of
the prospects in the Gulf Coast and in Ukraine are currently operated by other
parties, Therefore, Radiant Energy 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. We believe that the
assumptions underlying the forward-looking statements are reasonable, however,
any of the assumptions could prove inaccurate and, therefore, there can be no
assurance that the results contemplated in forward-looking information will be
realized. We intend that the forward-looking statements contained in this proxy
statement and prospectus are subject to the safe harbors created by Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.
3
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Carpatsky Petroleum Inc.
6671 Southwest Freeway, Suite 303
Houston, Texas 77074-2284
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _______, 2000
To the Shareholders of Carpatsky Petroleum Inc.:
Take notice that a special meeting of shareholders of Carpatsky Petroleum
Inc. will be held on __________, 2000, at 10:00, a.m., local time, at
___________________________, Calgary, Alberta, to consider and vote upon the
following matters:
1. A proposal to adopt a special resolution in the form set forth on page
35, the effect of which will change the law under which Carpatsky is
organized from Alberta, Canada to the state of Delaware, United States
of America. If the special resolution is adopted, Carpatsky will file
with the Secretary of State of the State of Delaware a Certificate of
Domestication and a Certificate of Incorporation of Carpatsky
Petroleum Inc., as a Delaware corporation. Carpatsky will then become
a Delaware corporation, and each outstanding share of Carpatsky common
stock and preferred stock (other than shares for which appraisal
rights are perfected under Alberta law) will be automatically
converted into one share of common stock or preferred stock of
redomesticated Carpatsky, the Delaware corporation. This proposal will
be considered under the law of Alberta.
2. (Assuming approval of Item 1) a proposal to approve and adopt the
Agreement and Plan of Merger, amended as of December 30, 1999, between
Carpatsky, Pease Oil and Gas Company, and a wholly-owned subsidiary of
Pease, will be considered under the law of Delaware. Pursuant to the
merger agreement, among other things: (a) The Pease subsidiary
corporation will be merged with and into Carpatsky, and Carpatsky as
the surviving corporation will become a wholly-owned subsidiary of
Pease, which will be re-named "Radiant Energy, Inc."; and (b) Shares
of redomesticated Carpatsky common stock and preferred stock (other
than shares for which appraisal rights are perfected under the laws of
Delaware) will be converted into and become the right to receive: o
.57842 of one share of common stock of Radiant Energy for each common
share, o 1.0739 shares of preferred stock of Radiant Energy for each
preferred share, and o Cash will be paid in lieu of issuing fractional
shares of Radiant Energy common and preferred stock.
3. Any other business which may properly come before the special meeting
or any adjournment or postponement of the special meeting.
Carpatsky's board of directors has unanimously approved continuing and
redomesticating the corporation in Delaware, the merger agreement and the merger
and declared them advisable and recommends that shareholders vote to approve
these proposals.
These items of business are more fully described in the proxy statement and
prospectus, which is attached to and made a part of this notice, and which you
are urged to read carefully.
The board of directors has fixed the close of business on _______, 2000 as
the record date for determining shareholders entitled to notice of and to vote
at the special meeting and any adjournment or postponement of the special
meeting. Under Alberta law, approval of the continuance and redomestication will
require a vote of the holders of two-thirds of the outstanding shares of
Carpatsky common and preferred stock, voting together as a single class
srepresented at the meeting and voting on the special resolution. Under Delaware
law approval of the merger agreement will require the affirmative vote of the
holders of a majority of the outstanding shares of Carpatsky common and
preferred stock, voting together as a class.
BY ORDER OF THE BOARD OF DIRECTORS
---------------------------------
Secretary
________, 2000
To assure that your shares are represented at the special meeting, you are
urged to complete, date and sign the enclosed proxy and mail it promptly in the
postage-paid envelope provided, whether or not you plan to attend the special
meeting in person. You may revoke your proxy in the manner described in the
accompanying proxy statement and prospectus at any time before it has been voted
at the special meeting. Any shareholder attending the special meeting may vote
in person even if that shareholder has returned a proxy.
4
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PEASE OIL AND GAS COMPANY
751 Horizon Court, Suite 203
P.O. Box 60219
Grand Junction, Colorado 81506-8758
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD _______, 2000
To the Stockholders of Pease Oil and Gas Company:
This shall serve as notice that a special meeting of stockholders of Pease
Oil and Gas Company, a Nevada corporation will be held at 9:00, a.m., local
time, on __________, 2000 at _________________________________, Houston, Texas,
to consider and vote upon the following matters:
1. A proposal to approve the issuance of approximately 44,959,557 shares
of common stock and 102,410,000 shares of preferred stock (which will
be convertible into approximately 28.9 million shares of common stock)
to holders of Carpatsky Petroleum Inc., a Delaware corporation, in
connection with the proposed merger pursuant to which Carpatsky will
become a wholly-owned subsidiary of Pease.
2. A proposal to issue 8,865,665 shares of common stock in exchange for
all outstanding Pease Series B preferred stock.
3. A proposal to approve and adopt Amended and Restated Articles of
Incorporation, pursuant to which Pease's corporate name shall be
changed to "Radiant Energy, Inc.," the number of shares of authorized
common stock shall be increased to 150,000,000 shares and the number
of shares of authorized preferred stock shall be increased to
200,000,000 shares. The Amended and Restated Articles of Incorporation
will become effective simultaneously with the closing of the merger.
If the merger is not completed for any reason, the Amended and
Restated Articles of Incorporation and the election of directors
described below will not become effective.
4. Election of a board of seven directors as follows:
Class I: B. Dee Davis and David A. Melman
Class II: Steve A. Antry and Roland E. Sledge
Class III: Leslie C. Texas, Jack Birks and J. P. Bryan
5. Any other business which may properly come before the special meeting
or any adjournment or postponement of the special meeting.
Pease's board of directors has unanimously approved the stock issuances and
the exchange, the Amended and Restated Articles of Incorporation, and the
election of the seven directors and recommends that you vote "FOR" approval of
these proposals. We have described these proposals in more detail in the
accompanying proxy statement and prospectus, which you should read in its
entirety before voting.
The board of directors has fixed the close of business on _______, 2000 as
the record date for determining stockholders entitled to notice of and to vote
at the special meeting and any adjournment or postponement of the special
meeting. The proposal to issues shares of Pease common and preferred stock in
the merger and to elect the directors must be approved by a plurality of the
votes cast on the proposal. For this purpose, the holders of at least a majority
of all outstanding shares of Pease common and preferred stock must be
represented at the meeting. The proposal to approve and adopt Amended and
Restated Articles of Incorporation must be approved by the holders of a majority
of the outstanding shares of Pease common and preferred stock.
BY ORDER OF THE BOARD OF DIRECTORS
Patrick J. Duncan
President
________, 2000
To assure that your shares are represented at the special meeting, you are
urged to complete, date and sign the enclosed proxy and mail it promptly in the
postage-paid envelope provided, whether or not you plan to attend the special
meeting in person. You may revoke your proxy in the manner described in the
accompanying proxy statement and prospectus at any time before it has been voted
at the special meeting. Any stockholder attending the special meeting may vote
in person even if that stockholder has returned a proxy.
5
<PAGE>
TABLE OF CONTENTS
Page
WHERE YOU CAN FIND MORE INFORMATION.......................................... 3
Available Information............................................... 3
FORWARD-LOOKING STATEMENTS................................................... 3
QUESTIONS AND ANSWERS
ABOUT THE PEASE AND CARPATSKY MERGER................................ 11
SUMMARY .................................................................... 13
General ........................................................... 13
The Companies....................................................... 13
The Pease Special Meeting........................................... 13
The Carpatsky Special Meeting....................................... 14
Summary Historical and Pro Forma Financial Data..................... 21
Summary Unaudited Pro Forma Combined Condensed Financial Data....... 23
RISK FACTORS................................................................. 24
THE SPECIAL MEETINGS......................................................... 35
General ........................................................... 35
Matters to be Considered at the Pease Special Meeting............... 35
Matters to be Considered at the Carpatsky Special Meeting........... 36
Votes Required for Approval......................................... 36
Voting and Quorum at the Special Meetings........................... 37
Proxies - Pease..................................................... 37
Proxies - Carpatsky................................................. 38
Procedure for Revocation of Proxies by Carpatsky Shareholders....... 38
Procedure for Revocation of Proxies by Pease Stockholders........... 39
Pease Dissenters' Rights............................................ 39
Carpatsky Dissenters' Rights under Alberta Law...................... 39
Carpatsky Dissenters' Rights under Delaware Law..................... 40
Expenses of Solicitation............................................ 40
Recommendation of the Board of Directors............................ 40
THE MERGER................................................................... 41
Background of the Merger............................................ 41
Bellwether Transaction.............................................. 45
Carpatsky's Reasons to Pursue the Merger............................ 45
Effects of the Merger............................................... 46
Opinion of Financial Advisor........................................ 48
Federal Income Tax Considerations in the United States.............. 51
Tax Consequences of Ownership and Disposition of
Radiant Energy Shares by Canadian Holders........................... 54
Income Tax Considerations in Canada................................. 56
Consequences of the Redomestication ................................ 57
Consequences of the Merger ......................................... 57
Disposition of Radiant Energy Common Stock................................... 57
Dividends on Radiant Energy Common Stock............................ 58
6
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Foreign Property Information Reporting.............................. 58
Dissenting Carpatsky Common Shareholders............................ 58
Dissenters' Rights.................................................. 59
Interests of Persons in the Merger.................................. 60
Financing the Merger................................................ 61
THE REDOMESTICATION.......................................................... 61
General ........................................................... 61
Effects of the Redomestication...................................... 61
THE MERGER AGREEMENT......................................................... 63
General ........................................................... 63
Effective Time of the Merger........................................ 63
Exchange of Certificates............................................ 64
Fractional Shares................................................... 64
Representations..................................................... 65
Conduct of Business Pending the Merger.............................. 65
Conditions to Consummation of the Merger............................ 66
Termination......................................................... 67
Expenses and Fees................................................... 68
SELECTED FINANCIAL DATA OF PEASE............................................. 69
Pease Management's Discussion and Analysis of Financial Condition... 70
Results of Operations............................................... 72
SELECTED FINANCIAL DATA OF CARPATSKY......................................... 79
Carpatsky Management's Discussion and Analysis of Financial
Condition............................................... 80
Liquidity, Capital Expenditures and Capital Resources............... 80
Results of Operations............................................... 82
UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS............................. 86
Pease Oil and Gas Company Pro Forma Combined Balance Sheet
September 30, 1999 (Unaudited)...................................... 87
Pease Oil and Gas Company Pro Forma Combined
Statement of Operations for the Nine Months Ended
September 30, 1999 (Unaudited)..................................... 89
Pease Oil and Gas Company Pro Forma Combined
Statements of Operations for the Year Ended
December 31, 1998 (Unaudited)..................................... 90
Pease Oil and Gas Company Pro Forma Combined Financial Information...... 91
Pease Oil and Gas Company Pro Forma Adjustments......................... 92
BUSINESS OF PEASE............................................................ 93
History and Overview................................................ 93
Business Strategy................................................... 93
Operations.......................................................... 94
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Principal Oil and Gas Interests.................................... 94
Gulf Coast Properties and Prospects ............................... 95
Rocky Mountain Properties.......................................... 95
Title to Properties................................................ 96
Estimated Proved Reserves.......................................... 96
Net Quantities of Oil and Gas Produced............................. 96
Drilling Activity.................................................. 97
Competition........................................................ 98
Markets .......................................................... 98
Regulations........................................................ 98
Operational Hazards and Insurance.................................. 100
Administration..................................................... 100
BUSINESS OF CARPATSKY....................................................... 101
History and Overview............................................... 101
Business Strategy.................................................. 102
Operations......................................................... 103
Carpatsky's Oil and Gas Properties................................. 103
Office Facilities.................................................. 104
Competition........................................................ 104
Markets and Gas Marketing.......................................... 105
REPUBLIC OF UKRAINE......................................................... 107
Key Statistics..................................................... 107
Current Status..................................................... 107
Ukraine - Political and Economic Context........................... 107
Economic Context................................................... 109
Foreign Investment................................................. 110
Government Recognized Business Entities............................ 111
Taxation .......................................................... 112
Corporate Profits Tax.............................................. 112
Value-added Tax ("VAT")............................................ 113
Transportation cost of natural gas................................. 114
Other Taxes and Charges............................................ 114
Double Taxation Treaties........................................... 114
MATERIAL CONTRACTS BETWEEN PEASE AND CARPATSKY.............................. 115
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF PEASE............................................ 116
SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS.......................................... 116
DIRECTORS AND EXECUTIVE OFFICERS OF PEASE................................... 117
Directors and Executive Officers................................... 117
Executive Compensation............................................. 119
Option Grants in the Last Fiscal Year.............................. 120
Aggregated Option Exercises in the Last Fiscal Year and the Fiscal
Year-End Option Values.................................... 120
Option and Warrant Repricing....................................... 121
Employment Contract................................................ 121
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Compensation of Directors.......................................... 121
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 121
Transactions with Beta Capital Group, Inc.......................... 121
Transactions with Other Directors During the Last Fiscal Year...... 122
Transactions with Former Officers.................................. 122
ELECTION OF DIRECTORS AT THE PEASE SPECIAL STOCKHOLDERS' MEETING............ 122
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF CARPATSKY........................................ 124
DIRECTORS AND EXECUTIVE OFFICERS OF CARPATSKY............................... 126
Directors and Executive Officers................................... 126
Executive Compensation............................................. 128
Option Grants in the Last Fiscal Year.............................. 128
Aggregated Option Exercises in the Last Fiscal Years and the Fiscal
Year-End Option Values.................................... 128
Employment Contracts............................................... 129
Compensation of Directors.......................................... 129
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 129
General and Overview .............................................. 129
Transactions with Directors........................................ 129
DESCRIPTION OF CAPITAL STOCK................................................ 132
Certain Provisions of the Articles of Incorporation, Bylaws
and Nevqada Law .......................................... 134
Anti-Takeover Statutes............................................. 135
Transfer Agent and Registrar....................................... 136
MARKET FOR PEASE'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS.................................... 136
COMPARISON OF RIGHTS OF HOLDERS OF CARPATSKY, PEASE AND
RADIANT ENERGY COMMON STOCK....................................... 137
COMPARISON OF OIL AND GAS RESERVES.......................................... 144
LEGAL OPINIONS.............................................................. 144
EXPERTS ................................................................... 144
Appendix A - Amended Agreement and Plan of Merger Appendix B - Opinion of
Houlihan Smith & Company, Inc.
Appendix C - Sections of the General Corporation Law of Delaware relating to
dissenters' rights for Carpatsky
Appendix D - Sections of the Corporation Law of Alberta relating to
dissenters' rights for Carpatsky shareholders
9
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QUESTIONS AND ANSWERS
ABOUT THE PEASE AND CARPATSKY MERGER
Q: Why are the two companies proposing to merge?
A: Pease and Carpatsky are proposing to merge because we believe the resulting
combination will create a stronger, more competitive company capable of
achieving greater financial strength, operational efficiencies, earning
power and growth potential than either company would have on its own.
Q: What do I need to do now?
A. If you are a Carpatsky or a Pease stockholder, please carefully read and
consider the information contained in this document, then fill out and sign
your proxy card. Please mail your signed proxy card in the enclosed return
envelope as soon as possible so that your shares may be represented at the
meetings. Your proxy card will instruct the persons named on the card to
vote your shares at the meeting as you direct on the card.The boards of
directors of Pease and Carpatsky have each unanimously recommended that
stockholders vote in favor of the proposed merger.
Q. If my broker holds my Pease shares in nominee or "street name," will my
broker vote my shares for me?
A: Your broker will vote your Pease shares only if you provide instructions on
how to vote. You should follow the directions provided by your broker to
vote your shares. If you do not give instructions to your broker, you will
in effect be voting against the merger.
Q: If my broker or other representative holds my Carpatsky shares, how will
the shares be voted?
A: If your Carpatsky shares are registered in the name of your broker or some
other representative (an "intermediary"), you must instruct that
intermediary how to vote your shares. Every intermediary has its own
mailing procedures and provides its own return instructions, which should
be carefully followed.
Q: May I change my vote after I have mailed my signed proxy card?
A: If you own Pease shares, you may change your vote at any time before your
proxy is voted at the meeting. You can do this in one of three ways. Each
method alone is sufficient to change your proxy.
(1) You can send a written notice to Pease at its business address stating
that you would like to revoke your proxy.
(2) You can complete and submit a new proxy card to Pease at its business
address.
(3) You can attend the meeting and vote in person. Simply attending the
meeting, however, will not revoke your proxy; you must notify the
secretary of the company at the meeting and cast a vote at the
meeting.
If you are a Carpatsky shareholder, you may revoke your proxy as to any
matter on which your shares have not been voted. A proxy can be revoked by
an instrument in writing deposited either at the registered office of
Carpatsky or at the office of The CIBC Mellon Trust Company at 600 The Dome
Tower, 333- 7th Avenue S.W., Calgary, Alberta T2P 2Z1, at any time up to
and including the last business day preceding the day of the meeting, or
any adjournment thereof at which the proxy is to be used, or with the
Chairman of the meeting on the day of the meeting or any adjournment
thereof at which the proxy is to be used. Further details can be found
under the "Special Meetings - Proxies - Carpatsky."
If you have instructed a broker or intermediary to vote your shares, you
must follow directions received from your broker to change your vote.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed, Carpatsky shareholders will receive
written instructions for exchanging their stock certificates. Pease
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stockholders will keep their existing certificates. However, Pease
stockholders may elect to surrender their stock certificates in exchange
for certificates reflecting the new name for the corporation.
Q: When will Carpatsky shareholders be permitted to sell the Pease shares they
receive in the merger?
A: Immediately following the merger, each Carpatsky shareholder will be
entitled to sell or transfer the Pease common stock or preferred stock
received by that stockholder in the merger, except those stockholders who
are officers, directors, or otherwise considered an "affiliate" of
Carpatsky under the SEC rules immediately before the merger or of Radiant
Energy following the merger.
Affiliates will be subject to restrictions on the number of shares they may
sell during a three month period.
Q: When do you expect the merger to be completed?
A: We expect to complete the merger shortly after receiving stockholder
approval at the meetings.
Q. Who can help answer my questions about the merger?
A. If you have more questions about the merger, you should contact:
If to Pease, to:
Pease Oil and Gas Company
751 Horizon Court, Suite 203
Grand Junction, CO 81506
Attention: Patrick J. Duncan
Telephone: (970) 245-5917
If to Carpatsky to:
Carpatsky Petroleum Inc.
1331 Lamar, Suite 1450
Houston, TX 77010
Attention: Robert Bensh
Telephone: (713) 756-7029
Carpatsky's registered office in Canada is:
1210, 606-4th Street S.W.
Calbary, Alberta
T2P 1T1
11
<PAGE>
SUMMARY
This summary highlights selected information from this joint proxy
statement/ prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read carefully this
entire joint proxy statement and prospectus and the documents to which we have
referred you.
General
This proxy statement and prospectus relate to the proposed merger of
Pease's subsidiary corporation, with and into Carpatsky in accordance with the
amended merger agreement which is dated December 30, 1999. A copy of the amended
merger agreement is attached as Appendix A. As a result of the merger Carpatsky
will become a wholly-owned subsidiary of Pease. The name of Pease will change to
"Radiant Energy, Inc." and Carpatsky shareholders will become stockholders of
Radiant Energy. Holders of Carpatsky stock will control Radiant Energy following
the merger.
The Companies
Carpatsky Carpatsky is a non-operating holding company which conducts
operations in the Republic of Ukraine through a wholly-owned Delaware subsidiary
corporation. Through the subsidiary Carpatsky holds interests in two producing
oil and natural gas fields in Ukraine. The Bitkov field had estimated proved
reserves of approximately 810,000 barrels of oil and 3 Bcf of natural gas, net
to Carpatsky's interest, and the RC field had approximately 209 Bcf of natural
gas and 1.9 million barrels of condensate, net to Carpatsky's interest, at
December 31, 1998.
The address and telephone number for Carpatsky and its subsidiary are:
Carpatsky Petroleum Inc., 1331 Lamar Suite 1450, Houston, Texas 77010, (713)
756-7029.
Pease Pease holds interests in two producing oil and natural gas fields in
southern Louisiana and a 12.5% working interest in a proprietary 3-D seismic
data set covering approximately 130,000 acres in Texas. Pease had estimated net
proved reserves of approximately 275,000 barrels of oil and 1.3 Bcf of natural
gas at December 31, 1998.
The address and telephone number of Pease is: Pease Oil and Gas Company,
751 Horizon Court, Suite 203, Grand Junction, Colorado 81506, (970) 245-5917.
Market Information Pease common stock trades in the OTC Bulletin Board
market under the symbol "WPOG." Until January 14, 1999, the common stock of
Pease was traded on the Nasdaq Small Cap Market. The quoted bid price range for
Pease common stock during 1999, and through January __, 2000, ranged from a high
bid of $1.00 to a low bid of $0.25. On _______ __, 2000, the closing bid price
was $_____ and the closing asked price was $-----.
There is a limited market for the Carpatsky common stock on the Canadian
Venture Exchange in Canada. The quoted bid price range for Carpatsky common
stock during 1999, and through ___________, 2000, ranged from a high bid of
$0.14 to a low bid of $0.03. The closing bid price was $_____ and the closing
asked price was $_____ on ___________, 2000. The bid prices have been converted
from Canadian dollars based upon the applicable exchange rate in effect.
The Pease Special Meeting
Record Date; Shares Entitled to Vote Only holders of record of shares of
Pease common stock at the close of business on ________ __, 2000 are entitled to
notice of and to vote at the Pease special meeting. As of that date, there were
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<PAGE>
__________ shares of Pease common stock outstanding. Each share will be entitled
to one vote on each matter to be acted upon at the special meeting.
Purpose of the Meeting The purpose of the Pease special meeting is to vote
upon a proposal to issue approximately 44,959,557 shares of common stock and
102,410,000 shares of newly created preferred stock in connection with the
merger of Carpatsky with a subsidiary corporation, and the exchange of 8,865,665
shares of Pease common stock for all outstanding Pease preferred stock. In
addition, stockholders will be asked to approve Amended and Restated Articles of
Incorporation for Pease which includes changing the name of the corporation to
"Radiant Energy, Inc.," increasing the number of authorized shares of common
stock to 150,000,000 and preferred stock to 200,000,000, and the election of a
board of seven directors to serve following the effective time of the merger.
Votes Required The holders of a majority of the outstanding shares of Pease
common stock must vote to approve the Amended and Restated Articles of
Incorporation. The vote of holders of a plurality of the votes cast, assuming a
quorum is represented at the meeting, is required to approve the issuance of the
shares of common and preferred stock.
Approval by Holders of Preferred Stock All 10 beneficial owners of
outstanding Series B 5% PIK Convertible Preferred Stock have agreed to vote for
the matters presented at the meeting and to exchange all outstanding shares of
their preferred stock for 8,865,664 shares of common stock of Radiant Energy at
or before the closing of the merger.
Dissenters' Rights Holders of Pease common stock and preferred stock will
not have the right to dissent to the merger or related transactions.
The Carpatsky Special Meeting
Record Date; Shares Entitled to Vote Only holders of record of shares of
Carpatsky common stock and preferred stock at the close of business on ________,
2000 are entitled to notice of and to vote at the Carpatsky special meeting. As
of that date there were 77,178,263 shares of Carpatsky common and 95,450,000
shares of Carpatsky preferred stock outstanding. The common shares and preferred
shares vote together as a class. Each share of common stock and preferred stock
will be entitled to one vote on each matter acted upon at the special meeting.
Purpose of the Meeting The purpose of the Carpatsky special meeting is to
vote upon a proposal to approve the continuance and redomestication and to adopt
the merger agreement. Approval and adoption shall result in the following:
(a) Carpatsky, an Alberta, Canada corporation, shall be continued and
redomesticated as a Delaware corporation;
(b) The Delaware corporation will then be merged with a wholly-owned subsidiary
of Pease; and
(c) Holders of common stock shall receive shares of common stock of Radiant
Energy upon completion of the merger and holders of preferred stock shall
receive shares of preferred stock of Radiant Energy upon completion of the
merger.
Votes Required The special resolution approving the continuance and
redomestica tion must be approved by two-thirds of the shares of Carpatsky
common and preferred stock, voting together as a class, represented at the
meeting and voting on the special resolution. The holders of a majority of the
outstanding shares of Carpatsky common and preferred stock, voting together as a
class, must vote to approve the merger. The officers and directors of Carpatsky
13
<PAGE>
who together beneficially own more than 9.8% of Carpatsky common stock have
advised Carpatsky that they intend to vote all shares which they beneficially
own in favor of the matters to be presented to Carpatsky shareholder.
In addition, Bellwether Exploration Company which owns all of the Carpatsky
preferred stock, has agreed with Carpatsky to vote in favor of the
redomestication and adoption of the merger agreement if the conditions to
closing the merger are satisfied. Shares of common and preferred stock held by
Bellwether represent approximately 58% of the votes entitled to be cast at the
special meeting.
Dissenters' Rights If you are a holder of record of Carpatsky common or
preferred stock you will have two statutory rights to dissent:
o You may, under the laws of Alberta, Canada, dissent from the special
resolution approving the continuance and redomestication as a Delaware
corporation.
o You will also be entitled to dissent to the merger under Delaware law.
A detailed description of these dissenters' rights are set forth in this
proxy statement and prospectus under the caption "Dissenters' Rights" beginning
at page __.
THE MERGER
We encourage you to read the merger agreement attached as Appendix A as it
is the legal document that governs the merger.
Reasons for the Merger
(Page __)
As a result of the merger, Carpatsky expects to achieve more ready access
to the United States capital markets, diversification through ownership of an
interest in Pease's producing oil and gas properties and reserves, access to
Pease's liquid assets and cash flow from oil and gas production as well as an
extensive stockholder base.
Pease expects to achieve diversification through acquisition of an interest
in Carpatsky's extensive oil and natural gas reserves in Ukraine, and the
opportunity to leverage a significant increase in assets and stockholder equity
for the benefit of the Pease common and preferred stockholders.
What Shareholders of Carpatsky
Will Receive in the Merger
(Page __)
Except for shares as to which you perfect your appraisal rights under the
law of Alberta, Canada or under Delaware law, each share of Carpatsky common
stock you own will automatically be converted into the right to receive .57842
shares of Radiant Energy common stock. Except for shares as to which you perfect
your appraisal rights under the law of Alberta, Canada or under Delaware law,
each share of Carpatsky preferred stock you own will automatically be converted
into the right to receive 1.07292 shares of Radiant Energy preferred stock. You
will receive cash in lieu of any fractional shares of Carpatsky common stock.
Ownership of Radiant Energy
Following the Merger
The Carpatsky shareholders will receive approximately 44.96 million shares
of Radiant Energy common stock and 102.41 million shares of Radiant Energy
preferred stock in the merger. If the preferred stock were converted into
Radiant Energy common stock immediately after the merger, the former Carpatsky
shareholders would own approximately 87.5% of the common stock and former Pease
stockholders would own the remaining 12.5%. Because the preferred stock will
vote as a class with common stock of Radiant Energy, former Carpatsky
stockholders will have the right to cast 87.5% of the votes at any matter
14
<PAGE>
submitted to our stockholders, including the election of directors. In addition,
Bellwether will own all of the preferred stock, which will entitle Bellwether to
cast a majority of the votes on all matters submitted to our stockholders,
including the election of directors.
Directors and Officers of Radiant Energy
Following the Merger
(Page __)
Following completion of the merger, Radiant Energy's board of directors
will consist of the following seven persons:
J. P. Bryan
B. Dee Davis
Steve A. Antry
David A. Melman
Leslie C. Texas
Jack Birks
Roland E. Sledge
The officers will be:
J. P. Bryan, Chief Executive Officer
Leslie C. Texas, President
David A. Melman, Executive Vice President
Robert Bensh, Vice President and Secretary
Votes Required
(Pages __ and __)
The proposals to issue shares of Pease common and preferred stock and the
election of Pease directors must each be approved by a plurality of the votes
cast on the proposal. For this purpose the holders of at least a majority of all
outstanding shares of Pease common stock must be represented at the
stockholders' meeting. The merger will not occur unless the proposals to issue
Pease common and preferred stock and to exchange Radiant Energy common stock for
outstanding Pease preferred stock are approved.
Holders of a majority of the outstanding shares of Pease common and
preferred stock must vote to approve amendment and restatement of the Articles
of Incorporation of Pease.
Holders of a two-thirds majority of the outstanding shares of Carpatsky
common stock and preferred stock, voting together as a class, represented at the
meeting and voting on the proposal must vote for the continuance and
redomestication. Holders of a majority of the outstanding Carpatsky common and
preferred stock, voting together as a class, must vote to approve and adopt the
merger agreement.
Our Recommendation to Stockholders
To Pease Stockholders:
(Page __)
The Pease board has approved the merger by unanimous vote, believes that
the merger is advisable and is in the best interest of Pease and all its
stockholders and has recommended that you vote for the proposals to approve the
issuance of Pease common and preferred stock in the merger, to issue common
stock in exchange for outstanding preferred stock, and to approve the Amended
and Restated Articles of Incorporation and to elect seven nominated directors.
To Carpatsky shareholders:
(Page __)
Carpatsky's board of directors has unanimously approved continuing and
redomesticating the corporation in Delaware, the merger agreement and the merger
and recommends that shareholders vote to approve these proposals.
Conditions of the Merger
(Page __)
The completion of the merger depends upon meeting a number of conditions,
described in this proxy statement and prospectus and including among other
things:
15
<PAGE>
o approval of the proposals described in this proxy statement and prospectus
by the stockholders of Pease;
o approval of continuance and redomestication and approval and adoption of
the merger agreement by the stockholders of Carpatsky;
o absence of any law or injunction that effectively prohibits the merger;
o absence of material adverse changes to the businesses or assets of Pease or
Carpatsky;
o receipts of opinions from the parties' respective tax counsel that the
merger will qualify as a tax-free reorganization;
o continued effectiveness of the registration statement filed with the SEC
with respect to the shares of Pease common and preferred stock to be issued
to the Carpatsky shareholders in the merger and to the holders of Pease's
outstanding Series B Convertible Preferred Stock in the exchange;
o receipt of all necessary third party consents and all approvals from
governmental authorities;
o absence of demands for appraisal by holders of more than .625% of Carpatsky
common and preferred stock;
o Carpatsky or its subsidiaries shall be delivering gas for sale by closing
of the merger under such reasonable gas sales arrangements as Pease shall
have approved in writing, which approval shall not be unreasonably
withheld;
o Carpatsky or its Ukrainian joint ventures shall have commenced receiving
payment for at least 90% of its natural gas sold by the closing of the
merger and reasonable assurance shall be given that future payments will
continue to be received; and o Carpatsky shall have established that all
taxes due, but unpaid, to any taxing authority in Ukraine by any subsidiary
of Carpatsky or any joint venture partner shall have been paid or otherwise
provided for.
Termination Fees and Expenses
(Page __)
The merger agreement provides for payment of a termination fee of $250,000
payable by one party to the other in the event that one party terminates the
merger agreement under certain conditions.
Opinions of Pease
Financial Advisors
(Page __)
Pease has received an opinion from its financial advisor, Houlihan Smith &
Company, that the proposed merger is fair, from a financial point of view, to
the Pease stockholders. The full text of this opinion are attached as Appendix B
and should be read carefully in its entirety. The opinion of Houlihan Smith &
Company is directed to the Pease board and does not constitute a recommendation
to any stockholder with respect to matters relating to the Pease proposals.
Carpatsky has neither solicited nor received a fairness opinion from any
investment banking, financial advisory or evaluation firm regarding the
redomestication and the merger, relying instead on the business judgment of its
board of directors.
Accounting Treatment
(Page __)
The merger will be accounted for as a purchase transaction, with Carpatsky
as the acquiror, in accordance with generally accepted accounting principles.
16
<PAGE>
Material United States Federal
Income Tax Considerations
(Page __)
Carpatsky expects that each of the redomestication and the merger will
constitute a tax-free reorganization for United States income tax purposes and
that shareholders of Carpatsky who are U.S. citizens will not recognize a gain
with respect to the shares of Pease common or preferred stock received by them
in exchange for their Carpatsky common or preferred stock as a result of the
merger. Pease expects that the merger will constitute a tax-free reorganization
for federal income tax purposes and that Pease stockholders will not recognize
gain in connection with the merger.
We discuss these issues under the caption "Income Tax Consequences- United
States" beginning on page __.
Material Canadian Income
Tax Considerations
(Page __)
Carpatsky expects that holders of Carpatsky common stock residing in, or
subject to the income tax authority of, Canada, may recognize taxable income or
loss for Canadian federal income tax purposes in connection with continuance and
redomestication of Carpatsky as a Delaware corporation and the merger.
The Canadian tax aspects of the transaction are set forth below under the
caption "Income Tax Consequences-Canada Stockholders" beginning at page __.
Regulatory Approvals
(Page __)
The continuance and redomestication of Carpatsky must be consented to by
the Registrar of Corporations for Alberta, Canada. Both the continuance and
redomestication and the merger must be approved by the Canadian Venture
Exchange.
Appraisal Rights of
Carpatsky shareholders
(Page __)
A holder of Carpatsky common or preferred stock is entitled under the law
of Alberta to dissent and be paid the fair value of such shares if the
continuance and redomestication of Carpatsky as a Delaware corporation is
completed. The right to dissent must be exercised by giving written objection to
the continuance and redomestication at or before the meeting and otherwise
complying with the procedure set out in section 184 of the Business Corporations
Act (Alberta), a copy of which is attached as Appendix D. Section 184 requires
adherence to the procedures established therein and failure to do so may result
in the loss of rights thereunder.
Holders of Carpatsky common and preferred stock have the right to seek
appraisal of, and to be paid, the value of their shares. Section 262 of the
Delaware General Corporation Law, which governs the rights of stockholders who
wish to seek appraisal of their shares, is attached to this joint proxy
statement/ prospectus as Appendix C. It is a condition to the consummation of
the merger that holders of no more than .625% of the outstanding Carpatsky
common and preferred stock shall demand an appraisal of its stock.
Effective Time of
the Merger
(Page __)
Management expects the merger to become effective soon after the special
meetings of the Carpatsky and Pease stockholders. The merger will be effective
when the Articles of Merger are filed with the Delaware Secretary of State and
the Amended and Restated Articles of Incorporation are filed by Pease with the
Nevada Secretary of State and the other conditions set forth in the merger
agreement are satisfied.
17
<PAGE>
Recent Developments
Bellwether Investment. In December 1999, Bellwether Exploration Company
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$.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.
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.
In the re-domestication and merger, the Bellwether preferred shares will be
converted into 102.41 million shares of Radiant Energy preferred stock. 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 Radiant Energy
stockholders, 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.
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 RC Field Protocol. Approximately 96% of Carpatsky's estimated net
proved reserves as of December 31, 1998, on a barrel of oil equivalency basis,
were located in the RC field in the Ukraine. Carpatsky's interest in this field
is based on a joint activities agreement between Carpatsky and Ukrnafta, the
Ukranian state oil company. Ukrnafta owns the license issued by the Ukranian
government to explore the RC field.
As of December 31, 1999, Carpatsky owed approximately $3.2 million to a
joint account established under the joint activities agreement to fund
operations in the RC field. Carpatsky used a portion of the proceeds from the
issuance of preferred stock and warrants to pay $1.0 million of the amount owed
under the joint account. In connection with this payment, Carpatsky and Ukrnafta
entered into a protocol in which Carpatsky agreed to pay the balance of $2.2
million under the joint account and Ukrnafta agreed to assist Carpatsky in
amending the RC field license to either specifically name Carpatsky as a license
holder or reference the joint activities agreement. Without this amendment to
the license, the Ukranian government may not recognize Carpatsky's interest in
the RC field. Carpatsky agreed to pay the balance owed to the joint account when
the license is amended. If the license is not amended by the end of the first
quarter, Carpatsky and Ukrnafta agreed to meet to review the protocol.
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<PAGE>
Fees and Expenses
(Page __)
We anticipate approximately $250,000 of expenses will be incurred in
connection with the merger.
In addition, Patrick J. Duncan, President of Pease, will receive a
termination payment equal to approximately $195,000 and will be entitled to sell
1,564 shares of Pease common stock he owns to Radiant Energy for $25,000 upon
completion of the merger in accordance with the terms of his employment
agreement.
Summary of Risk Factors
(Pages __ to __)
Risks Relating to the Merger
o Pease and Carpatsky have generated operating losses for each of the last
two years. The auditors issued a qualified audit report for both companies;
o Radiant Energy will require additional financing. The terms may be
unfavorable to present stockholders.
o Required additional financing may be difficult to raise;
o Most of the Carpatsky proved reserves are undeveloped and there is a risk
that some of them may not be recovered;
o The transaction may not close; and
o Matters described in forward-looking statements in this prospectus may not
occur; thus increasing the risk to investors.
Risks Related to Carpatsky's Business
o Radiant Energy will conduct most of its operations in Ukraine;
o Carpatsky must contribute additional capital or risk losing a portion of
its reserves in Ukraine; and
o A substantial portion of the Carpatsky reserves are undeveloped; and
o There are risks in operating in Ukraine, including distributing and being
paid for gas produced in Ukraine.
Risks Relating to Pease
o Pease is subject to the risk of volatile oil and natural gas prices;
o Pease does not control its oil and gas properties; therefore it will
continue to be dependent upon the various operators of its domestic
properties to explore and develop those prospects;
o Pease's corporate charter includes certain anti-takeover provisions;
o Pease's corporate charter makes certain limitations on director liability;
and
o Carpatsky shareholders will control Radiant Energy.
Risks Related to the Oil and Natural Gas Business and Other General Risks
o Our estimates of proved oil and natural gas estimates may be inaccurate and
we may not ultimately realize the future net revenues predicted in our
reserve estimates;
o Radiant Energy will experience drilling and operating risks;
o Radiant Energy must continue to comply with significant amounts of
governmental regulation;
o Radiant Energy must comply with environmental regulations;
o Radiant Energy will face substantial competition;
o Acquiring interests in other properties involves substantial risks;
o There will be no dividends on common stock; and
o The common stock market price for Radiant Energy common stock following the
merger is likely to be volatile.
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<PAGE>
Summary Historical and Pro Forma Financial Data
Set forth below are summary historical financial and unaudited pro forma
consolidated data of Pease and Carpatsky. The summary historical financial data
are based upon the historical financial statements of Pease and Carpatsky,
including the notes to those financial statements, included at the end of this
proxy statement and prospectus, and should be read in conjunction with those
financial statements. The summary unaudited pro forma combined condensed
financial data are presented for illustrative purposes only and are not
necessarily indicative of the financial position or results of operations that
would have been reported had the merger been in effect during the periods
presented or that may be reported in the future. The summary unaudited pro forma
combined condensed financial statements, including the notes to those unaudited
pro forma financial statements, appearing elsewhere in this proxy statement and
prospectus.
<TABLE>
<CAPTION>
Pease Oil and Gas Company
Summary Financial Data
Nine Months Ended September 30, Year Ended December 31,
------------------------------ -----------------------
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ......................................... $ 1,504,145 $ 2,404,342 $ 2,916,982 $ 4,659,309
Gross profit .................................... 1,228,131 843,515 1,296,406 2,132,262
Income (loss) from operations ................... (299,502) (4,617,031) (10,371,593) (15,374,234)
Net income (loss) ............................... (535,771) (4,845,125) (10,627,471) (15,895,067)
Net income (loss) applicable to common
stockholders ................................ (713,588) (6,569,779) (12,694,965) (15,985,036)
Net income (loss) per common share .............. (0.43) (4.15) (7.99) (12.21)
Weighted average number of common
shares outstanding .......................... 1,668,400 1,584,200 1,588,000 1,309,000
<CAPTION>
Sept. 30, 1999 Dec. 31, 1998
-------------- -------------
<S> <C> <C>
Balance Sheet Data:
Current assets ................................ $ 1,201,345 $ 1,740,729
Current liabilities ........................... 363,087 638,841
Working capital ............................... 838,258 1,101,888
Total assets .................................. 7,099,895 7,912,971
Total liabilities ............................. 2,816,593 2,932,102
Stockholders' Equity .......................... 4,283,302 4,980,869
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Carpatsky Petroleum Inc.
Summary Financial Data
Nine Months Ended September 30, Year Ended December 31,
------------------------------- -----------------------
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net Revenue .............................. $ 160,506 $ 152,259 $ 225,665 $ 85,633
Gross profit (loss) ...................... (575,590) (35,679) (81,896) 3,282
Income (loss) from operations ............ (1,590,934) (576,669) (719,672) (821,140)
Net income (loss) ........................ $ (1,256,353) $ 33,203 $ (346,544) $ (965,734)
Net income (loss) per share .............. $ (0.03) Nil $ (0.01) $ (0.03)
Weighted average number of common
shares outstanding ..................... 40,796,000 40,796,000 40,796,000 31,691,000
<CAPTION>
Sept. 30,1999 Dec. 31, 1998
------------- -------------
<S> <C> <C>
Balance Sheet Data:
Current assets ......................... $ 680,415 $ 208,503
Current liabilities .................... 5,501,415 4,849,874
Working capital (deficit) .............. (4,821,000) (4,641,371)
Total assets ........................... 10,903,668 9,751,616
Total liabilities ...................... 5,501,413 6,857,581
Stockholders' Equity ................... 5,402,253 2,894,035
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Pease Oil and Gas Company
and
Carpatsky Petroleum Inc.
Summary Unaudited Pro Forma Combined Condensed Financial Data
Year Ended December 31, 1998
-------------------------------------------------------
Pro Forma
Carpatsky Pease Adjustments Combined
--------- ----- ----------- ---------
<S> <C> <C> <C> <C>
Statement of
Operations Data:
Net revenue .................... 225,665 2,916,982 -- 3,142,647
Gross profit (loss) ............ (81,896) 1,296,406 -- 1,214,510
Net income (loss) .............. (346,594) (10,627,471) 8,582,051 (2,392,014)
Income (loss) per share ........ (0.01) (7.99) -- (0.04)
<CAPTION>
Nine Months Ended September 30, 1999
-------------------------------------------------------
Pro Forma
Carpatsky Pease Adjustments(1) Combined
--------- ----- ------------- ---------
<S> <C> <C> <C> <C>
Statement of
Operations Data:
Net revenue .................... $ 160,506 $ 1,504,145 $ -- $ 1,664,651
Gross profit (loss) ............ (575,590) 1,228,131 -- 652,541
Net income (loss) .............. (1,256,353) (713,588) (146,271) (1,823,670)
Income (loss) per share ........ (0.03) (0.43) -- (0.03)
Balance Sheet Data
as of September 30, 1999:
Working capital (deficit) .... (4,821,000) 838,258 3,573,023 (409,719)
Current assets ............... 680,415 1,201,345 2,573,023 4,454,783
Current liabilities .......... 5,501,415 363,087 (1,000,000) 4,864,502
Total assets ................. 10,903,668 7,099,895 236,378 18,239,941
Total liabilities ............ 5,501,415 2,816,593 (671,004) 7,647,002
Stockholders' equity ......... 5,402,253 4,283,302 907,384 10,592,939
- ------------
</TABLE>
(1) Includes pro forma adjustments giving effect to a $4.0 million capital
investment in Carpatsky in December 1999, as described elsewhere in
this proxy statement and prospectus. See the detailed pro forma
financial information elsewhere in this prospectus for more details.
Combined Proved Oil and Natural Gas Reserves at December 31, 1998
Net Proved Reserves
----------------------------------
Bbls Bcf Bcfe
---- --- ----
Pease ........ 275,000 1.268 3.019
Carpatsky .... 2,738,000 211.961 228.389
---------- -------- -------
Total 3,016,000 213.229 231.408
========== ======== =======
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RISK FACTORS
In evaluating Pease, Carpatsky, our businesses, the merger, the merger
agreement and the transactions contemplated by the merger agreement, and the
proposals described in this proxy statement and prospectus, you should carefully
consider the following risk factors, as well as the other information we have
included or referenced.
Pease and Carpatsky have each generated operating losses for each of the
last two years and have retained deficits. The auditors issued a qualified audit
report for both companies.
Pease has incurred the following losses from operations:
o $15.4 million for the year ended December 31, 1997;
o $10.4 million for the year ended December 31, 1998; and
o $.3 million for the nine months ended September 30, 1999.
Carpatsky has incurred the following losses from operations:
o $822,000 for the year ended December 31, 1997;
o $720,000 for the year ended December 31, 1998; and
o $1,591,000 for the nine months ended September 30, 1999.
Carpatsky will be a wholly-owned subsidiary corporation of Radiant Energy,
formerly Pease, following the merger. At September 30, 1999 Pease had positive
working capital of $838,000. On a pro forma basis assuming the merger was
completed as of September 30, 1999, Radiant Energy would have had a working
capital deficit of approximately $409,719.
Our auditors' reports for the financial statements of both Pease and
Carpatsky for our last fiscal years ending December 31, 1998, were qualified as
to whether each company has sufficient operating capital to enable us to
continue as a going concern.
Radiant Energy will use our available cash resources and cash flow, if any,
for the following purposes:
o To fund costs of development activities of Carpatsky's Ukraine
properties;
o To fund development activities in Pease's Gulf Coast properties.; and
o To fund operating overhead.
Radiant Energy will require additional financing. The terms may be
unfavorable to present stockholders. Failure to receive financing will
jeopardize the chances for future success.
We anticipate that approximately $250,000 to as much as $1.6 million will
be required to develop Pease's interest in the Gulf Coast properties through the
end of 2000. We also anticipate that a minimum of $2.9 million and as much as
$8.3 million will be required to continue to develop the Carpatsky Ukraine
properties through 2000. These anticipated expenditures exceed our present
combined cash resources in Pease and Carpatsky. Therefore, there can be no
assurance that Radiant Energy will have sufficient funds available to implement
the intended development activities after of the merger is completed. Radiant
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Energy will continue to seek additional financing, the terms of which are
presently unknown and which may be disadvantageous to our stockholders. We can
give no assurance that required additional capital will be obtained.
Required additional financing may be difficult to raise.
We will be looking to the following sources for operating capital during
the balance of 2000:
o Pease's present cash assets, which are expected to total approximately
$500,000 after merger and related expenses;
o Carpatsky's cash assets, which will be less than $100,000 once the
existing obligations to the Ukrainian partners and other vendors are
satisfied,;
o Cash flow from Pease's existing oil and natural gas production, which
we estimate will be approximately $500,000 per quarter during 2000,
assuming our oil production sells for at least $22 per barrel and our
natural gas sells for at least $2.50 per Mcf; and
o Equity and debt financing for which we have no present commitments.
If we are unable to secure additional financing following the merger, we may
have to:
o Forfeit our interest in development or exploratory wells which may be
drilled by the various operators in the Gulf Coast;
o Assign our interest in drilling prospects to other participants on
such terms as can be negotiated, if any;
o Suffer significant reductions in the interest held by Carpatsky in the
RC field; and
o Forfeit any right to participate in any future wells in the RC field,
which would substantially reduce Radiant Energy's estimated proved
reserves.
It is important to remember:
o Developing proved undeveloped oil and natural gas properties requires
substantial capital;
o Radiant Energy will be required to raise additional funds through
public or private financings or borrowings;
o Radiant Energy may be unable to raise sufficient additional capital to
carry out its intended business plan;
o If Radiant Energy cannot obtain sufficient additional capital
resources, our operations and financial condition will suffer and we
will surrender a portion of our present reserves;
o Any capital resources which are available may not be available on
terms that are advantageous to us;
o If Radiant Energy issues additional equity or other securities to
raise capital, the ownership interest of our existing stockholders
will be diluted; and
o Any additional securities issued to raise capital may have better
rights, preferences or privileges than common stock held by our
existing stockholders.
Radiant Energy will conduct most of its operations in Ukraine.
We expect that most of the future oil and gas production of Radiant Energy
will be from operations in Ukraine in Eastern Europe. The success of operations
in Ukraine will depend on our ability to maintain our relationships with our
local development partners in Ukraine, the political and economic stability of
Ukraine, export and transportation tariffs, local and national tax requirements
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and exercise of foreign government sovereignty over the exploration area. No
assurance can be given that our operations in Ukraine will be profitable. See
"Republic of Ukraine," and Note 1 of the Notes to Carpatsky's Consolidated
Financial Statements. Generally the risks of operations in Ukraine include the
following:
o 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 our 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. We can give you no assurance that we will
be able to take measures to provide adequate protection of our oil and gas
interests against political instability or changes in government, policies or
practices, institutions, personnel or shifts in political power. See "Republic
of Ukraine."
o 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,
so there may not be enforcement history or established practice that can aid
Radiant Energy in evaluating how the regulatory regime will affect our
operations. The procedures for obtaining permits and approvals may be
cumbersome, and officials may 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. See "Republic of Ukraine."
o Currency risk in Ukraine
We may be exposed to the risk of foreign currency exchange losses in
connection with our 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. Generally, Carpatsky has paid for goods and
services obtained locally in hryvna (UAH), the Ukrainian currency, and has paid
for materials and equipment, expatriate employees and international contractors
in United States dollars.
We may receive hryvna from sales of oil and gas within Ukraine although the
hryvna is presently readily convertible into United States dollars. However, we
can give no assurance that such convertibility will continue.
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o There are risks in producing and monetizing oil and gas produced in
Ukraine.
All of the reserves of oil and natural gas owned by Carpatsky 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 we will
attempt to transport natural gas produced from our properties for sale in
Western Europe which will help assure that full payment for gas is timely
received. Following the merger we will continue to face risks in commercializing
production of our natural gas reserves. These risks are based on a number of
factors, including the following:
o The political climate;
o Regulations applicable to the oil and gas business in Ukraine and to
foreign companies such as Radiant Energy;
o Competitors in Ukraine;
o The limited access to transport natural gas for export;
o The possibility that oil and natural gas prices in Ukraine are
substantially different from prevailing world prices for these
commodities;
o Development of oil and natural gas reserves in Ukraine will require
the use of local resources;
o The possibility that Ukraine may require produced oil and natural gas
to be sold domestically;
o Currency exchange fluctuations;
o Restriction on repatriation of capital and profits;
o Confiscatory changes in Ukraine's tax regime; and
o Non-payment for gas sold and lack of availability 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 we will 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 which we hold. See "Republic of Ukraine."
o Business disputes must be resolved in a foreign jurisdiction
ln the event of a future dispute in connection with Ukraine operations,
Radiant Energy may 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. Radiant Energy may also be hindered or prevented from enforcing
our rights with respect to a governmental instrumentality because of the
doctrine of sovereign immunity.
o Changing Ukrainian culture may adversely affect business operations there
Ukraine has not yet achieved economic, political or social stability.
Ukraine's heavy industry suffered from the loss of government subsidies and
protected markets. Agricultural production has fallen despite excellent natural
resources, as a result of shortages of equipment and fertilizer, among other
factors. Ukraine's political institutions have not been able to address
successfully these economic problems or other difficulties facing the nation.
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Ukraine is likely to remain unstable, and instability represents a threat to the
successful implementation of our two projects and any other projects which we
may undertake in Ukraine.
o We must complete the licensing process to our largest field and we must
receive a development license to produce reserves following the completion of
exploration activities
Carpatsky currently conducts operation in the RC field 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. Being named on the license or having the
joint activity agreement referenced in the license is important to Carpatsky's
ability to enforce its rights under the joint activity agreement. Under current
Ukranian law, the government of the Ukraine will not recognize Carpatsky as
having any rights in the RC field until it is named on the license or until the
joint activity agreement is referenced in the license. It is very difficult, if
not impossible, to enforce rights in the Ukraine under the private law of
contract which governs the joint activities agreement. Also, if Carpatsky is
able to enforce its rights under the joint activity agreement in a court outside
of the Ukraine, realizing on a judgement (i.e. converting the judgement into
cash or assets) in the Ukraine will be difficult or impossible. For this reason,
most 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.
While Carpatsky and Ukrnafta have agreed to seek to amend the exploration
license in the RC field, we can make no assurances that we will be successful.
The present exploration license must be converted into a development
license before we begin commercial production from the field. The conversion to
a development license is subject to the discretion of the Ukranian government,
and we can give no assurance that it will be granted. 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 may 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
Carpatsky.
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, 1998 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 our development operations
will be successful. A substantial portion of these reserves could be
economically unrecoverable for various reasons, notwithstanding the expected
presence of hydrocarbons. In such event the inherent value of our reserves would
be substantially reduced.
The transaction may not close.
The proposed merger transaction is subject to a number of conditions,
including obtaining approval of our stockholders. Pease or Carpatsky may be
unable to meet the applicable conditions or the transaction could be abandoned
for other reasons. In any event, the transaction will not be completed until the
second quarter of 2000.
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Matters described in forward-looking statements in this prospectus may not
occur, thus increasing the risk to investors.
Some of the statements contained in this prospectus under the following
captions are "forward looking": "Summary," "Risk Factors," "Pease Management's
Discussion and Analysis of Financial Conditions and Results of Operations,"
"CarpatskyManagement's Discussion and Analysis of Financial Conditions and
Results of Operations," "Business of Pease" and "Business of Carpatsky." When
used in this prospectus the forward-looking statements are often identified by
the use of such terms and phrases as "anticipates," "believes," "intends,"
"estimates," "plans," "expects," "seeks," "scheduled," "foreseeable future" and
similar expressions. The forward-looking statements involve risks and
uncertainties that might adversely affect our operating results in the future in
a material way. The risks and uncertainties include:
o The availability of capital resources;
o Whether we will be able to maintain and develop our oil and gas
properties in Ukraine and successfully market oil and gas produced;
o Whether we are successful in exploring for oil and natural gas in
other areas; and
o Volatility in oil and natural gas prices in the United States and
throughout Europe.
Many of these risks are beyond our control. Our actual results,
performances and achievements could differ materially from the results
suggested, or implied by, the forward-looking statements.
Bellwether will control Radiant Energy.
Following the merger, Bellwether will own 102.41 million shares of our
convertible preferred stock. These shares are entitled to vote as a class with
our common stock. In addition, if we issue additional shares of voting stock, we
must also make a dividend to Bellwether of a like number of additional shares of
preferred stock. As a result, Bellwether will have the right to vote
approximately 53.4% of the votes entitled to be voted by Radiant Energy
stockholders.
Following the merger, a majority of our board of directors will be
appointed by Bellwether. Mr. J.P. Bryan and Dr. Jack Birks, who will be on our
board of directors after the merger, also are directors of Bellwether.
Bellwether has also appointed Roland E. Sledge, who is proposed to be elected to
our board of directors. Mr. Bryan, the Chief Executive Officer of Bellwether and
Carpatsky, will become our chief executive officer after the merger. Our
activities following the merger will therefore be controlled by Bellwether.
Carpatsky shareholders will be subject to the provisions of Nevada law.
As a result of the merger, Carpatsky shareholders will become stockholders
in Radiant Energy, a Nevada corporation, and, accordingly, your rights as
stockholders will be governed by Nevada law. See "Comparison of Rights of
Holders of Carpatsky, Pease and Radiant Energy Common Stock."
Radiant Energy will 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 Radiant Energy's future financial viability,
including:
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o Revenue;
o Results of operations, profitability and growth; and
o The carrying value of oil and natural gas reserves acquired or
developed by Radiant Energy.
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:
o the worldwide and domestic supplies of oil and natural gas;
o the ability of members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production controls;
o political instability or armed conflict in oil or natural gas
producing regions;
o the price and level of foreign imports;
o the level of consumer demand;
o the price, availability and acceptance of alternative fuels;
o the availability of pipeline capacity;
o weather conditions;
o domestic and foreign government regulations and taxes; and
o the overall local and world economic environment.
Any significant decline in the price of oil or natural gas will adversely
affect Radiant Energy and could require an impairment in the carrying value of
any reserves which Radiant Energy 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.
Pease is not presently the operator of any of its 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, 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 to contribute capital to
the budgets of both Ukrainian ventures will determine our level of authority on
the management committees.
Radiant Energy 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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o Economic conditions;
o Title problems in the U.S.;
o Compliance with governmental requirements;
o Weather conditions; and
o 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:
o Fires; o Natural disasters;
o Explosions; o Encountering formations with abnormal
o Blowouts; pressures;
o Pipeline ruptures; o Cratering;
o Power shortages; o Spills; and
o 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.
Radiant Energy 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:
o Permits for drilling operations; o Construction of processing
o Reports concerning operations; facility
o Unitization and pooling of o Road and pipeline construction;
properties; o The spacing of wells;
o Environmental protection o Taxation;
o Customs regulations o Production rates; and
o 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
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regulations and may have a material adverse affect on our financial condition
and future results of operations.
Radiant Energy's Ukranian oil and gas operations will also be subject to
Ukrainian laws and regulations which are in various states of development.
Radiant Energy 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 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.
Radiant Energy must develop additional reserves to replace reserves
depleted by production.
Our future success will depend upon our ability to develop the proved
undeveloped oil and natural gas reserves in the Gulf Coast area and in Ukraine
and to find or acquire additional oil and natural gas reserves which are
economically recoverable. Once production is established, proved reserves will
decline as they are depleted by production. Radiant Energy must continue
exploratory drilling or otherwise acquire proved reserves to continue to
increase its reserves and its production. Our strategic plan includes increasing
our reserve base through exploratory drilling, development and exploitation of
our existing properties and acquiring other producing properties if we have
sufficient capital resources. We can give no assurance that our planned
drilling, development and exploitation projects will result in significant
additional reserves or that we will have success drilling productive wells with
reserves greater than finding, development and production costs.
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 proxy statement and prospectus 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, prices and 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 and Carpatsky crude oil and natural gas properties described in
this proxy statement and prospectus 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, 1998, with respect to production attributable to our interests in our
respective properties.
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Radiant Energy will face substantial competition.
Radiant Energy will be competing with both major and independent oil and
natural gas and other companies, nearly all of which will have substantially
larger financial resources, operations, staffs and facilities. Radiant Energy
will continue to face intense competition from both major and independent oil
and natural gas companies when it seeks to acquire desirable properties and to
market its production. These competitors have financial and other resources
substantially in excess of those which will be available to us. The effects of
this highly competitive environment could have a material adverse effect on
Radiant Energy.
Acquiring interests in other properties involves substantial risks.
Following the merger, we intend to evaluate and acquire interests in oil
and natural gas properties in the Gulf Coast of the United States and in Ukraine
which, in management's judgement, will provide attractive investment
opportunities to acquire additional production and oil and gas reserves. To
acquire producing properties or undeveloped exploratory acreage will require an
assessment of a number of factors including:
o Value of the oil or gas properties and likelihood of future
production;
o Recoverable reserves;
o Operating costs;
o Potential environmental and other liabilities;
o Drilling and production difficulties; and
o Other factors beyond our control
Such assessments will necessarily be inexact and uncertain. We intend to
perform such reviews in a manner which we believe at the time to be generally
consistent with industry practice. These reviews, however, may not reveal all
existing or potential problems, nor would they permit a buyer to become
sufficiently familiar with such properties to assess fully their deficiencies or
benefits. For instance, inspections may not be performed on every well, and
structural or environmental problems may not be observable even when an
inspection is undertaken. We can make no assurance that any future acquisitions
will be beneficial. Any unsuccessful acquisition could have a material adverse
affect on Radiant Energy.
The corporate charter includes certain anti-takeover provisions.
The Amended and Restated Articles of Incorporation of Radiant Energy will
authorize 200 million shares of preferred stock, of which 102.41 million will be
issued to Bellwether in the merger. The board of directors of Radiant Energy may
issue the balance of the unissued preferred stock without stockholder approval
and may set the rights, preferences and other designations, including voting
rights, of those shares as the board of directors may determine. These
provisions may discourage transactions involving actual or potential changes of
control of Radiant Energy, including transactions that otherwise could involve
payment of a premium over prevailing market prices to holders of common stock.
We have no plans, arrangements, commitments or understandings relating to
potential future issuances of preferred stock. Radiant Energy will not be
subject to provisions of the Nevada General Corporation Law that would make some
business combinations more difficult. See "Description of Capital Stock--Certain
Provisions of Pease's Charter and Bylaws," and "Comparison of Rights of Holders
of Carpatsky, Pease and Radiant Energy Common Stock."
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The corporate charter of Radiant Energy limits director liability.
The Radiant Energy Amended and Restated Articles of Incorporation will
provide, as permitted by Nevada law, that a director of Radiant Energy 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 on behalf of Radiant Energy against directors. In
addition, the Amended Restated Articles of Incorporation and Radiant Energy's
Bylaws will provide for mandatory indemnification of directors and officers to
the fullest extent permitted by Nevada law.
Absence of dividends on common stock.
Neither Pease nor Capatsky have ever declared or paid cash dividends on our
common stock and we do not anticipate that we will pay dividends in the
foreseeable future. We anticipate that future earnings, if any, will be retained
for development of our business.
The market price for Radiant Energy common stock following the merger is
likely to be volatile and the market for Radiant Energy common stock may not be
liquid.
If Radiant Energy's 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. Finally, upon
consummation of the merger, the shares owned by Carpatsky shareholders will
cease trading on the Canadian Venture Exchange. Pease's common stock traded in
the OTC Bulletin Board market and, accordingly, stockholders may experience
different levels of spreads between bid and asked quotations as a result of
deficiencies between such markets.
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THE SPECIAL MEETINGS
General
This proxy statement and prospectus constitutes the Management Information
Circular provided to shareholders of Carpatsky in connection with the
solicitation of proxies from holders of shares of Carpatsky common and preferred
stock for use at the special meeting of shareholders of Carpatsky.
This proxy statement and prospectus is being furnished to holders of common
and preferred stock of Pease in connection with the solicitation of proxies by
our board of directors for use at our special meeting of stockholders.
This proxy statement and prospectus and the accompanying forms of proxy are
first being mailed to Pease and Carpatsky shareholders on or about ________ __,
2000.
Matters to be Considered at the Pease Special Meeting
The Pease special meeting will be held to consider and vote upon for the
following proposals:
o A proposal to approve the issuance of approximately 44,959,557 shares
of common stock and 102,410,000 shares of preferred stock in
connection with the proposed merger pursuant to which Carpatsky
Petroleum Inc. will become a wholly-owned subsidiary of Pease, and the
exchange offer to holders of Pease preferred stock.
o A proposal to issue 8,865,665 shares of common stock in exchange for
all outstanding Pease Series B preferred stock
o A proposal to adopt Amended and Restated Articles of Incorporation of
Pease, pursuant to which Pease's corporate name shall be changed to
"Radiant Energy, Inc.," the number of shares of authorized common
stock shall be increased to 150,000,000 shares and the number of
shares of authorized preferred stock shall be increased to 200,000,000
shares. The Amended and Restated Articles of Incorporation will become
effective upon completion of the merger. If the merger is not
completed for any reason whatsoever, the exchange, the Amended and
Restated Articles of Incorporation and the election of directors will
not become effective.
o The election of a board of seven directors as follows:
Term ending:
o Class I: B. Dee Davis and David A. Melman 2000
o Class II: Steve A. Antry and Roland E. Sledge 2001
o Class III: J. P. Bryan, Leslie C. Texas; and Jack Birks 2002; and
o to transact any other business which may properly come before the
special meeting or any adjournments or postponements of the special
meeting.
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Matters to be Considered at the Carpatsky Special Meeting
The Carpatsky special meeting will be held for the following purposes;
o To consider and vote upon the following proposal under Alberta law to
continue and redomesticate Carpatsky in the state of Delaware as a
Delaware corporation:
BE IT RESOLVED as a special resolution that:
1. Carpatsky Petroleum Inc. make application to be continued
and redomesticated into the State of Delaware, United States of
America, and to be governed by the Delaware General Corporate Law
("DGCL"), by filing with the Secretary of State of the State of
Delaware, a Certificate of Domestication and Certificate of
Incorporation of Carpatsky Petroleum Inc., a Delaware Corporation
("New Carpatsky") pursuant to which each outstanding common share
of Carpatsky Petroleum Inc. will be converted into one share of
New Carpatsky common stock (other than shares for which holders
have exercised their right to dissent with respect to this
special resolution and to be paid the fair value of their shares)
and each outstanding preferred share of Carpatsky Petroleum, Inc.
will be converted into one share of New Carpatsky preferred stock
(other than shares for which holders have exercised their right
to dissent with respect to this special resolution and to be paid
the fair value of their shares);
2. Carpatsky Petroleum Inc. make application to the
Registrar of Corporations under the Business Corporations Act
(Alberta) for a Certificate of Discontinuance discontinuing the
Corporation under the Business Corporations Act (Alberta);
3. the board of directors of the Carpatsky Petroleum Inc.
may in its discretion abandon the application for continuance
under the DGCL without further approval of the shareholders; and
4. any director or officer of the Carpatsky Petroleum Inc.
is hereby authorized to do, sign and execute, under seal or
otherwise, all things, deeds and documents necessary or desirable
for the due carrying out of the foregoing, the execution of such
documents or doing of any such act or thing by any director or
officer of the Carpatsky Petroleum Inc. being conclusive evidence
of such authorization.
o To consider and vote upon a proposal under Delaware law to adopt the
merger agreement among a Pease subsidiary corporation, Pease, and
Carpatsky, which includes the merger of the Pease subsidiary
corporation with and into New Carpatsky; and
o To transact any other business which may properly come before the
special meeting or any adjournments or postponements of the special
meeting.
Votes Required for Approval
The proposals to issue shares of Pease common and preferred stock in the
merger and the exchange, and the proposal to elect the directors must be
approved by a plurality of the votes cast, assuming at least a majority of the
outstanding stock is represented at the meeting. The proposal to adopt Amended
and Restated Articles of Incorporation must be approved by the holders of a
majority of the outstanding shares of Pease common and preferred stock.
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The special resolution approving the continuance and redomestication of
Carpatsky as a Delaware corporation must be approved by two-thirds of the shares
of Carpatsky common stock and preferred stock, voting together as a single
class, represented at the meeting and voting on the special resolution. The
merger must be approved by the affirmative vote of the holders of a majority of
the outstanding shares of the Carpatsky common and preferred stock, voting
together as a single class. Bellwether Exploration Company which owns all of the
Carpatsky preferred stock, has agreed with Carpatsky to vote in favor of the
redomestication and the merger if the conditions to closing the merger are
satisfied. Bellwether's common and preferred stock represent approximately 57.7%
of the votes entitled to be cast at the special meeting.
Voting and Quorum at the Special Meetings
The boards of directors of Pease and of Carpatsky have each fixed
__________, 2000 as the record date for the determination of stockholders
entitled to notice of and to vote at the special meetings of Pease and
Carpatsky. Accordingly, only holders of record of shares of Pease common and
preferred stock or shares of Carpatsky common and preferred stock on the record
date will be entitled to notice of and to vote at the respective special
meetings. As of the record date, there were 1,731,398 shares of Pease common
stock outstanding, held by approximately 1,100 holders of record, and 105,828
shares of Pease Series B preferred stock held by 10 persons, 77,728,263 shares
of Carpatsky common held by approximately 165 registered holders of record and
95.45 million shares of Carpatsky preferred stock held by Bellwether. Each
holder of record of Pease and Carpatsky common and preferred stock on the record
date is entitled to one vote per share on each proposal properly submitted to a
vote at the special meeting of Pease stockholders, provided that holders of
Pease Series B preferred stock will vote only on the proposal to exchange such
stock for our common stock. The presence, in person or by properly executed
proxy, of the holders of a majority of the outstanding shares of both Pease and
Carpatsky common and preferred stock is necessary to constitute a quorum at each
of the special meetings.
Treatment of Abstentions
Abstentions and broker non-votes will be counted as shares present for
purposes of determining the presence or absence of a quorum at the Pease and
Carpatsky special meetings. Broker non-votes are shares held by brokers or
nominees that are represented at a meeting but with respect to which the broker
or nominee is not empowered to vote on a particular matter.
Proxies - Pease
The Pease proxy accompanying this proxy statement and prospectus is
solicited on behalf of the Pease board of directors for use at the special
meeting. You are requested to complete, date, and sign the accompanying proxy
and promptly return it in the accompanying envelope to Pease's transfer agent,
American Securities Transfer & Trust, Inc. or otherwise mail it to Pease. Pease
stockholders, who hold their Pease common stock in the name of a bank, broker or
other nominee should follow the instructions provided by their bank, broker or
nominee on voting their shares. All shares of Pease common stock that are
entitled to vote and are represented at the special meeting by properly executed
proxies received prior to or at the special meeting, and are not revoked, will
be voted at the special meeting in accordance with the instructions indicated on
the proxies. If the instruction is to abstain and in the case of a broker
non-vote, the shares represented by the proxy will be deemed to be present at
the special meeting but will not be voted with respect to the merger, thus
having the same effect as a vote against the merger. If no instructions are
indicated, the proxy will be voted FOR approval of the merger.
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In the event that a quorum is not present at the time the Pease meeting is
convened, or if for any other reason we believe that additional time should be
allowed for the solicitation of proxies, we may adjourn the Pease meeting with
or without a vote of the stockholders. If we propose to adjourn the Pease
meeting by a vote of the stockholders, the persons named in the enclosed form of
proxy will vote all shares of Pease common stock for which they have voting
authority in favor of an adjournment.
The Pease board of directors does not presently intend to bring any other
business before the special meeting and, so far as is known to Pease's board of
directors, no other matters are to be brought before the special meeting. As to
any business that may properly come before the special meeting, however, it is
intended that proxies, in the form enclosed, will be voted in accordance with
the judgment of the persons voting the proxies.
Proxies - Carpatsky
The Carpatsky proxy accompanying this proxy statement and prospectus is
solicited by the management of Carpatsky for use at the special meeting. You are
requested to complete, date, and sign the accompanying proxy and promptly return
it in the accompanying envelope to Carpatsky's transfer agent, CIBC Mellon Trust
Company, 600 The Dome Tower, 333-7th Avenue S.W., Calgary AB T2P 2Z1. Messrs. J.
P. Bryan and Robert Bensh, the persons named in the form of proxy enclosed with
the notice of the special meeting, are respectively, the Chief Executive Officer
and director and the Secretary of Carpatsky.
UNDER ALBERTA LAW CARPATSKY SHAREHOLDERS HAVE THE RIGHT TO APPOINT SOME
OTHER PERSON (WHO NEED NOT BE A SHAREHOLDER OF CARPATSKY) TO REPRESENT HIM AT
THE SPECIAL MEETING. TO EXERCISE THAT RIGHT, A SHAREHOLDER MAY EITHER INSERT THE
NAME OF THE DESIRED REPRESENTATIVE IN THE BLANK SPACE PROVIDED IN THE FORM OF
PROXY ENCLOSED WITH THE NOTICE OF THE MEETING OR SUBMIT ANOTHER FORM OF PROXY
APPOINTING THE DESIRED REPRESENTATIVE. PROXIES WILL NOT BE VALID UNLESS RECEIVED
BY CIBC MELLON TRUST COMPANY, NOT LATER 4:00 P.M. (CALGARY TIME) ON
_____________.
The proxy must be in writing and must be signed by the Carpatsky
shareholder or his attorney authorized in writing, or, if the Carpatsky
shareholder is a corporation, the proxy must be signed under its corporate seal
or by a duly authorized officer or attorney of the corporation authorized in
writing.
Procedure for Revocation of Proxies by Carpatsky Shareholders
A Carpatsky shareholder who has submitted a proxy may revoke it. In
addition to revocation in any other manner permitted by law, a proxy may be
revoked, by an instrument in writing signed by the Carpatsky shareholder or his
attorney authorized in writing, or, if the Carpatsky shareholder is a
corporation, signed under its corporate seal or by an officer or attorney of the
corporation authorized in writing, and depositing the instrument either at the
registered office of Carpatsky, 1210, 606-4th Street S.W., Calgary, Alberta T2P
1T1, or at the office of The CIBC Mellon Trust Company, 600 The Dome Tower,
333-7th Avenue S.W., Calgary AB T2P 2Z1, at any time up to and including the
last business day preceding the day of the special meeting, or any adjournment
thereof at which the proxy is to be used, or with the Chairman of the special
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meeting on the day of the special meeting or any adjournment thereof at which
the proxy is to be used. Upon such deposit the proxy will be revoked as to any
matter in respect of which a vote has not already been cast.
The form of proxy enclosed with the notice of the special meeting affords a
means for Carpatsky shareholders to specify the manner in which shares of
Carpatsky common stock registered in their name will be voted. If appointed
proxy, Messrs. Bryan and Bensh will vote the shares or withhold from voting the
shares as specified by the Carpatsky shareholder on any ballot that may be
called for. THE SHARES WILL BE VOTED IN FAVOR OF APPROVAL OF EACH MATTER FOR
WHICH NO SPECIFICATION HAS BEEN GIVEN. THE FORM OF PROXY ENCLOSED WITH THE
NOTICE OF THE SPECIAL MEETING CONFERS DISCRETIONARY AUTHORITY UPON THE PERSONS
APPOINTED PROXY THEREUNDER TO VOTE ON AMENDMENTS OR VARIATIONS TO MATTERS
IDENTIFIED IN THE NOTICE OF MEETING, AND ON OTHER MATTERS WHICH MAY PROPERLY
COME BEFORE THE MEETING. At the date hereof, management of Carpatsky knows of no
such amendment, variation or other matter which may come before the special
meeting.
Procedure for Revocation of Proxies by Pease Stockholders
If you have given us a proxy, you may revoke it at any time before it is
exercised at the special meeting by
o delivering a written notice to the corporate secretary, bearing a date
later than the date of the proxy, stating that the proxy is revoked;
o signing and delivering a proxy relating to the same shares and bearing
a later date than the date of the previous proxy prior to the vote at
the special meeting; or
o attending the special meeting and voting in person.
If you attend the meeting and do not vote, you will not automatically
revoke a proxy given previously, and any revocation during the meeting will not
affect votes previously taken. Pease stockholders who hold their common stock in
the name of a bank, broker or other nominee should follow the instructions
provided by their bank, broker or nominee to revoke previously voted shares.
Pease Dissenters' Rights
Holders of Pease common or preferred stock do not have a right to dissent
to the merger and receive compensation for their shares.
Carpatsky Dissenters' Rights under Alberta Law
A holder of shares of Carpatsky common and preferred stock is entitled to
dissent and be paid the fair value of such shares if continuance and
redomestication of Carpatsky as a Delaware corporation is completed and such
shareholder provides Carpatsky with written objection to the continuance and
redomestication at or before the special meeting and otherwise complies with the
procedure set out in section 184 of the Business Corporations Act (Alberta).
Section 184 requires adherence to the procedures established therein and failure
to do so may result in the loss of all rights thereunder. Accordingly, each
holder of shares of Carpatsky common and preferred stock who might desire to
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exercise the right of dissent and appraisal should carefully consider and comply
with the provisions of that section, the full text of which is set out in
Appendix "D."
Carpatsky Dissenters' Rights under Delaware Law
Under the law of Delaware, if you are a holder of Carpatsky common or
preferred stock who (a) does not vote in favor of the merger, and (b) delivers a
demand for payment prior to the vote on the proposed merger at the Carpatsky
special meeting, may demand a cash payment for the "fair value" of his or her
shares of Carpatsky common stock. If we cannot agree to an appropriate "fair
value," the matter would be determined in judicial proceedings. We cannot
predict what the determination of "fair value" would be if it is determined in
judicial pro ceedings. In order to exercise this right, you must comply with
each of the procedural requirements of the General Corporation Law of Delaware.
A description of the applicable requirements is provided in "The Merger -
Dissenters' Rights." The failure to take any of the steps required in a timely
manner will result in a loss of your dissenters' rights.
Expenses of Solicitation
Pease and Carpatsky will share the cost of solicitation of proxies from our
shareholders, estimated to be $30,000 plus reasonable out-of-pocket expenses. In
addition to solicitation by mail, our directors, officers, and employees may
solicit proxies from stockholders by telephone, facsimile, or in person,
following the original mailing of the proxies and other soliciting materials. We
will also make arrangements with custodians, nominees, and fiduciaries for
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by custodians, nominees, and fiduciaries, and we will reimburse those
holders for their reasonable expenses.
Recommendation of the Board of Directors
The board of directors of Carpatsky has unanimously approved the
continuance and redomestication of Carpatsky into Delaware and the boards of
directors of both Pease and Carpatsky have unanimously approved the merger
agreement and the merger, and found the terms of the merger agreement to be fair
to, and in the best interests of, their respective companies and their
stockholders. The Carpatsky board of directors has recommended that the holders
of Carpatsky common stock vote FOR approval and adoption of the redomestication,
the merger agreement and the consummation of the transactions described in this
proxy statement and prospectus. The Pease board of directors has recommended
that holders of Pease common stock vote FOR approval of issuance of Pease common
or preferred stock in the merger, FOR approval of the Amended and Restated
Articles of Incorporation, and FOR election of the seven nominated directors.
The matters to be considered at the special meetings are of great
importance to our stockholders. Accordingly, stockholders of both companies are
urged to read and carefully consider the information presented in this proxy
statement and prospectus and to complete, date, sign, and promptly return the
enclosed proxy in the enclosed postage-paid envelope, whether or not you intend
to attend the special meeting.
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THE MERGER
Background of the Merger
On March 18, 1998 one of the Pease directors, Steve A. Antry, wrote a
letter to the then-President of Pease, Willard H. Pease, Jr., and Patrick J.
Duncan, then Secretary and CFO, suggesting ways to improve the financial
position of Pease. This followed 18 months of low oil prices, a disappointing
drilling program resulting in 10 dry holes, and a private placement of nonvoting
Series B Convertible preferred stock which became hyper-dilutive to the common
stock, all of which resulted in declining trading prices for Pease common stock.
One of the suggestions was to consider a merger.
On March 24, 1998 Steve A. Antry, Stephen L. Fischer and R. Thomas Fetters,
Jr., all directors of Pease, sent a second letter to the board with a list of
suggestions for the board to consider to strengthen Pease and reinforce
stockholder confidence. One of their key points was that the board should
discuss entertaining a possible merger or sale of Pease.
At a meeting held on July 10, 1998 in Salt Lake City, Utah, the directors
voted to restructure Pease's management and formed an Executive Committee to
assist in day-to-day management of Pease. William F. Warnick was elected
Chairman of the board of directors to replace Willard H. Pease, Jr., who
retained his position as President.
Subsequently, Mr. Antry wrote to Mr. Warnick on August 10, 1998 requesting
that the Executive Committee discuss a possible merger of Pease at their next
meeting. On August 12, 1998 Pease received an unsolicited preliminary proposal
to merge from Texoil, Inc., a small public oil and gas company.
Chairman Warnick met with Kenneth Etheredge of San Jacinto Securities of
Dallas, Texas on August 13, 1998 to discuss the Company's financing efforts and
the possibility of merging Pease. Etheredge proposed that San Jacinto Securities
be engaged as the exclusive investment banker to pursue possible merger
candidates for Pease.
On August 24, 1998 the directors met in Phoenix, Arizona at which the
directors determined that it may be in the interest of the stockholders to merge
with another company to give Pease stockholders a greater opportunity for
increased values. That decision was based upon assessment of Pease's limited
base of oil and gas reserves and lack of access to capital required to undertake
substantial additional exploration and development activities. To advance its
plan, the board retained the services of San Jacinto Securities to search for
appropriate merger candidates and to assist the board to evaluate those
candidates to determine which would offer Pease the potential for exposure to a
substantial reserve base and growth opportunity.
Mr. Warnick next met on August 27, 1998 with a Denver law firm retained to
advise Pease to discuss, among other things, the possibility of merging and the
terms for San Jacinto Securities to act as investment banker for such a
transaction. Pease and Mr. Warnick also met during the period with the CFO of
Benz Oil Company who wished to discuss a possible transaction focused on buying
out the outstanding nonvoting Series B Convertible preferred stock, converting
it to common stock at a predetermined price and holding Pease as a separate
entity. Warnick advised the board that he did not feel that this transaction was
in the best interests of Pease.
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An Executive Committee meeting was held on August 31, 1998 to discuss
merger possibilities, details of the engagement of San Jacinto Securities to
initiate such a merger and pursuing a third party "white knight" to assist Pease
in financing and to restructure Pease's capital, particularly the outstanding
nonvoting Series B Convertible preferred stock.
The board of directors next met on October 22, 1998 in Phoenix, Arizona and
was informed by the investment banker that indications of interest had been
expressed and that confidentiality agreements had now been submitted to a number
of inquiring candidates. Many recipients had objected to the proposed terms of
the amount of liquidated damages for breach requested in the confidentiality
agreements and the term for nondisclosure. The board approved modifying the
agreement. The board also elected Patrick J. Duncan as interim President of
Pease replacing Willard H. Pease, Jr. Mr. Pease remained as a director and
employee.
The board had a telephone conference meeting on November 16, 1998 to update
the directors on the status of the merger selection process. They were informed
that meetings had been scheduled by then director F. Allan Wise and
representatives of San Jacinto Securities for the following week with several
interested companies in Texas. A full report would be issued to the directors
after the meetings. At this meeting the board voted to accept the resignation of
Mr. Pease as an employee of Pease.
On November 19, 1998 Cheniere Energy, Inc., a small public oil and gas
company, submitted a proposal to merge the two companies which was not accepted.
The board met on November 30, 1998 by telephone conference call and
director Wise reviewed the meetings he had attended with several candidates in
Texas. The directors were advised that Pease, through the Executive Committee of
the board, intended to continue discussions with Fortune Natural Resources
Corporation, Browning Oil Company, Inc., Goodrich Petroleum, Inc., North Coast
Energy, Inc. and other similar companies regarding a potential merger with
Pease.
During December 1998 Pease received unsolicited proposals from MJM Oil &
Gas, Inc., Fortune Natural Resources Corporation, and Aviva Petroleum, Inc. On
December 21, 1998 an Executive Committee meeting was held and the Committee
determined that none of the proposals which had been received were in the best
interests of Pease and its stockholders.
The board of directors next met in Phoenix, Arizona on January 11, 1998 and
received a detailed report from San Jacinto Securities. Thirty-eight
confidentiality agreements had been mailed to prospective companies who had
indicated a potential interest in acquiring or merging with Pease. Twenty-one
companies signed confidentiality agreements and were sent information memos and
oil and natural gas reserve reports. Directors Wise and Fetters and Bruce Lazier
from San Jacinto Securities had met with Texoil, Inc., Xplor Energy, Inc.,
Centas Technical Services, and Edge Petroleum Corp. Messrs. Wise and Fetters and
Kenneth Etheredge of San Jacinto Securities also had met with Venus Exploration.
San Jacinto Securities had additional meetings with Benz Oil & Gas, Fortune
Natural Resources, Aviva Petroleum, Fieldpoint Petroleum, Sandefer Oil and Gas,
Bellwether Exploration, Cheniere Energy, MJM Oil and Gas, and Southern Minerals
Corp. According to Etheredge's records, five companies had made written
proposals: Cheniere Energy, MJM Oil and Gas, PetroQuest Energy Inc., Fortune
Natural Resources Corp. and Venus Exploration, Inc. Centas Technical Services
had expressed an interest in providing management services for Pease if Pease
continued to operate and Aviva Petroleum had expressed interest in an
acquisition but had not made a written proposal. Mr. Etheredge advised the board
that Pease should meet with Venus Exploration and MJM Oil and Gas Company, the
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two companies who had proposed the best offers, and attempt to structure an
acceptable transaction. He further advised that the board should seek input and
guidance from Robert V. Sinnott of Kayne Anderson Investment Management,
representing a majority of the 10 holders of the nonvoting Series B Convertible
preferred stock, to determine whether the holders would be likely to agree to
restructure the preferred stock in connection with an acceptable offer.
In November, 1998, Mr. Fetters, then a director of Pease, advised David A.
Melman, a former business associate of Fetters and a consultant to Carpatsky,
that the Pease directors had determined to seek a merger as its primary
corporate objective. He informed Melman that Pease had retained San Jacinto
Securities to assist in locating an appropriate candidate and to negotiate a
transaction. Mr. Fetters described the Pease corporate structure and its
producing properties to Melman who then approached Fred Hofheinz and Leslie C.
Texas, both then directors of Carpatsky, with this information. They agreed that
Pease appeared to satisfy the Carpatsky objectives. Later in November Mr. Melman
contacted Mr. Etheredge of San Jacinto Securities and discussed the potential
for a merger of the companies. Mr. Etheredge then informed the Pease board of
Carpatsky's interest and San Jacinto Securities delivered a confidentiality
agreement to Carpatsky which was signed by Mr. Hofheinz and returned to Pease.
Later that month Pease forwarded copies of Pease's publicly filed annual and
quarterly reports, as well as oil and natural gas reserve reports, cash flow
projections and a description of Pease properties and potential. After
evaluating Pease, Carpatsky, by letter to Mr. Etheredge dated February 15, 1999,
proposed the basis of a merger, subject to satisfactory due diligence and other
conditions. On February 17, 1999, Carpatsky delivered to Pease the Carpatsky oil
and natural gas reserve report (as of June 30, 1997) and other information. On
March 3, 1999, Messrs. Duncan and Fetters met with Messrs. Texas, Hofheinz and
Melman in Houston, Texas to further refine Carpatsky's initial proposal and
discuss Carpatsky's operations and corporate objectives. On March 11, 1999,
Carpatsky responded by memorandum to questions raised during the meeting held
the previous week. On March 19, 1999, Messrs. Texas and Melman, met in Newport
Beach, California with Steve Antry, and then in Century City, California with
Mr. Sinnott. Discussion at both meetings centered on Carpatsky's ability to
produce, sell and receive payment for its gas reserves in Ukraine. These
meetings were followed by delivery of a Carpatsky memorandum to Pease proposing
procedures for asset valuation of both companies.
At a March 29, 1999 board of directors meeting held by telephone conference
call, President Patrick J. Duncan explained that he had met with several
potential merger candidates the first week in February 1999, including
Carpatsky, Venus Exploration, Texoil, Fortune Natural Resources and Moose
Exploration. On March 9, 1999 Pease received an offer to purchase Pease from Pan
Western Energy Corporation. On the date of the meeting the Executive Committee
of the board and Mr. Etheredge were still evaluating the candidates and awaiting
written proposals from them.
A revised verbal offer was received on April 13, 1999 from Texoil, Inc.
President Duncan faxed a counterproposal to Texoil, Inc. which was declined.
On April 15, 1999, Pease suggested that Carpatsky address the Pease
directors at a meeting to be held in Beverly Hills, California. Messrs. Hofheinz
and Melman represented Carpatsky at the meeting which was held on April 26. They
described Carpatsky's properties and objectives and responded to questions
raised by the directors, legal advisor, and Mr. Etheredge. Subsequent to the
meeting Pease representatives requested, among other things, that Carpatsky
engage a petroleum engineering firm to produce a current valuation of its
reserves as of December 31, 1998. By letters dated April 29 and May 5 Carpatsky
responded to the Pease requests, advising that Carpatsky had retained Ryder
Scott Company, independent petroleum
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consultants, to undertake a study of Carpatsky's oil and gas reserves in
Ukraine, and the discounted present value of those reserves with estimates of
capital required to develop the fields and product pricing. On May 12 a
committee of the Pease board of directors (including Messrs. Warnick and Duncan)
met with representatives of Carpatsky and with B. Dee Davis and Roland Sledge of
Torch Energy Advisors in Houston, Texas, a major creditor of Carpatsky, to
assess the Torch commitment to Carpatsky and its assessment of the political and
economic climate of Ukraine.
At the April 26, 1999 meeting of directors, potential merger candidates
suggested by San Jacinto Securities also made presentations. Representatives of
EnCap Investments L.C., Alliance Resources Plc. and, representatives of Virgin
Oil Company, Inc. and Pecos Operating Co. described proposals to acquire Pease.
The board agreed to review and further discuss the proposals and others.
Virgin Oil submitted a definitive proposal to merge with Pease on May 5,
1999. On May 20, 1999 Virgin Oil withdrew its May 5, 1999 offer and submitted a
revised offer. Pease also received a proposed letter of intent on May 20, 1999
from Carpatsky. At a directors meeting held on that date in Dallas, Texas, the
Pease directors reviewed the proposals from Virgin Oil and Carpatsky. During the
course of the meeting a telephone discussion was held with Mr. Sinnott to inform
him of the latest offers. Mr. Sinnott advised the board that while the board
should determine the proposal most beneficial to Pease, the holders of the
nonvoting Series B Convertible preferred stock would be unlikely to approve the
transaction proposed by Virgin Oil. The Virgin Oil offer was subsequently
withdrawn.
On May 20 the boards of directors of Pease and Carpatsky approved a letter
of intent regarding the merger which was signed by Mr. Warnick, Chairman of
Pease and Mr. Hofheinz, Chairman of Carpatsky. The directors of Pease met by
telephone conference call on June 30, 1999 to be updated on the status of the
due diligence process (which was to include a fact finding trip to Ukraine by
President Duncan and several consultants) and to review a draft Agreement and
Plan of Merger.
On July 9 a Pease contingent including Patrick Duncan and Ms. Karen
Ostrander-Krug, an attorney and petroleum engineer with extensive experience in
Eastern European oil and gas ventures, joined Messrs. Texas and Melman of
Carpatsky, to review Carpatsky assets and operations in Ukraine and to conduct
further due diligence. During the fact finding mission, which ended on July 15,
the group was joined from time to time by additional individuals to issue
reports on Carpatsky's title to its properties and to revenue to be generated
therefrom. Also joining the group were Alexey Kolkov, a partner in a Kyiv-based
law firm; and several members of Carpatsky's Kyiv staff. The group traveled to
both oil/gas fields and met with local management, and met in Kyiv with oil and
gas industry officials and others from governmental agencies.
Upon returning to the U.S., Ms. Ostrander-Krug prepared a written report
which was submitted to the Pease directors along with a report of Mr. Wise, who
had been retained as a petroleum engineer to independently evaluate Carpatsky's
reserves and review the assumptions and calculations that supported the Ryder
Scott reserve report prepared for Carpatsky. On July 27-29, Mr. Melman and
counsel for Carpatsky conducted a due diligence review of Pease at its offices
in Grand Junction, Colorado.
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The share exchange ratio originally described in the letter of intent that
had been previously established was slightly modified to take into account the
opinions of the Pease consultants. On September 1, 1999, the boards of directors
of both companies held meetings during which the definitive merger agreement was
approved. Counterpart documents were signed that same day.
Bellwether Transaction
In December 1997, Torch Energy Advisors Incorporated loaned $500,000 to
Carpatsky. The loan was convertible into common shares of Carpatsky at a
conversion rate of $0.20 per share. During 1997, Torch loaned an additional
$700,000 to Carpatsky and Bellwether agreed to guarantee the first loan of
$500,000. The guarantee by Bellwether was negotiated during the summer of 1998,
when Bellwether and Carpatsky had extensive negotiations under which Bellwether
would acquire a significant or the entire equity interest in Carpatsky. At that
time, Bellwether declined to pursue the transaction because of uncertainties
regarding the investment environment in the Ukraine.
In September 1999, at the request of Carpatsky in connection with the Pease
merger, Torch transferred the $500,000 to Bellwether and both Torch and
Bellwether converted their loans into an aggregate of 11,130,944 shares of
common stock of Carpatsky. In connection with this conversion, Torch and
Bellwether received warrants to purchase 1,407,808 and 967,296 Carpatsky common
shares for $0.20 per share. The warrants expire on December 31, 2000.
In November 1999, Mr. Texas, President of of Carpatsky informed Mr. Davis
of Torch that Carpasky was considerably behind in its payments to the account
established under the joint activity agreement for the RC field. Mr. Davis was
advised that without an additional infusion of cash, Carpatsky would forfeit a
portion of its interest under the joint activity account covering the RC field
in the Ukraine. Although the joint activity agreement could be read to provide
for a reinstatement of the interest if the amounts owed were ultimately paid,
the ability to enforce the reinstatement provision was uncertain. After
reviewing the status of Carpatsky's operations in the Ukraine and negotiations
with Carpatsky's management, Bellwether agreed to acquire 95.45 million shares
of Carpatsky preferred stock and warrants to purchase 12.5 million common
shares. The preferred shares are convertible into 50 million shares of Carpatsky
common stock. For a description of the terms of the preferred shares, see
"Description of Capital Stock." The Carpatsky preferred stock will be converted
into preferred stock of Radiant Energy in the merger. Following the merger,
Bellwether will control Radiant Energy. In connection with the Bellwether
financing and with the approval of the Canadian Venture Exchange, Mr. Melman,
Carpatsky's Chief Corporate Officer, was issued 2,000,000 shares of Carpatsky
common stock which previously had been contingent upon the completion of the
Pease merger. These shares will be valued at $200,000 for financial reporting
purposes.
Carpatsky's Reasons to Pursue the Merger
During the time Pease was seeking a merger partner, the board of directors
of Carpatsky, determined that it required substantial funds to develop its large
natural gas reserves in Ukraine and that its listing on the Canadian Venture
Exchange would likely not attract sufficient capital to implement its business
plan. The directors decided that a redomestication to the United States by way
of merger into an existing, publicly-traded oil and gas company was most likely
to accomplish this and other objectives. Carpatsky believes that Pease's current
cash and working capital positions, the proceeds of the sale of securities to
Bellwether, plus its projected cash flow from producing properties will provide
additional capital to fund completion of the first stage of Carpatsky's drilling
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program at the RC field in Ukraine, while funding modest amounts for continued
improvement of the Bitkov field. Carpatsky believes that capital which has not
been available to Carpatsky may become available as one of the benefits from
including its securities for trading in the United States.
Effects of the Merger
When the merger is completed, CPI Acquisition Corp., a wholly-owned
subsidiary of Pease will be merged with and into Carpatsky and Carpatsky will
become a wholly-owned subsidiary of Pease. The stockholders of Carpatsky will
have the right to receive an aggregate of approximately 44,959,557 shares of
Radiant Energy common stock and 102,410,000 shares of Radiant Energy preferred
stock, subject to adjustment for any dissenters' shares. After the merger, the
Carpatsky shareholders will hold approximately 81% of the issued and outstanding
shares of Radiant Energy common stock and 100% of the Radiant Energy preferred
stock. Carpatsky shareholders will control approximately 93.3% of the voting
power of Radiant Energy following the merger.
Pease and Carpatsky initially reached the exchange ratio estimating the
relative net values of the two companies, using the financial statements and
estimated reserves of oil and gas of each company. The common stock exchange
ratio was subsequently renegotiated to effect the Bellwether investment in
Carpatsky. The common stock exchange ratio equals the number of Radiant Energy
shares of common stock to be issued to Carpatsky common shareholders as a result
of the merger divided by the number of shares of Carpatsky common stock
outstanding before the merger. The computed common stock exchange ratio was then
rounded. The preferred stock exchange ratio was determined based on the number
of shares of Radiant Energy preferred stock, voting together with common stock
as a single class, which would be required to assure the preferred stockholder
that it would have voting control of Radiant Energy.
Following the merger, the board of directors of Radiant Energy will consist
of:
o Class I: B. Dee Davis and David A. Melman
o Class II: Steve A. Antry and Roland E. Sledge
o Class III: Leslie C. Texas, Jack Birks and J. P. Bryan
The Class I, Class II and Class III directors serve until the annual meeting of
stockholders in 2000, 2001 and 2002, respectively, and until their successors
have been duly elected and qualified. Only Steve A. Antry is presently a
director of Pease. The other directors of Pease, Messrs. Clemons Walker, Homer
Osborne, Patrick J. Duncan, Stephen L. Fischer and James C. Ruane, will be
replaced at the effective time of the merger. Patrick J. Duncan is currently the
President, CFO and Treasurer of Pease. Virginia Cherry is currently Pease's
Corporate Secretary. Both Mr. Duncan and Mrs. Cherry will resign their
respective positions following the Effective Time of the merger. The executive
officers of Radiant Energy following the merger are expected to be: J. P. Bryan,
Chief Executive Officer; Leslie C. Texas, President; David A. Melman, Executive
Vice President; and Robert Bensh, Vice President.
The business backgrounds of the directors and officers of management of
Pease after the merger are set forth elsewhere in this proxy statement and
prospectus.
The Amended and Restated Articles of Incorporation to be adopted by Pease
stockholders at the meeting and the Bylaws of Pease as of the effective time of
the merger, and the designation of the Pease Class A preferred stock to be
issued to Bellwether in the merger will govern the rights, duties and privileges
of all Radiant Energy stockholders subsequent to the merger. Any material
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differences between the rights set forth in the charter and bylaws of Carpatsky
and those set forth in the Pease Amended and Restated Articles of Incorporation
and bylaws are described under "Comparison of Rights of Holders Of Carpatsky,
Pease and Radiant Energy Common Stock" at page __.
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Opinion of Financial Advisor
The boards of directors of Pease and Carpatsky negotiated and established
the principal terms of the merger, which are set forth in the Merger Agreement
dated August 31, 1999. Thereafter, in connection with the Bellwether investment
in Carpatsky, the Merger Agreement was amended as of December 30, 1999. Pease
retained Houlihan Smith & Company, Inc. as a financial advisor to render an
independent opinion to the board of directors of Pease. The purpose of the
opinion was to advise the Pease board of directors whether, in the opinion of
the advisor, the merger is fair to Pease and its stockholders. The merger
consideration resulted from the negotiations between Pease and Carpatsky and was
not initially determined by the advisor. The advisor's opinion was based upon a
review of the two companies from a financial point of view. As described below,
in the opinion of the financial advisor, the merger as described in this proxy
statement and prospectus is fair, from a financial point of view, to the
stockholders of Pease as of the date of the opinion.
The full text of Houlihan's opinion, dated January 7, 2000, is attached as
Appendix B. The opinion contains a description of the matters considered by
Houlihan and the limits of its review. Pease stockholders are encouraged to read
the opinion carefully and in its entirety. Houlihan's opinion was provided to
the Pease board for its information and only addresses the fairness from a
financial point of view of the exchange ratio to Pease stockholders. The
Houlihan opinion does not address the merits of the underlying decision by Pease
to engage in the merger and does not constitute a recommendation to any holder
of Pease common stock as to how that holder should vote. Houlihan's opinion was
among many factors taken into consideration by the Pease board in making its
determination to approve the merger and recommend the share issuance as
contemplated in the merger agreement.
In arriving at its opinion, Houlihan, among other things:
o Reviewed the financial terms of the transaction as provided in the
definitive Merger Agreement, as amended. This included a review of the
First Amendment to Merger Agreement, including exhibits.
o Reviewed the Pease and Carpatsky disclosure schedules to the Merger
Agreement.
o Reviewed the financial terms of the Securities Purchase Agreement
between Carpatsky and Bellwether, including exhibits.
o Reviewed the public Securities and Exchange Commission filings of
Pease including the most recent Forms 10-QSB, 10-KSB, and the 8-Ks
announcing the planned merger and amendments to the merger agreement.
o Reviewed financial statements of Pease and Carpatsky audited by Hein +
Associates.
o Reviewed internal financial and capitalization schedules describing
the operations of Pease prepared by Pease management.
o Reviewed reserve reports as of January 1, 1999 of Pease oil and
natural gas reserves as prepared by Netherland, Sewell & Associates,
Inc. and dated March 16, 1999. Additionally Houlihan was provided with
a pricing sensitivity analysis prepared by the same dated March 18,
1999.
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o Reviewed reserve reports dated June 30, 1999 of certain leasehold
interests of Carpatsky as prepared by Ryder Scott Company and dated
June 21 and 23, 1999. These reports represent the full contractual
interest reserves as well as the paid-in interest reserves. Houlihan
also reviewed various reserve sensitivity analyses prepared by Ryder
Scott.
o Reviewed a report of Wise & Treece Petroleum Management, Inc. dated
August 23, 1999 which reviews the Ryder Scott reserve report, and
calculates an estimated engineered value of the reserves in the
Carpatsky interest in the RC field based upon the Ryder Scott data and
other assumptions provided by Wise & Treece and Pease management.
o Reviewed other due diligence documents and letters including documents
reviews, due diligence memos and opinions from Pease management and
Ostrander-Krug & Sobel, LLC.
o Reviewed several other proposals for mergers, acquisitions, or
proposed financings as well as various memos from advisors to Pease
evaluating several of these various offers.
o Reviewed the Agreement Not to Sell or Convert Securities and the
Exchange Agreement and Irrevocable Proxy pertaining to the outstanding
Series B Convertible preferred stockholders' agreement not to convert
outstanding preferred stock to common stock during the merger
negotiations and the final agreement by holders of the preferred stock
to exchange all outstanding Series B preferred stock for a set number
of shares of common stock at or before the Effective Time of the
merger.
o Reviewed the Resolutions of the Pease board of directors and the
Amended and Restated Articles of Incorporation proposed to facilitate
the merger.
o Analyzed the historical trading prices and volumes of Pease and
Carpatsky stock as quoted on the NASDAQ Small Cap Market and OTC
Bulletin Board in the case of Pease and the Canadian Venture Exchange
in the case of Carpatsky.
o Analyzed the risk adjusted valuation of Pease assets and the various
assets of Carpatsky and the share exchange ratio calculation that
determined the number of shares of Pease common stock to be issued in
the merger.
o Compared Pease and Carpatsky from a financial point of view with
certain other companies in the oil and gas exploration and production
industry that we deemed to be relevant. Houlihan focused on general
financial ratios as well as equity and asset valuation ratios.
o Reviewed the terms of the Bellwether investment in Carpatsky,
including the terms of the Securities Purchase Agreement, the terms of
the Carpatsky preferred stock and the required terms of the Pease
preferred stock.
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o Conducted such other studies, analyses, inquiries and investigations
as Houlihan deemed appropriate.
Houlihan considered such factors as it deemed relevant including, but not
limited to: (1) the reserve and engineering values as calculated by Pease, (2)
the allocation between preferred and common stockholders of Pease as negotiated
by Pease and documented in the Exchange Agreement and Irrevocable Proxy and the
Merger Agreement, as amended; (3) the historical cash flows of Pease and
Carpatsky, (4) the conditions of closing of the merger, (5) the risks associated
with the merger, (5) the upside potential of the merger, as described in the due
diligence conducted by Pease management, and (6) other due diligence findings of
Pease related to the merger.
Houlihan relied upon and assumed, without independent verification, the
accuracy, completeness and fairness of the financial and other information
obtained from public sources or provided to it by Pease and Carpatsky, and
further relied upon the assurances of Pease management that they are unaware of
any facts that would make the information provided to Houlihan to be incomplete
or misleading for the purposes of Houlihan's opinion. Houlihan has not assumed
responsibility for any independent verification of this information or
undertaken any obligation to verify this information. The management of Pease
and Carpatsky informed Houlihan that the forecasts and reserve reports provided
represent their best current judgment, at the date of the opinion, as to the
future financial performance of Pease and Carpatsky, each on a stand-alone
basis. Houlihan assumed reserve reports had been reasonably prepared based on
the current judgment of Pease's and Carpatsky's management. Houlihan assumed no
responsibility for and expressed no view as to the forecasts and reserves or the
assumptions on which they were based. Houlihan did not perform an independent
evaluation or appraisal of the assets of either Pease or Carpatsky.
Houlihan's opinion is necessarily based on economic, market, financial and
other conditions as they exist on, and on the information made available to
Houlihan as of the date of its opinion letter. Houlihan has disclaimed any
obligation to advise the board of directors of Pease or any person of any change
in any fact or matter affecting the opinion, which may come or be brought to
Houlihan's attention after the date of the opinion.
Houlihan's opinion does not constitute a recommendation to any stockholder
of Pease or Carpatsky as to how a stockholder should vote, or as to any other
actions, which such stockholder should take in conjunction with the merger. The
opinion relates solely to the question of fairness to Pease stockholders, from a
financial point of view, of the merger as currently proposed. Further, Houlihan
expressed no opinion as to the structure, terms or effect of any other aspect of
the merger, including, without limitation, any effects resulting from
environmental issue(s), the application of any bankruptcy proceeding, fraudulent
conveyance, or other international, federal or state insolvency law, or of any
pending or threatened litigation affecting Pease or Carpatsky.
Houlihan expressed no opinion as to the price at which Pease common stock
will actually trade at any time. Houlihan also expressed no opinion as to the
income tax consequences of the merger. Houlihan's opinion does not address the
relative merits of the merger, nor does it address the decision of Pease or
Carpatsky to proceed with the merger.
Houlihan, a member of the National Association of Securities Dealers, as
part of its investment banking services, is regularly engaged in the valuation
of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
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private placements and valuations for corporate and other purposes. Houlihan
will receive a non-contingent fee plus reimbursement for all reasonable
out-of-pocket expenses from Pease relating to its services in providing the
opinion. Under the terms of the agreement, Pease also agreed to indemnify,
defend and hold Houlihan harmless if Houlihan becomes involved in any way in any
legal or administrative proceeding related to the services Houlihan provided in
rendering the opinion.
Carpatsky neither solicited nor obtained a third party opinion on the
fairness of the merger to the Carpatsky shareholders, from a financial point of
view, relying instead on the business judgment of the board of directors.
Federal Income Tax Considerations in the United States
Consequences of the Redomestication and Merger to Carpatsky shareholders
The following discussion summarizes the material United States federal
income tax considerations relevant to the exchange of shares of Carpatsky common
and preferred stock for common and preferred stock of the Delaware corporation
created for purposes of the merger ("New Carpatsky") in the redomestication and
concurrently the exchange of New Carpatsky common and preferred stock for Pease
common and preferred stock under the merger. This discussion is based on
currently existing provisions of the Internal Revenue Code of 1986 (the "Code"),
existing and proposed Treasury Regulations under the Code, and current
administrative rulings and court decisions, all of which are subject to change.
Any change in the Code and Treasury Regulations, which may or may not be
retroactive, could alter the tax consequences to Pease, Carpatsky, or
Carpatsky's stockholders as described in this discussion.
Carpatsky shareholders should be aware that this discussion does not deal
with all United States federal income tax considerations that may be relevant to
particular Carpatsky shareholders in light of their particular circumstances,
like stockholders who are dealers in securities, who are subject to the
alternative minimum tax provisions of the Code, who are foreign persons, who do
not hold their Carpatsky stock as capital assets, or who acquired their shares
in connection with stock option or stock purchase plans or in other compensatory
transactions. In addition, the following discussion does not address the tax
consequences of the merger under foreign, state, or local tax laws. Nor does the
following discussion address the tax consequences of transactions effectuated
prior or subsequent to, or concurrently with, the merger. This is so whether or
not any of those transactions are undertaken in connection with the merger,
including without limitation any transaction in which shares of Carpatsky common
or preferred stock are acquired or in which shares of Pease common or preferred
stock are disposed. Accordingly, Carpatsky shareholders are urged to consult
their own tax advisors as to the specific tax consequences to them of the
merger, including the applicable federal, state, local, and foreign tax
consequences.
Both the redomestication and the merger are intended to constitute
reorganizations. If the redomestication and the merger qualify as
reorganizations, then, subject to the limitations and qualifications referred to
in this discussion, they will generally result in the following federal income
tax consequences:
1. No gain or loss will be recognized by Carpatsky's stockholders solely
upon their receipt of first New Carpatsky stock in the continuance and
redomestication and thereafter Pease common and preferred stock in exchange for
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Carpatsky common and preferred stock in the merger except to the extent of cash
received instead of a fractional share of Pease common or preferred stock.
2. The aggregate tax basis of the Pease common and preferred stock received
by Carpatsky shareholders in the merger, reduced by any tax bases attributable
to fractional shares deemed to be disposed of, will be the same as the aggregate
tax basis of the Carpatsky common and preferred stock exchanged for the New
Carpatsky common and preferred stock and then surrendered in exchange for the
Pease common and preferred stock.
3. The holding period applicable to the Pease common and preferred stock
received by each Carpatsky shareholder in the merger will include the period for
which the Carpatsky common and preferred stock exchanged for the New Carpatsky
common and preferred stock and then surrendered in exchange for the Pease common
and preferred stock was considered to be held, provided that the Carpatsky
common and preferred stock is held as a capital asset at the time of the merger.
4. Cash payments received by Carpatsky's stockholders instead of a
fractional share will be treated as if the fractional share of Pease common or
preferred stock had been issued in the merger and then redeemed by Pease. A
Carpatsky shareholder receiving cash will recognize gain or loss upon the
payment of the cash, measured by the difference, if any, between the amount of
cash received and the basis in the fractional share.
5. Neither Pease, CPI Acquisition Corp., New Carpatsky nor Carpatsky will
recognize material amounts of gain solely as a result of the continuance and
redomestication and merger.
The parties are not requesting and will not request a ruling from the
Internal Revenue Service in connection with the merger. The consummation of the
merger is conditioned on the receipt by Pease and Carpatsky of an opinion from
Satterlee Stephens Burke & Burke LLP to the effect that the merger will qualify
as a reorganization. Carpatsky shareholders should be aware that the tax opinion
does not bind the Internal Revenue Service ("IRS") and the IRS is therefore not
precluded from successfully asserting a contrary opinion. The tax opinion will
be subject to assumptions and qualifications, including but not limited to the
truth and accuracy of representations made by Pease, Carpatsky, and the Pease
subsidiary.
A successful IRS challenge to the reorganization status of the merger would
result in Carpatsky shareholders recognizing taxable gain or loss with respect
to each share of common or preferred stock of Carpatsky surrendered equal to the
difference between the stockholder's basis in his/her shares and the fair market
value, as of the effective date of the merger, of the Pease common or preferred
stock received in exchange for the Carpatsky common or preferred stock. In an
event like this, a stockholder's aggregate basis in the Pease common and
preferred stock received in the merger would equal its fair market value, and
the stockholder's holding period applicable to the stock would begin the day
after the merger.
Consequences of the Exchange
The following discussion summarizes the material United States federal
income tax considerations relevant to the exchange of Pease Series B Convertible
Preferred stock for Pease common stock under the exchange that are generally
applicable to holders of Pease Series B Convertible Preferred. This discussion
is based on currently existing provisions of the Code, existing and proposed
Treasury Regulations under the Code, and current administrative rulings and
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court decisions, all of which are subject to change. Any change in the Code and
Treasury Regulations, which may or may not be retroactive, could alter the tax
consequences to Pease Series B Convertible Preferred as described in this
discussion.
Pease Series B Convertible Preferred stockholders should be aware that this
discussion does not deal with all federal income tax considerations that may be
relevant to particular Pease Series B Convertible Preferred stockholders in
light of their particular circumstances, like stockholders who are dealers in
securities, who are subject to the alternative minimum tax provisions of the
Code, who are foreign persons, who do not hold their Pease Series B Convertible
Preferred shares as capital assets, or who acquired their shares in connection
with stock option or stock purchase plans or in other compensatory transactions.
In addition the following discussion does not address the tax consequences of
the exchange under foreign, state or local tax laws. Nor does the following
discussion address the tax consequences of transactions effectuated prior or
subsequent to, or concurrently with, the exchange. This is so whether or not any
of those transactions are undertaken in connection with the exchange.
Accordingly, Pease Series B Convertible Preferred stockholders are advised to
consult their own tax advisors as to the specific tax consequences to them of
the exchange, including the applicable federal, state, local, and foreign tax
consequences.
The exchange is intended to qualify as a tax-free recapitalization of
Pease. If the exchange qualifies as a tax-free recapitalization, Pease Series B
Convertible Preferred stockholders will not recognize gain or loss in the
exchange, except to the extent that the receive cash in lieu of fractional
shares. Cash received in lieu of fractional shares (if any) will result in gain
or loss to the stockholder as if the stockholder had sold that fractional share.
A stockholder's gain or loss will be determined by subtracting from the amount
of cash received, the stockholder's adjusted basis in the fractional share. The
basis and holding period of the Pease common stock received in the exchange will
be the same as the basis and holding period of the Pease Series B Convertible
Preferred given up in the exchange, except that the basis will be reduced to the
extent of any fractional shares for which the stockholder receives cash. Pease
and the Pease common shareholders will not recognize material amounts of gain
solely as a result of the exchange.
The parties are not requesting and will not request a ruling from the
Internal Revenue Service in connection with the exchange. The consummation of
the exchange is conditioned upon the receipt by Pease of an opinion from
Satterlee Stephens Burke & Burke LLP to the effect that the exchange will
constitute a reorganization. Pease Series B Convertible Preferred stockholders
should be aware that the tax opinion does not bind the IRS and the IRS is
therefore not precluded from successfully asserting a contrary opinion. The tax
opinion will be subject to assumptions and qualifications, including, but not
limited to, the truth and accuracy of representations made by management of
Pease and Carpatsky.
Consequences to Pease Stockholders
A successful challenge to the reorganization status of the exchange would
result in Pease Series B Convertible Preferred stockholders recognizing taxable
gain or loss with respect to each share of Series B Convertible Preferred
surrendered equal to the difference between the stockholder's basis in his/her
shares and the fair market value, as of the effective date of the exchange, of
the Pease common stock received in the exchange. In an event like this, a Pease
Series B Convertible Preferred stockholder's aggregate basis in the Pease common
stock received would equal its fair market value, and the stockholder's holding
period for the stock would begin the day after the exchange.
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Subject to the qualifications set forth above in Consequences of the
Redomestication and Merger to Carpatsky shareholders, Pease common stockholders
should not recognize any gain or loss as a result of the merger. Pease common
stockholders will not dispose of or exchange their shares of Pease common stock
in the merger, but will continue to hold their existing shares of common stock,
with the same adjusted basis and holding period.
Tax Consequences of Ownership and Disposition of Radiant Shares by Canadian
Holders
Dividends with respect to Radiant Shares
In general, the gross amount of dividends paid to a Canadian stockholder
with respect to its Radiant shares (a "Canadian Holder") will be subject to U.S.
withholding tax either at a rate of 30% of the gross amount of the dividend or
such lower rate as may be specified by an applicable tax treaty. Under the U.S.
- - Canada income tax treaty, withholding tax rates are reduced to 15%, or 5% in
the case of corporate shareholders owning at least 10% of the stock of the payor
corporation. Dividends received by a Canadian Holder that are effectively
connected with a U.S. trade or business conducted by the Canadian Holder are
exempt from such withholding tax. However, those effectively connected
dividends, net of certain deductions and credits, are taxed at the same
graduated rates applicable to U.S. persons.
In addition to the graduated tax described above, dividends received by a
corporate Canadian Holder that are effectively connected with a U.S. trade or
business of the corporate Canadian Holder may also be subject to a branch
profits tax a rate of 30% or such lower rate as may be specified by an
applicable tax treaty.
A Canadian Holder of Radiant shares that is eligible for a reduced rate
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
IRS.
Gain on Disposition of Radiant Shares
A Canadian Holder generally will not be subject to U.S. Federal income tax
on any gain realized upon the sale or other disposition of its Radiant shares
unless (i) the gain is effectively connected with a U.S. trade or business of
the Canadian Holder (which gain, in the case of a corporate Canadian Holder,
must also be taken into account for branch profits tax purposes), (ii) the
Canadian Holder is an individual who holds his or her Radiant shares as a
capital asset (generally, an asset held for investment purposes) and who is
present in the U.S. for a period or periods aggregating 183 days or more during
the taxable year in which the sale or disposition occurs and certain other
conditions are met, or (iii) Radiant is or has been a "U.S. real property
holding corporation" for U.S. Federal income tax purposes at any time within the
shorter of (x) the five-year period preceding the disposition or (y) the
holder's holding period for its Radiant shares. Pease has determined that it is
not currently, has not been within the last five years, and does not believe
that it will become a "U.S. real property holding corporation" for U.S. Federal
income tax purposes.
Backup Withholding and Information Reporting
Generally, Radiant will report annually to the IRS the amount of dividends
paid, the name and address of the recipient, and the amount, if any, of tax
withheld. A similar report is sent to the holder. Pursuant to tax treaties or
other agreements, the IRS may make its reports available to tax authorities in
the recipient's country of residence.
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Dividends paid to a Canadian Holder at an address within the U.S. may be
subject to backup withholding at a rate of 31% if the Canadian Holder fails to
establish that it is entitled to an exemption or to provide a correct taxpayer
identification number and other information to the payer. Backup withholding
will generally not apply to dividends paid to Canadian Holders at an address
outside the U.S. on or prior to December 31, 2000, unless the payer has
knowledge that the payee is a U.S. person. Under recently finalized Treasury
Regulations regarding withholding and information reporting, payment of
dividends to Canadian Holders at an address outside the outside the U.S. after
December 31, 2000 may be subject to backup withholding at a rate of 31% unless
such Canadian Holder satisfies various certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition by a Canadian Holder of such Canadian Holder's Radiant shares to or
through the U.S. office of a broker is subject to information reporting and
backup withholding at a rate of 31% unless the Canadian Holder certifies its
non-U.S. status under penalties of perjury or otherwise establishes an
exemption. Generally, the payment of the proceeds of the disposition by a
Canadian Holder of Radiant shares outside the U.S. to or through a foreign
office of a broker will not be subject to backup withholding but will be subject
to information reporting requirements if the broker is (i) a U.S. person, (ii) a
"controlled foreign corporation"for U.S. Federal income tax purposes, or (iii) a
foreign person 50% or more of whose gross income for certain periods is from the
conduct of a U.S. trade or business, unless the broker has documentary evidence
in its files of the Canadian Holder's non-U.S. status and certain other
conditions are met, or the Canadian Holder otherwise establishes an exemption.
Neither backup withholding nor information reporting generally apply to a
payment of the proceeds of a disposition of a Canadian Holder's Radiant shares
by or through a foreign office of a foreign broker not subject to the preceding
sentence.
In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certification procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
Radiant shares. Canadian Holders should consult their tax advisors regarding the
effect, if any, of those final Treasury Regulations on the ownership and
disposition of Radiant shares. Those final Treasury Regulations are generally
effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
EACH CANADIAN HOLDER WHO RECEIVES RADIANT ENERGY SHARES PURSUANT TO THE
MERGER IS URGED TO CONSULT HIS OR HER ADVISOR TO DETERMINE THE IMPACT OF SUCH
CANADIAN HOLDER'S PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF THE RECEIPT, OWNERSHIP AND
DISPOSITION OF SUCH RADIANT SHARES.
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Income Tax Considerations in Canada
General
The following discussion summarizes the material Canadian federal income
tax considerations that are generally applicable to holders of Carpatsky common
shares in connection with the continuance and redomestication of Carpatsky in
the state of Delaware and the concurrent merger of New Carpatsky with CPI
Acquisition Corp., a wholly-owned subsidiary of Pease.
This discussion is based on the provisions of the Income Tax Act (Canada)
(the "ITA") and the regulations thereunder (the "Regulations"), the
Canada-United States Income Tax Convention, 1980, (the "Convention"), and
counsel's understanding of the current administrative practices and policies of
Revenue Canada, Customs, Excise and Taxation (which became the Canada Customs
and Revenue Agency on November 1, 1999) (the "Agency"). This discussion takes
into account all proposed amendments to the ITA and the Regulations that have
been publicly announced by or on behalf of the Minister of Finance (Canada)
prior to the date hereof and assumes that all the proposed amendments will be
enacted in their present form. No assurances can be given that the proposed
amendments will be enacted in the form proposed, if at all. However, the
Canadian federal income tax considerations generally applicable to a Carpatsky
common shareholder with respect to the transactions will not be different in a
materially adverse way if such proposed amendments are not enacted. Except for
the foregoing, this discussion does not take into account or anticipate any
changes in law, whether by legislative, administrative or judicial decision or
action, nor does it take into account provincial, territorial or foreign income
tax legislation or considerations which may differ from the Canadian federal
income tax considerations described herein.
This discussion is applicable to those who hold their Carpatsky common
shares as capital property and deal at arm's length with each of Carpatsky and
Pease for the purposes of the ITA. This discussion does not apply to financial
institutions which are subject to the mark-to-market provisions of the ITA.
For purposes of the ITA, all amounts relating to the acquisition, holding
or disposition of Carpatsky common shares, shares of New Carpatsky common stock
and shares of Pease common stock, including dividends, adjusted cost base and
proceeds of disposition must be converted into Canadian dollars based on the
prevailing United States dollar exchange rate at the time such amounts arise.
All references herein to sections, subsections, etc. are to the ITA unless
otherwise stated.
Neither Carpatsky nor Pease is or will be requesting an advance income tax
ruling from the Agency in connection with any of the transactions contemplated
herein. Carpatsky common shareholders should be aware that this summary does not
bind the Agency and the Agency is therefore not precluded from asserting a
contrary position.
This discussion is of a general nature only. Therefore, Carpatsky common
shareholders should consult their own tax advisors with respect to their own
particular circumstances.
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Consequences of the Redomestication
The redomestication (or continuance as it is known in Canada) of Carpatsky
under the laws of the state of Delaware will not constitute a taxable event
under the ITA for holders of Carpatsky common shares, whether or not they are
resident in Canada. Holders of Carpatsky common shares who receive New Carpatsky
common stock in replacement will continue to hold the shares of New Carpatsky
common stock at the same adjusted cost base as their Carpatsky common shares
immediately before the redomestication.
Consequences of the Merger
The merger of New Carpatsky and CPI Acquisition Corp. will qualify as a
foreign merger pursuant to the provisions of subsection 87(8.1). Pursuant to
subsection 87(8), the merger will be a tax-deferred event to holders of New
Carpatsky common stock, whether or not they are resident in Canada, unless the
holder otherwise elects in the holder's Canadian return of income for the
taxation year in which the merger takes place. Unless the election is made, a
holder of shares of New Carpatsky common stock will be deemed to have disposed
of such common shares for proceeds of disposition equal to the total of the
adjusted cost base to the holder of such common shares immediately before the
merger and will be deemed to have acquired the shares of Pease common stock at a
cost to the holder of an equal amount.
Disposition of Radiant Energy Common Stock
Shareholders Resident in Canada
A disposition or deemed disposition by a holder of shares of Radiant Energy
common stock who is resident in Canada will generally result in a capital gain
(or a capital loss) equal to the amount by which the proceeds of disposition,
net of any reasonable costs of disposition, exceed (or are less than) the
adjusted cost base to the holder of such shares of Radiant Energy common stock.
Three-quarters of any capital gain (the "taxable capital gain") must be included
in the holder's income for the year of disposition. Three-quarters of any
capital loss (the "allowable capital loss") must be deducted by the holder from
the capital gains in the year of disposition. Any capital losses in excess of
capital gains in the year of disposition generally may be carried back up to
three taxation years or carried forward indefinitely and deducted against net
capital gains (capital gains less capital losses) in such other years.
Shareholders Not Resident in Canada
Carpatsky common shares will not be "taxable Canadian property" as defined
in the ITA, provided that such shares are listed on a prescribed stock exchange
(which includes the Canadian Venture Exchange) and the holder, persons with whom
such holder does not deal at arm's length, or the holder and such persons, has
not owned (or had under option) 25% or more of the issued shares of any class of
the capital stock of Carpatsky at any time in the last five years preceding the
particular time.
A non-resident holder of Carpatsky common shares that are not taxable
Canadian property to such holder will not be subject to tax under the ITA on the
future sale or other disposition of the shares of Radiant Energy common stock
which such holder receives on the merger.
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A non-resident holder of Carpatsky common shares that are taxable Canadian
property to such holder will be subject to tax under the ITA on the future sale
or other disposition of the shares of Radiant Energy common stock which such
holder receives on the merger, as such shares of Radiant Energy common stock
will be deemed to continue to be taxable Canadian property to the holder thereof
for the purposes of the ITA.
Dividends on Radiant Energy Common Stock
Shareholders Resident in Canada
Dividends on shares of Radiant Energy common stock received by a
shareholder resident in Canada will be included in the recipient's income for
the purposes of the ITA. Such dividends received by an individual shareholder
will not be subject to the gross-up and dividend tax credit rules in the ITA. A
shareholder that is a corporation will include such dividends in computing its
income and generally will not be entitled to deduct the amount of such dividends
in computing its income. A shareholder that is throughout the relevant taxation
year a "Canadian-controlled private corporation", as defined in the ITA, may be
liable to pay an additional refundable tax of 6 2/3% on its "aggregate
investment income" for the year which will include such dividends. United States
non-resident withholding tax on such dividends received by Canadian residents
will be generally eligible for foreign tax credit or deduction treatment, where
applicable under the ITA.
Shareholders Not Resident in Canada
Dividends on shares of Radiant Energy common stock received by a
shareholder not resident in Canada will not be subject to tax under the ITA.
Foreign Property Information Reporting
A holder of shares of Radiant Energy common stock who is a "specified
Canadian entity" for a taxation year or fiscal period and whose total cost
amount of "specified foreign property", at any time in the year or fiscal period
exceeds CDN $100,000 will be required to file an information return for the year
or period disclosing prescribed information, including the shareholder's cost
amount, any dividends received in the year, and any gains or losses realized in
the year, in respect of such property. With some exceptions, a taxpayer resident
in Canada in the year will be a specified Canadian entity. A holder of shares of
Radiant Energy common stock should consult such holder's own advisors about
whether such holder must comply with these rules.
Dissenting Carpatsky Common Shareholders
Shareholders Resident in Canada
The receipt by a dissenting Carpatsky shareholder resident in Canada of a
cash payment from Carpatsky before the continuance and redomestication will
generally be treated as a dividend by such shareholder to the extent that the
payment exceeds the paid-up capital of the shares, and taxed in the manner
described above. The balance of the amount paid (i.e., the amount equal to the
paid-up capital of such shares) will be treated as proceeds of disposition for
the purposes of calculating the shareholder's capital gain (or capital loss)
from the disposition of such shares in the manner described above.
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The receipt by a dissenting shareholder of Carpatsky common shares of a
cash payment after the continuance and redomestication and merger will be
treated under the ITA as proceeds of disposition and any capital gain (or
capital loss) will be determined by reference to the full amount of such
proceeds.
Dividend treatment will not arise if the cash payment is made after the
redomestication and merger has occurred.
Shareholders Not Resident in Canada
A cash payment received by a dissenting Carpatsky shareholder not resident
in Canada from Carpatsky will be treated as a dividend to the extent that the
payment exceeds the paid-up capital of the shares, while an amount equal to the
paid-up capital of the shares will be treated as proceeds of disposition.
Dividends deemed to be paid to a shareholder not resident in Canada will be
subject to non-resident withholding tax under the ITA at the rate of 25%,
although such rate may be reduced under the provisions of an applicable income
tax treaty or convention. For example, under the Convention the rate is
generally reduced to 15% in respect of dividends paid to a resident of the
United States.
The receipt by a non-resident Carpatsky common shareholder of a cash
payment after the continuance and redomestication and merger will be treated
under the ITA as proceeds of disposition equal to the redemption proceeds. Any
capital gain realized by a dissenting Carpatsky shareholder would not be taxed
under the ITA if the Carpatsky common shares in respect of which the dissent is
exercised are not taxable Canadian property to the holder as described above.
Eligibility for Investment
Provided that the shares of Radiant Energy common stock is listed on a
prescribed stock exchange, it will be a "qualified investment" for trusts
governed by registered retirement savings plans, registered retirement income
funds and deferred profit sharing plans, all within the meaning of the ITA.
However, under the ITA the shares of Radiant Energy common stock will
constitute "foreign property" to such plans. Generally, where the cost of
foreign property of such a plan or fund exceeds 20% of the cost of all of its
property at the end of any month, it will be subject to a tax of 1% on the
excess amount.
Dissenters' Rights
A holder of shares of Carpatsky common and preferred stock is entitled to
dissent and be paid the fair value of such shares if continuance and
redomestication of Carpatsky as a Delaware corporation is completed and such
shareholder provides Carpatsky with written objection to the continuance and
redomestication at or before the Carpatsky special meeting and otherwise
complies with the procedure set out in section 184 of the Business Corporations
Act (Alberta). Section 184 requires adherence to the procedures established
therein and failure to do so may result in the loss of all rights thereunder.
Accordingly, each holder of shares of Carpatsky common and preferred stock who
might desire to exercise the right of dissent and appraisal should carefully
consider and comply with the provisions of that section, the full text of which
is set out in Appendix "D."
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Under the provisions of Section 262 under the General Corporation Law of
the State of Delaware, stockholders of Carpatsky objecting to the merger of the
CPI Acquisition Corp. with and into Carpatsky and the receipt of Radiant shares
for shares of Carpatsky have appraisal rights. Each stockholder electing to
demand appraisal of his shares under that section is required to deliver to
Carpatsky before the taking of the vote on the merger, a written demand for
appraisal of shares. Such demand will be sufficient if it informs Carpatsky of
the identity of the stockholder and that the stockholder intends to demand
appraisal of his shares, provided that such demand must be in addition to and
separate from any proxy or vote against the merger. Within ten (10) days after
the effective date of the merger, Carpatsky will notify each stockholder who has
complied with the provisions of that section and has not voted for or consented
to the merger of the date that the merger has become effective. Such notice
shall also indicated that appraisal rights are available. Any stockholder
entitled to appraisal rights may, within twenty (20) days of the date of the
mailing of such notice by Carpatsky, demand in writing from Carpatsky the
appraisal of his shares. Within one hundred and twenty (120) days after the
effective date of the merger, Carpatsky or any stockholder who has complied with
the provisions of Section 262 and who is otherwise entitled to appraisal rights
thereunder may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within sixty (60) days after the
effective date of the merger, any stockholder shall have the right to withdraw
his demand for appraisal and to accept the terms offered under the merger.
A copy of the sections of the Delaware law and the Alberta law which
discuss the rights of stockholders to dissent from the transaction are attached
as Appendix C and Appendix D to this proxy statement and prospectus.
Because of the complexities of these provisions of Alberta and Delaware
law, Carpatsky shareholders who are considering pursuing dissenters' rights may
wish to consult legal counsel. The foregoing discussion of such provisions
should not be deemed to constitute legal advice and is qualified in its entirety
by reference to such provisions attached as Appendices C and D to this proxy
statement and prospectus.
Interests of Persons in the Merger
Two members of the Pease board of directors have interests in the merger
that are in addition to their interests as stockholders.
If and when the merger is consummated, Patrick J. Duncan will receive
$220,000 under the provisions in his existing employment agreement with Pease.
If and when the merger is consummated, Radiant Energy expects to grant
Steve A. Antry, or Beta Capital Group, Inc., an affiliated entity, or his
assignees, an undetermined number of warrants to purchase shares of Radiant
Energy, exercisable at the then current market price, and to pay a consulting
fee of $15,000 payable over a six month period following the merger. This
consideration will be paid in exchange for consulting services to be provided to
Radiant Energy on a post-merger basis.
The board of directors of Pease were aware of these interests and
considered them in approving the merger agreement and the transactions
contemplated in the merger agreement.
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Financing the Merger
The merger will be a stock-for-stock transaction. Stockholders of Carpatsky
will receive shares of the common and preferred stock of Radiant Energy in
exchange for their shares of Carpatsky common and preferred stock. Cash will be
paid to Carpatsky shareholders instead of fractional shares, which is not
expected to be material. Expenses and other costs incurred by Pease in
connection with the merger will be paid from funds generated by the operations
of Pease, while Carpatsky will pay its expenses from its own assets.
Accounting Treatment
The merger will be accounted for as a purchase, with Carpatsky as the
acquiror, in accordance with generally accepted accounting principles. Under
this method of accounting, the purchase price will be allocated to assets
acquired and liabilities assumed based on their estimated fair values. The
income or loss of Radiant Energy will not include the income or loss of Pease
prior to completion of the mergers. See "Unaudited Pro Forma Combined Financial
Statements."
THE REDOMESTICATION
General
The Business Corporations Act (Alberta) to which Carpatsky is subject, does
not contain provisions allowing the direct merger of Carpatsky and Pease.
Therefore, the board of directors of Carpatsky, upon advice of counsel,
determined that it would be appropriate first to continue and redomesticate
Carpatsky under the Delaware General Corporation Law ("DGCL"), thereby
converting Carpatsky into a Delaware corporation, and then to proceed with the
merger under Delaware law. Such continuance will be effected pursuant to Section
388 of the DGCL and Section 182 of the Business Corporations Act (Alberta).
The redomestication is effected by filing with the Secretary of State of
Delaware (i) a Certificate of Domestication, which certifies the date on which
and jurisdiction where the corporation was first incorporated; the name of the
corporation immediately prior to the filing of the Certificate; the name of the
corporation as set forth in the Certificate of Incorporation to be filed
together with the Certificate of Domestication; and the jurisdiction that
constituted the seat, siege social, or principal place of business or central
administration of the corporation, or any other equivalent thereto under
applicable law, immediately prior to the filing of the Certificate of
Domestication and (ii) a Certificate of Incorporation.
The Certificate of Domestication, and, consequently, the redomestication,
will become effective concurrently with the filing of the Certificate of Merger
effecting the merger and will be withdrawn in the event the conditions to the
merger are not satisfied or waived.
Effects of the Redomestication
In accordance with Delaware law, upon filing the Certificate of
Domestication and Certificate of Incorporation with the Secretary of State's
office in Delaware, Carpatsky shall thereafter become subject to the law of
Delaware except that its existence as a corporation shall be deemed to have
commenced on the date of its original Incorporation under the laws of Alberta,
Canada. The redomestication shall not be deemed to affect any obligations or
liabilities of Carpatsky issued prior to the redomestication nor shall it affect
the ownership interests of any Carpatsky shareholder. The sole effect on
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Carpatsky will be that the corporation will become subject to Delaware law
commencing on the effective date of the redomestication as if it had been
incorporated in such State on such date.
Under Canadian law, the redomestication (or continuance as referred to
under applicable Canadian law) shall trigger dissenters' rights, as discussed
above in greater detail. Furthermore, the continuance shall have an effect under
Canadian income tax law as also discussed above. Carpatsky shareholders are
urged to consult with their own legal and tax advisors regarding both their
dissenters' rights and the tax effects of the redomestication, as well as the
subsequent merger.
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THE MERGER AGREEMENT
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.
General
Pease, a wholly-owned subsidiary of Pease, and Carpatsky have entered into
the merger agreement, which provides that:
o Carpatsky will continue and redomesticate in the State of Delaware and
thereby become a Delaware corporation;
o concurrently with the continue and redomestication, the wholly-owned
subsidiary of Pease will be merged with and into Carpatsky;
o 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;
o each share of outstanding Carpatsky common stock, except for shares
held by stockholders who dissent, will be exchanged for .57842 shares
of Radiant Energy common stock and each share of outstanding Carpatsky
preferred stock will be converted into 1.07292 shares of Radiant
Energy preferred stock;
o 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;
o we will change our name to "Radiant Energy, Inc.";
o we will amend our articles of incorporation to increase the number of
shares of common stock and preferred stock we are allowed to issue.
The merger is subject to the satisfaction of a number of conditions, including
the approval by stockholders of Pease and Carpatsky of the matters described in
this proxy statement and prospectus.
Effective Time of the Merger
The closing will occur, and the merger will become effective, upon:
1. the approval of the continuance and redomestication of Carpatsky to
Delaware;
2. the acceptance for filing of a Certificate of Domestication and a
Certificate of Incorporation of Carpatsky;
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3. the approval of the merger agreement by the stockholders of Carpatsky
voting under Delaware law and approval of issuance of additional common and
preferred stock under the merger agreement by stockholders of Pease;
4. the acceptance for filing of a Certificate of Merger between the Pease
subsidiary corporation and Carpatsky with the Delaware Secretary of State;
5. acceptance for filing of the Amended and Restated Articles of
Incorporation and the Designation of Preferred Stock of Radiant Energy with the
Nevada Secretary of State; and
6. the satisfaction or waiver of the other conditions set forth in the
merger agreement.
It is anticipated that the merger will become effective soon after the
Carpatsky and Pease stockholders meetings upon satisfaction or waiver of all
conditions to the merger; and that the Certificate of Domestication, Certificate
of Incorporation of Carpatsky in Delaware, the Amended and Restated Articles of
Incorporation of Pease and Certificate of Merger will all be filed concurrently.
Exchange of Certificates
American Securities Transfer and Trust, Inc. will act as exchange agent in
the United States and CIBC Mellon Trust Company will act as exchange agent in
Canada in connection with the merger. As soon as practicable after the effective
date of the merger, the exchange agents will send a notice and transmittal form
to Carpatsky shareholders to be used in forwarding their Carpatsky stock
certificate for surrender and exchange for certificates representing Radiant
Energy common stock. Please do not surrender your Carpatsky certificate for
exchange until you receive the transmittal form and instructions. The
instructions will include procedures concerning lost certificates and securities
held in broker's or nominee names.
Each holder of Carpatsky common or preferred stock will be entitled, upon
surrender to the exchange agent, to receive in exchange for his shares of
Carpatsky a common or preferred stock certificate representing the number of
whole shares of Radiant Energy common or preferred stock into which his shares
of Carpatsky common or preferred stock were converted in the merger, together
with any cash payable instead of fractional shares. Until a holder of Carpatsky
common or preferred stock surrenders his/her Carpatsky common or preferred stock
certificate to the exchange agent, the certificate representing shares of
Carpatsky common or preferred stock will be deemed to represent the number of
whole shares of Radiant Energy common or preferred stock into which the shares
of Carpatsky common or preferred stock were converted.
Carpatsky shareholders should not send any stock certificate
with their proxy cards
Fractional Shares
Certificates representing fractional shares of Radiant Energy common stock
will not be issued in the merger. Fractional share interests will not entitle
you to vote or to any other rights of a stockholder of Radiant Energy. Instead
of the issuance of any fractional share, each holder of Carpatsky common stock
who otherwise would be entitled to receive a fractional share of Radiant Energy
common stock in the merger will receive, upon surrender for exchange, an amount
in cash determined by multiplying (1) the average of the reported "bid" price
for Carpatsky common stock on the Canadian Venture Exchange for the 10 trading
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days before the effective date, (2) the fraction of a Radiant Energy share to
which that holder would otherwise be entitled. If more than one certificate
representing shares of Carpatsky common stock is surrendered for the account of
the same stockholder of record, the number of full shares of Radiant Energy
common stock for which certificate will be delivered will be computed on the
basis of the aggregate number of shares of Carpatsky common stock represented by
the certificates surrendered by that stockholder.
Representations
The parties make various representations and warranties in the merger
agreement, including representations and warranties by each of Carpatsky and
Pease as to:
o organization and good standing,
o capitalization,
o authorization of the merger agreement and the absence, except as
specified, of the need for governmental or third party consents to the
merger,
o compliance with applicable law,
o accuracy of financial statements,
o absence of material undisclosed liabilities and the absence of
material adverse changes in the financial or other condition,
operations, or business of Carpatsky and Pease, taken as a whole,
o absence of pending or threatened material litigation,
o absence of employee benefit plans and collective bargaining
agreements,
o material compliance with applicable environmental laws and
regulations,
o absence of brokers or finders, and
o other customary matters.
Conduct of Business Pending the Merger
Pease and Carpatsky have agreed to conduct their operations, except as
otherwise provided in the merger agreement, according to their normal course of
business until completion of the merger. Further, Pease and Carpatsky have each
agreed that, among other things, until the consummation of the merger, unless
the other agrees in writing or as otherwise required or permitted by the merger
agreement, it will not:
o issue any shares of capital stock (with certain exceptions), effect
any stock split, or otherwise change its capitalization as it existed
on the date the merger agreement was signed;
o declare, set aside, or pay any dividend or other distribution, whether
in cash, stock, or property or any combination of cash, stock, or
property, in respect of any of its capital stock;
o amend or propose to amend its articles of incorporation or bylaws,
except for Pease's Amended and Restated Articles of Incorporation;
o acquire, sell, lease, encumber, transfer, or dispose of any assets
except in the ordinary course of business;
o incur any indebtedness for borrowed money or guarantee any
indebtedness issued, sell any debt securities, warrants or rights to
acquire any debt securities, guarantee any debt of others, make any
loans, advances, or capital contributions, or mortgage, pledge, or
otherwise encumber any material assets or create any material lien on
material assets, except in the ordinary course of business;
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o pay, discharge, or satisfy any claims, liabilities, or obligations
except in the ordinary course of business; or
o change any accounting principles or practices except as required by
generally accepted accounting principles.
Conditions to Consummation of the Merger
The obligations of Pease and Carpatsky to complete the merger are subject
to the following conditions:
o Carpatsky's stockholders must approve the transactions contemplated by
the merger agreement, including the redomestication to Delaware;
o The relevant governmental authorities must grant all required
authorizations, consents, orders or approvals;
o The registration statement that contains this proxy statement and
prospectus shall have become effective under the Securities Act and
must not be the subject of any stop order or proceedings seeking a
stop order;
o There must be no law, order, injunction, or other legal restraint or
prohibition enjoining or preventing the consummation of the merger;
o The representations and warranties of Pease, CPI Acquisition and
Carpatsky contained in the merger agreement must be true and correct
in all material aspects as of the closing;
o Neither Pease nor Carpatsky shall have suffered any material adverse
change to its business or financial condition;
o Each party to the merger agreement shall have performed all
obligations required to be performed under the merger agreement except
where the failure to perform would not have a material adverse effect;
o Pease and Carpatsky shall have each furnished to the other an opinion
of its counsel to the effect that the respective party and each of its
respective subsidiaries, among other conditions:
o is a corporation duly incorporated, validly existing and in good
standing under the laws of the state of its incorporation;
o has the corporate power to carry on its business as it is being
conducted on the closing date of the merger agreement; and
o has validly issued its capital stock, and that capital stock is
outstanding, fully paid and nonassessable, and that between the
date of the merger agreement and the closing date of the merger,
no additional shares of its capital stock have been issued; and
o Holders of no more than .625% of the issued and outstanding shares of
Carpatsky common stock or Pease common stock have exercised their
dissenters' rights.
Additional conditions to the obligation of Carpatsky are as follows:
o Carpatsky shall have received the opinion of Carpatsky's tax counsel
to the effect that (i) the merger will be treated for U. S. federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Code and that CPI Acquisition Corp. and Carpatsky will
each be a party to that reorganization within the meaning of Section
368(b) of the Code and (ii) the redomestication and merger shall not
be taxable to Carpatsky's Canadian stockholders under United States
income tax laws.
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o Pease shall not have determined to withhold any amounts in respect of
the shares of Pease common stock or preferred stock issuable in the
merger;
o All of this issued and outstanding shares of Pease Preferred Stock
shall have been exchanged for shares of Pease common stock (the
"Exchange"); and
o Holders of no more than .625% of the issued and outstanding shares of
Carpatsky common stock or Pease common stock have exercised their
dissenters' rights.
Additional unsatisfied conditions to Pease's obligations are as follows:
o Pease shall have received an opinion from tax counsel to the effect
that (i) Pease will be a party to a reorganization with in the meaning
of Section 368(a) of the Code, with respect to the Exchange and this
merger and no gain or less will be recognized by the Pease Preferred
Stockholders as a result of the Exchange;
o Holders of no more than .625% of the issued and outstanding shares of
Carpatsky common stock or Pease common stock have exercised their
dissenters' rights; and
o Carpatsky shall have completed its audited financial statements for
the years ended December 31, 1998 and 1997 and its unaudited financial
statements for the fiscal periods ended September 30, 1998 and 1999
and such financial statements shall reflect the following:
o total long term liabilities as at September 30, 1999 not to
exceed $550,000 (exclusive of amounts due under the joint
activities agreement;
o the balance due to the joint account as at September 30, 1999 for
Carpatsky's working interest in the RC field does not exceed
$6.75 million;
o the net working interest net to Carpatsky in the RC field should
not be less than 19.7% at September 30, 1999;
o Carpatsky or its subsidiaries shall be delivering gas for sale by
closing of the merger under such reasonable gas sales
arrangements as Pease shall have approved in writing, which
approval shall not be unreasonably withheld; and
o Carpatsky or its Ukrainian joint ventures shall have commenced
receiving payment for at least 90% of gas sold by the closing of
the merger and reasonable assurance shall be given that future
payments will continue to be received.
Termination
The merger agreement may be terminated at any time prior to effectiveness
of the merger, whether before or after stockholder approval of the merger, by
o mutual consent of Pease and Carpatsky;
o either Pease or Carpatsky if the merger is not consummated before
April __, 2000 unless the failure to consummate the merger by that
date is due to the action or failure to act of the party seeking to
terminate the agreement;
o either Pease or Carpatsky if
(i) the conditions to that party's obligations have become impossible
to satisfy; or
(ii) any permanent injunction or other order of a court or other
competent authority preventing the consummation of the merger has
become final and non-appealable;
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o either Pease or Carpatsky, if
(i) its board of directors withdraws or changes its recommendation of
the merger agreement and the transactions contemplated thereby or
(ii) its board of directors has recommended a competing transaction or
shall have resolved to do so or
(iii) a tender or exchange offer is commenced for 20% or more of its
outstanding stock, its board of directors fails to recommend to
its stockholders not tender or exchange their shares in such
offer or
(iv) any person (other than Pease or Carpatsky or their affiliates)
has acquired 20% or more of the outstanding shares of capital
stock of the other party;
o either Pease or Carpatsky fails to obtain the required approval of its
stockholders upon a vote held at a duly convened meeting of
stockholders or at any adjournment; or
o Pease has not received a favorable opinion from Houlihan Smith &
Company.
If the merger agreement is terminated and abandoned, the merger agreement
will immediately become void and have no effect, without any liability on the
part of any party to the merger agreement or its affiliates, directors,
officers, or stockholders, except with respect to confidentiality obligations
and indemnification provisions relating to brokers or finders or other similar
persons or entities.
If the merger agreement is terminated as a result of (i) a willful breach
of any representation, warranty, covenant or agreement by a party or (ii) a
party has had contacts or entered into negotiations regarding a competing
transaction and within twelve months after the termination of the merger
agreement such party has entered into a business combination in connection
therewith or (iii) a party has failed to secure the requisite vote of its
stockholders or its board of directors has withdrawn its recommendation to
stockholders and at the time there exists a competing transaction or (iv) a
party's board of directors has failed to recommend that its stockholders not
tender or exchange their shares in connection with a tender or exchange offer
for 20% or more of its outstanding capital stock, the other party shall be
entitled to receive a $250,000 payment, which amount shall be inclusive of all
of such party's expenses.
Expenses and Fees
Except as set forth above if the merger is not consummated, all expenses
incurred in connection with the merger agreement and the transactions
contemplated by the merger agreement will be paid by the party incurring costs
and expenses of the merger and merger agreement, except that the printing and
mailing and other costs associated with this proxy statement and prospectus
(excluding legal and accounting fees which shall be borne by the party incurring
such expenses) shall be borne equally by Pease and Carpatsky; provided, however,
if the merger is completed all such expenses will be borne by the combined
entity, Radiant Energy. In addition to printing and mailing expenses, costs and
expenses incurred in connection with the merger agreement are expected to
consist primarily of legal and accounting fees, tax opinion fees, petroleum
engineering fees and filing fees under federal and state regulatory laws and are
estimated to be $250,000.
67
<PAGE>
SELECTED FINANCIAL DATA OF PEASE
The selected balance sheet data as of December 31, 1998 and the selected
statement of operations data for the years ended December 31, 1997 and 1998,
have been derived from our audited financial statements. The selected unaudited
financial data at September 30, 1999 and for the nine months ended September 30,
1998 and 1999 have been prepared on a basis consistent with the consolidated
financial statements. In our opinion, the selected unaudited financial data
include all adjustments-consisting only of normal recurring
adjustments-necessary for a fair presentation of the financial position at the
date presented and results of operations for the periods presented. Operating
results for the nine months ended September 30, 1999 are not necessarily
indicative of results for the full fiscal year. These data should be read in
conjunction with our consolidated financial statements, the notes to the
consolidated financial statements and the management's discussion and analysis
of financial condition and results of operations, all of which are included in
this proxy statement and prospectus.
<TABLE>
<CAPTION>
Pease Selected Financial Data Table
Nine Months Ended September 30, Year Ended December 31,
------------------------------ ----------------------
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue .................................................... $ 1,504,145 $ 2,404,342 $ 2,916,982 $ 4,659,309
Cost of operations ......................................... (276,014) (1,560,827) (1,620,576) (2,527,047)
------------ ------------ ------------ ------------
Gross profit ............................................. 1,228,131 843,515 1,296,406 2,132,262
------------ ------------ ------------ ------------
Other costs and expenses:
General and administrative ............................... 729,355 1,260,941 1,834,136 1,924,472
Depreciation, depletion and amortization ................. 798,278 1,460,562 2,241,092 2,669,319
Impairment ............................................... -- 2,739,043 7,592,771 12,912,705
------------ ------------ ------------ ------------
Total other costs and expenses ......................... 1,527,633 5,460,546 11,667,999 17,506,496
------------ ------------ ------------ ------------
Income (loss) from operations .............................. (299,502) (4,617,031) (10,371,593) (15,374,234)
Other income and (expense):
Interest and other income ................................ 33,590 170,652 143,340 180,544
Interest expense ......................................... (269,859) (398,746) (399,218) (701,377)
------------ ------------ ------------ ------------
Net income (loss) .......................................... $ (535,771) $ (4,845,125) $(10,627,471) $(15,895,067)
============ ============ ============ ============
Net income (loss) applicable to common
stockholders ............................................... $ (713,588) $ (6,569,779) $(12,694,965) $(15,985,036)
============ ============ ============ ============
Net income (loss) per common share ......................... $ (0.43) $ (4.14) $ (7.99) $ (12.21)
============ ============ ============ ============
Weighted average number of common
shares outstanding ......................................... 1,668,400 1,584,200 1,588,000 1,309,000
============ ============ ============ ============
<CAPTION>
Sept. 30,1999 Dec. 31, 1998
------------- -------------
<S> <C> <C>
Balance Sheet Data:
Current assets ........................................... $ 1,201,345 $ 1,740,729
Current liabilities ...................................... 363,087 638,841
Working capital .......................................... 838,258 1,101,888
Total assets ............................................. 7,099,895 7,912,971
Total liabilities ........................................ 2,816,593 2,932,102
Stockholders' Equity ..................................... 4,283,302 4,980,869
</TABLE>
68
<PAGE>
Pease Management's Discussion and Analysis of Financial Conditions
and Results of Operations
Liquidity, Capital Expenditures and Capital Resources
At September 30, 1999, our cash balance was $777,835 with a positive
working capital position of $838,258, compared with cash of $1,049,582 and
positive working capital position of $1,101,888 at December 31, 1998, and
$6,547,804 in cash and working capital of $5,295,474 at December 31, 1997. The
changes in our cash balance on those dates is summarized as follows:
Cash Balance at December 31, 1997 .......................... $ 6,547,804
Sources of Cash in 1998:
Proceeds from the sale of property and equipment ......... 3,823,286
Proceeds from the redemption of certificate of deposit ... 25,000
Proceeds from the exercise of common stock warrants ...... 939
-----------
Total Sources of Cash in 1998 ..................... 3,849,225
-----------
Uses of Cash in 1998:
Capital Expenditures for exploration activities .......... (6,948,755)
Repayment of long term debt .............................. (1,207,805)
Interest paid and capitalized in the full cost pool ...... (380,914)
Cash used in operating activities ........................ (211,453)
Series B preferred stock dividends ....................... (210,942)
Purchase and retirement of Series B preferred stock ...... (206,250)
Costs associated with the sale of Series B preferred stock (146,765)
Capital expenditures for property, plant and equipment ... (34,564)
-----------
Total uses of cash in 1998 ........................ (9,347,447)
Cash balance at December 31, 1998 .......................... 1,049,582
Sources of Cash in 1999:
Cash provided by operating activities .................... 497,407
Proceeds from the sale of property and equipment ......... 100,000
Proceeds from redemption of certificate of deposit ....... 70,000
-----------
Total Sources of Cash in 1999 ..................... 667,407
Uses of Cash in 1999:
Capital expenditures for exploration activities .......... (428,466)
Series B preferred stock dividends ....................... (244,902)
Interest paid and capitalized in the full cost pool ...... (208,226)
Purchase and retirement of Series B preferred stock ...... (51,313)
Payments on long term debt ............................... (4,342)
Capital expenditures for office equipment ................ (2,015)
-----------
Total uses of cash in 1999 ........................ (871,820)
-----------
Cash balance at September 30, 1999 ........................... $ 777,835
============
Our uses of cash for exploration activities in the Gulf Coast are
summarized as follows (the difference between the total cash paid for
exploration activities in the above table and the amounts illustrated below,
represent the net changes in accounts payable between the beginning and the end
of the periods presented):
69
<PAGE>
<TABLE>
<CAPTION>
BY PROGRAM OPERATOR FOR YEAR ENDED DECEMBER 31, 1998
Category NEGX(1) Parallel(3) AHC(2) Other Total %
- ------------------------------------------- ------ ---------- ----- ----- ----- --
<S> <C> <C> <C> <C> <C> <C>
Successful Wells .......................... $ 362,254 $ -- $ 575,019 $ -- $ 937,273 16%
Exploratory Dry Holes ..................... 1,350,585 188,879 -- -- 1,539,464 26%
Land, G&G-Seismic
Programs ............................. 1,283,521 1,557,698 135,616 -- 2,976,835 50%
Other Exploration Costs ................... -- -- -- 492,830 492,830 8%
----------- ----------- ----------- ----------- ----------- ------
Total Exploration Costs ................ $ 2,996,360 $ 1,746,577 $ 710,635 $ 1,345,810 $ 5,946,402 100%
=========== =========== =========== =========== =========== ======
Percent of Total Costs ................. 51% 29% 12% 8% 100%
=========== =========== =========== =========== ===========
<CAPTION>
BY PROGRAM OPERATOR FOR NINE MONTHS ENDED SEPT 30, 1999
Category NEGX(1) Parallel(3) AHC(2) Other Total %
- ------------------------------------------- ------ ---------- ----- ----- ----- --
<S> <C> <C> <C> <C> <C> <C>
Successful Wells .......................... $ (6,879) $ -- $ 214,001 $ -- $ 207,122 50%
Exploratory Dry Holes ..................... (7,096) 23,666 -- -- 16,570 4%
Land, G&G-Seismic
Programs ........................... 15,446 157,725 -- -- 173,171 41%
Other Exploration Costs ................... -- -- -- 21,261 21,261 5%
----------- ----------- ----------- ----------- ----------- ------
Total Exploration Costs ................ $ 1,471 $ 181,391 $ 214,001 $ 21,261 $ 418,124 100%
=========== =========== =========== =========== =========== ======
Percent of Total Costs ................. 1% 43% 51% 5% 100%
=========== =========== =========== === ======== ===========
</TABLE>
For the remainder of 1999 and continuing into 2000, we will focus our
activities on cultivating the existing exploration program in the Gulf Coast
region, principally in Louisiana and Texas. This activity will focus on what we
consider our three core areas in the Gulf Coast, which are:
1. The East Bayou Sorrel Area in Iberville Parish, Louisiana,
operated by National Energy Group, Inc. ("NEGX");
2. The Maurice Prospect in Fayetteville Parish, Louisiana, operated
by Amerada Hess Corporation ("AHC"); and
3. The Formosa, Texana and Ganado 3-D prospects encompassing 130,000
acres in and around Jackson County, Texas, operated by Parallel
Petroleum ("Parallel").
Pease is a non-operating partner in all three areas. Accordingly, we have
little control over the timing of new wells or the ability to control costs.
However, we can elect not to participate in a proposed well and have the
opportunity to farmout proposals to other parties should we elect not to
participate in a particular exploratory proposal. Accordingly, we have the
right, not the obligation, to participate in future exploratory drilling
prospects within these areas. However, assuming sufficient working capital is
available, it is our intent to participate in all the exploratory or development
proposals that are fundamentally sound and adequately supported with competent
geologic and geophysical data. Under the present known circumstances, should we
elect to participate in all of the anticipated proposals for these three areas,
the following table summarizes the range of our expected capital requirements,
by program, through the end of 2000:
70
<PAGE>
Estimated Investment
----------------------
Operator Minimum Maximum
- -------- ------- -------
East Bayou Sorrel Area ......................... $ -- $ 400,000
Formosa, Texana, and Ganado Prospects .......... 200,000 600,000
Maurice Prospect ............................... 50,000 600,000
---------- ----------
Total .................................... $ 250,000 $1,600,000
========== ==========
Our current and anticipated cash position may not be sufficient to cover
the future working capital and exploration opportunities that may be proposed
within our three core areas.
As discussed above, we began actively searching for a merger candidate in
August 1998 in order to, among other things, increase our 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. All holders
of the Series B preferred stock have agreed that no more dividends shall accrue
or be paid on their holdings if the contemplated transaction with Carpatsky is
ultimately consummated. The holders have also agreed not to sell or convert any
outstanding shares of the Series B preferred stock until the contemplated
transaction with Carpatsky is either completed or abandoned. When the merger is
effective, we will be obligated to pay out of our existing working capital
approximately $220,000 to our President/CFO in connection with the severance
terms included in his employment agreement.
If the merger with Carpatsky is either abandoned or cannot be consummated
within a reasonable period of time, 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. Given the delisting, combined with our historically
poor financial performance and the fact that production from only four wells
provides most of our current cash flow and production, it is unclear at this
time what alternatives for future working capital will be available, if any, 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, nonconsenting on proposed wells or
workovers, 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 of these commodities. Accordingly, our operating
results for any prior period are not necessarily indicative of future operating
results because of the fluctuations in oil, natural gas, and natural gas liquid
prices and the lack of predictability of those fluctuations as well as changes
in production levels.
71
<PAGE>
Dispositions of Rocky Mountain Assets
During 1998, Pease substantially completed the sale of all of its Rocky
Mountain assets. Accordingly, for 1999 and thereafter the revenue, costs,
operating margins and cash flows historically generated and discussed under the
captions "Gas Plant Processing," "Oil Field Services and Supply," and "Well
Administration and Other Income" are no longer a part of our operations. Because
these assets included a significant portion of Pease's historical operations
before the end of 1998, the sale of these assets had an immediate and material
negative impact on our future cash flows and results of operations.
Revenue
Total Revenue from all operations was as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1998 1997
------------------ -----------------
Amount % Amount %
------ -- ------ --
<S> <C> <C> <C> <C>
Oil and gas sales ....................... $2,359,905 81% $3,168,042 68%
Gas plant processing .................... 256,174 9% 691,828 15%
Oil field services and supply ........... 271,932 9% 707,060 15%
Well administration and other income .... 28,971 1% 92,379 2%
---------- ------- ---------- -------
Total revenue ...................... $2,916,982 100% $4,659,309 100%
========== ======= ========== =======
<CAPTION>
For the Nine Months Ended Sept. 30,
-------------------------------------------
1998 1997
------------------ -----------------
Amount % Amount %
------ -- ------ --
<S> <C> <C> <C> <C>
Oil and gas sales ....................... $1,504,065 100% $ 1,853,,284 77%
Gas plant, service and supply ........... -- -- 528,418 22%
Well administration and other income .... 80 Nil 22,640 1%
---------- ------- ---------- -------
Total revenue ...................... $1,504,145 100% $1,644,631 100%
========== ======= ========== =======
</TABLE>
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.
72
<PAGE>
Oil and Gas
Operating statistics for oil and gas production for the periods presented
are as follows:
<TABLE>
<CAPTION>
For the Year For the Nine Months
Ended December 31, Ended Sept. 30,
--------------------- ----------------------
1998 1997 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Production:
Oil (Bbls)
Rocky Mtns ............................... 51,752 79,949 -- 47,900
Gulf Coast ............................... 58,702 43,286 53,800 37,300
Gas (Mcf)
Rocky Mtns .............................. 230,529 391,975 -- 228,300
Gulf Coast .............................. 319,828 91,469 281,500 197,400
BOE (6:1)
Rocky Mtns .............................. 89,174 145,278 -- 86,000
Gulf Coast .............................. 112,006 58,531 100,700 70,200
Average Collected Price:
Oil (per Bbl)
Rocky Mtns ............................ $ 12.11 $ 18.75 $ -- $ 12.32
Gulf Coast ............................ $ 12.19 $ 19.15 $ 15.54 $ 12.96
Gas (per Mcf)
Rocky Mtns ............................. $ 1.39 $ 1.46 $ -- $ 1.39
Gulf Coast ............................. $ 2.22 $ 2.94 $ 2.37 $ 2.34
Per BOE (6:1)
Rocky Mtns ............................. $ 10.50 $ 14.25 $ -- $ 10.56
Gulf Coast ............................. $ 12.73 $ 18.76 $ 14.93 $ 13.46
Operating Margins:
Rocky Mtns:
Revenue -
Rocky Mtns. - Oil ................... $ 612,370 $ 1,498,800 $ -- $ 590,067
Rocky Mtns. - Gas ................... 321,333 571,213 -- 318,034
----------- ----------- ----------- -----------
$ 933,703 $ 2,070,013 -- 908,101
Cost .................................... (806,224) (1,320,758) -- (870,227)
----------- ----------- ----------- -----------
Operating Margin .................... $ 127,479 $ 749,255 $ -- $ 37,874
=========== =========== =========== ===========
Operating Margin % .................. 14% 36% -- 4%
Gulf Coast:
Revenue -
Gulf Coast - Oil .................... $ 715,699 $ 828,779 $ 836,569 $ 484,016
Gulf Coast - Gas .................... 710,503 269,250 667,496 461,167
----------- ----------- ----------- -----------
1,426,202 $ 1,098,029 1,504,065 945,183
Costs .................................. (243,339) (165,980) (276,014) (125,768)
----------- ----------- ----------- -----------
Operating Margin .................... $ 1,182,863 $ 932,049 $ 1,228,051 $ 819,415
=========== =========== =========== ===========
Operating Margin % .................. 83% 85% 82% 87%
Production Costs per
BOE before DD&A:
Rocky Mtn Region ..................... $ 9.04 $ 9.09 $ -- $ 10.12
Gulf Coast Region .................... $ 2.17 $ 2.84 $ 2.74 $ 1.79
Change in Revenue Attributable to:
Production ........................... $ (143,959) $ (659,938)
Price ................................ (661,732) 310,719
----------- -----------
Total Decrease in Revenue ............ $ (805,691) $ (349,219)
=========== ===========
</TABLE>
In May 1999 the J. P. Owen well located in the Maurice Prospect in
Vermillion Parish, Louisiana, operated by AHC, began experiencing significant
water production as a result of a very poor primary cement job in the completion
casing. Accordingly, the well was shut in and during the third quarter of 1999
AHC performed various remedial operations attempting to squeeze the zones, shut
off the water source and restore production. However, the procedures were
unsuccessful and the well was plugged at that producing interval. Recompletion
in an upper zone was commenced in early 2000. We do not believe the loss of the
73
<PAGE>
well bore at that interval will impair our total reserves quantities because our
independent petroleum reservoir engineers have advised us that these reserves
will probably be classified as "Proved Undeveloped." However, because production
has been lost, it will negatively impact current and anticipated cash flows for
at least the near future. In 1999, Pease's proportionate share of production
from this well totaled 13,360 Mcf of gas and 490 Bbls of oil before it was shut
in. There was no production from this well in 1998. At December 31, 1998, this
well represented approximately 14.5% of our estimated proven reserves (PV-10).
Therefore, substantially all of Pease's 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 discussed above, we sold these assets in 1998. However, the historical
operating results excluding depreciation and amortization are as follows:
<TABLE>
<CAPTION>
For the Year For the Nine Months
Ended December 31, Ended Sept. 30,
------------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue ......................... $ 271,932 $ 707,060 $ -- $ 528,418
Costs ........................... (295,789) (651,458) -- (564,832)
--------- --------- --------- ---------
Net Operating Income ......... $ (23,857) $ 55,602 $ -- $ (36,414)
========= ========= ========= =========
</TABLE>
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.
General and Administrative
General and Administrative ("G&A") expenses increased $99,777 in 1998 when
compared to 1997. However the totals in 1998 include several non-recurring
expenses as follows:
74
<PAGE>
$ 175,000 - Severance and bonus for Willard H. Pease, Jr., our former
President and CEO
150,000 - Fee paid to San Jacinto Securities for advise and asistance in
connection with our seeking and reviewing merger candidates
75,000 - Costs associated with the corporate restructuring and
--------- divestment of Rocky Mountain assets.
$ 400,000
The net decrease in G&A expenses of $379,950 during the first nine months
of 1999 when compared to the same period in 1998 is summarized as follows:
For the 9 months
ended 9/99 vs 9/98 Description
------------------ -----------
$ 173,774 Reduction of payroll as a result of eliminating executive
and administrative positions
150,000 Fee paid in 1998 to San Jacinto Securities
101,992 Legal and accounting
25,276 Travel
19,604 Consulting
12,475 Filing fees associated with NASDAQ
3,308 All other, net
(106,479) Costs associated with pursuing the merger with Carpatsky
---------
$ 379,950 Net decrease between the periods presented
Pease capitalized $236,931 and $280,000 of costs associated with the Gulf
Coast exploration activities in 1998 and 1997, and $21,261 and $238,861 during
the first nine months of 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 1999 and 2000 to be approximately $60,000 to $70,000 per
month. However, we expect additional amounts (aggregating $25,000 to $50,000)
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:
<TABLE>
<CAPTION>
For the Year For the Nine Months
Ended December 31, Ended Sept 30,
----------------------- -----------------------
1998 1997 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Oil and Gas Properties - Gulf Coast ............ $ 275,137 $1,176,865 $ 780,899 $ 866,477
Oil and Gas Properties - Rocky Mtns ............ 1,639,125 1,018,499 -- 265,510
Gas Plant, Service and Supply .................. 273,345 378,740 -- 291,766
Furniture and Fixtures ......................... 53,485 49,219 17,379 36,809
---------- ---------- ---------- ----------
Total ...................................... $2,241,092 $2,623,323 $ 798,278 $1,460,562
========== ========== ========== ==========
</TABLE>
75
<PAGE>
DD&A for the oil and gas properties, per BOE, for the periods presented is
as follows:
Rocky Mountains $ -- $ 2.94 $ -- $ 3.09
Gulf Coast $ 7.67 $ 7.75 $ 7.75 $ 12.33
Combined Total $ 7.67 $ 5.27 $ 7.75 $ 7.25
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:
<TABLE>
<CAPTION>
For the Year For the Nine Months
Ended December 31, Ended Sept 30,
----------------------- -----------------------
1998 1997 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest paid or accrued ........................... $ 399,218 $ 448,705 $ 209,795 $ 299,313
Amortization of debt discount ...................... 367,443 353,310 164,503 485,676
Amortization of debt issuance costs ................ 485,535 223,003 103,677 307,208
----------- ----------- ----------- -----------
Total interest incurred ................... 1,252,196 1,025,018 477,975 1,092,197
Interest capitalized for exploration activities .... (852,978) (323,641) (208,116) (693,451)
----------- ----------- ----------- -----------
Interest expense ..................... $ 399,218 $ 701,377 $ 269,859 $ 398,746
=========== =========== =========== ===========
</TABLE>
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 $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 the debt.
Impairment Expense - 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, for the year ended December 31, 1997, we
incurred an impairment charge of $3,946,733 related to our Gulf Coast oil and
gas properties. The majority of this charged was the result of the dry holes
drilled in 1997 (which increased the accumulated costs above the "ceiling"). In
1998 we incurred an additional impairment charge of $7,278,818 (of which
$2,739,043 had been recognized during the first nine months) which can be
76
<PAGE>
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).
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; and 3) any imputed dividends attributable to the
beneficial conversion feature. Accordingly, the net loss applicable to common
stockholders includes the following charges associated with the Series B
preferred stock that was issued on December 31, 1997:
<TABLE>
<CAPTION>
For the Year For the Nine Months
Ended December 31, Ended Sept 30,
----------------- --------------------
1998 1999 1998
---- ---- ----
<S> <C> <C> <C>
Dividends declared ............................. $ 278,026 $ 177,817 $ 210,941
Non-cash imputed dividend charge ............... 1,789,468 -- 1,513,713
---------- ---------- ----------
Total ................................. $2,067,494 $ 177,817 $1,724,654
========== ========== ==========
</TABLE>
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.
77
<PAGE>
SELECTED FINANCIAL DATA OF CARPATSKY
The selected balance sheet data as of December 31, 1998 and the selected
statement of operations data for the years ended December 31, 1997 and 1998,
have been derived from the audited financial statements of Carpatsky. The
selected unaudited financial data at September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 have been prepared on a basis consistent with
the consolidated financial statements of Carpatsky. In the opinion of Carpatsky,
the selected unaudited financial data include all adjustments-consisting only of
normal recurring adjustments-necessary for a fair presentation of the financial
position at the date presented and results of operations for the periods
presented. Operating results for the nine months ended September 30, 1999 are
not necessarily indicative of results for the full fiscal year. These data
should be read in conjunction with the consolidated financial statements of
Carpatsky, the notes to the consolidated financial statements of Carpatsky and
Carpatsky's management's discussion and analysis of financial condition and
results of operations, all of which are included in this proxy statement and
prospectus.
<TABLE>
<CAPTION>
Carpatsky Selected Financial Data Table
Nine Months Ended September 30, Year Ended December 31,
------------------------------ ----------------------
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ......................................................... $ 1,778,258 $ 348,572 $ 768,851 $ 98,683
Less allowance for doubtful accounts ............................ (1,617,752) (196,313) (543,186) (13,050)
------------ ------------ ------------ ------------
Net revenue ................................................... 160,506 152,259 225,665 85,633
Cost of operations .............................................. (736,096) (187,938) (307,561) (82,351)
------------ ------------ ------------ ------------
Gross profit (loss) ........................................... (575,590) (35,679) (81,896) 3,282
Other costs and expenses:
General and administrative .................................... 742,081 501,463 552,391 805,218
Depreciation, depletion and amortization ...................... 273,263 39,527 85,385 19,204
------------ ------------ ------------ ------------
Total other costs and expenses ............................ 1,015,344 540,990 637,776 824,422
------------ ------------ ------------ ------------
Income (loss) from operations ................................... (1,590,934) (576,669) (719,672) (821,140)
Other income and (expense):
Interest and other income ..................................... 46,535 36,334 4,710 40,288
Gain on net monetary position ................................. 859,293 1,457,144 1,477,213 44,059
Amortization of debt discount ................................. -- (657,895) (657,895) (139,377)
Interest expense .............................................. (236,042) (225,711) (318,512) (89,564)
------------ ------------ ------------ ------------
Income (loss) before taxes ...................................... (921,148) 33,203 (214,156) (965,734)
Provision for income taxes ...................................... (335,205) -- (132,388) --
------------ ------------ ------------ ------------
Net income (loss) ............................................... $ (1,256,353) $ 33,203 $ (346,544) $ (965,734)
============ ============ ============ ============
Net income (loss) per share ..................................... $ (0.03) $ Nil $ (0.01) $ (0.03)
============ ============ ============ ============
Weighted average number of common
shares outstanding ............................................ 40,796,000 40,796,000 40,796,000 31,691,000
============ ============ ============ ============
<CAPTION>
Sept. 30, 1999 Dec. 31, 1998
-------------- -------------
<S> <C> <C>
Balance Sheet Data:
Current assets ................................................ $ 680,415 $ 208,503
Current liabilities ........................................... 5,501,415 4,849,874
Working capital (deficit) ..................................... (4,821,000) (4,641,371)
Total assets .................................................. 10,903,668 9,751,616
Total liabilities ............................................. 5,501,413 6,857,581
Stockholders' Equity .......................................... 5,402,253 2,894,035
</TABLE>
78
<PAGE>
Carpatsky Management's Discussion and Analysis of Financial Conditions
and Results of Operations
Liquidity, Capital Expenditures and Capital Resources
At September 30, 1999, Carpatsky's cash balance was $128,414 with a working
capital deficit of $4,821,000, compared with cash of $25,434 and working capital
deficit of $4,641,371 at December 31, 1998, and $83,408 in cash and a working
capital deficit of $2,826,787 at December 31, 1997. The changes in Carpatsky's
cash balance during 1998 and through September 30, 1999 are summarized as
follows:
Cash Balance at December 31, 1997 .......... $ 83,408
Sources of Cash in 1998:
Cash provided by operating activities .... 888,069
Proceeds from debt ....................... 600,000
-----------
Total Sources of Cash in 1998 ..... 1,488,069
Uses of Cash in 1998:
Capital Expenditures ..................... (1,540,543)
Loan to Ukrainian joint venture .......... (5,500)
-----------
Total uses of cash in 1998 ........ (1,546,043)
Cash balance at December 31, 1998 .......... 25,434
Sources of Cash in 1999:
Proceeds from the issuance of common stock 762,500
Uses of Cash in 1999:
Capital expenditures ..................... (528,892)
Deferred acquisition costs ............... (92,088)
Cash used in operating activities ........ (16,806)
Loan to Ukrainian joint venture .......... (16,486)
Offering costs ........................... (5,248)
-----------
Total uses of cash in 1999 ........ (659,520)
-----------
Cash balance at September 30, 1999 ......... $ 128,414
===========
In September 1999, Carpatsky: a.) completed a private placement of common
stock which raised $1.0 million of which $237,500 was received in October 1999;
b.) converted $2.676 million of debt and payables into common stock and
warrants; and c.) entered into an Agreement and Plan of Merger with Pease, a
U.S. publicly held company. Carpatsky sought out the merger primarily to obtain
a stock listing in the United States and to increase and diversify its asset
base.
Carpatsky's oil and gas assets consist of interests in the following two
fields in the Republic of Ukraine: 1.) the Rudovsko-Chervonozavodskoye natural
gas and gas 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-Frankovsk District of southwest Ukraine. To date, these
ventures have been financed through a series of private debt and equity
offerings. Common to the oil and gas industry in foreign countries, Carpatsky
does not own an interest in real property; its rights and obligations are
governed by joint venture arrangements. The agreements governing the RC field
provides Carpatsky with a net revenue interest ("NRI") in the project that
varies based on its proportionate cumulative capital contributions. Therefore,
the actual NRI is determined by: a.) dividing Carpatsky's total capital
contributions by the total capital contributions to the Joint Account (this
computes Carpatsky's proportionate share of the total capital contributions);
and b.) multiplying this quotient by 90%. This formula determined Carpatsky's
NRI as of September 30, 1999 totaled 40%. A recalculation of the interest is
made as of the last day in each calendar quarter, however, Carpatsky's NRI may
79
<PAGE>
not exceed 45%. Unlike the governing documents associated with the RC field,
Carpatsky's ownership and NRI in the Bitkov Joint Venture is not subject to
adjustment and is fixed at 45%. In both fields, Carpatsky's planned operations
will primarily focus on exploitation activities -- drilling development wells
and performing workovers on existing wellbores -- in order to monetize proved
reserves.
Most of Carpatsky's current oil and gas reserve value is attributable to
the RC field with current daily gross production in excess of 20 million cubic
feet of natural gas and 120 barrels of condensate from 3 wells. Two other wells
are in the final stages of completion and are expected to be on production in
2000. In addition, a sixth well is currently drilling and is expected to reach
its proposed target depth of 18,000' in mid-2000. Carpatsky expects two to seven
additional development wells will be drilled (or start to be drilled) in this
field during 2000.
Carpatsky's historical use of cash in 1998 and 1999 (through September 30)
for its oil and gas activities in Ukraine are summarized by field as follows:
Cumulative
Venture 1998 1999 through 9/30/99
- --------------------------- ---- ---- ---------------
The RC field .............. $1,521,498 $ 512,853 $4,296,367
The Bitkov field .......... 19,045 16,039 1,016,762
---------- ---------- ----------
Totals ................ $1,540,543 $ 528,892 $5,313,129
========== ========== ==========
Under the existing commitments related to the two ventures in Ukraine, the
following table summarizes the range of expected capital requirements through
the end of 2000:
Estimated Investment Requirements
---------------------------------
Venture Minimum Maximum
- -------------------------------------- ------- -------
The RC field ......................... $2,800,000 $7,840,000
The Bitkov field ..................... 54,000 414,000
---------- ----------
Totals ........................... $2,854,000 $8,254,000
========== ==========
The estimated capital requirements for the RC field as presented above
assume Carpatsky's share of net revenues under the joint activities agreement in
the RC field is 45% (its maximum potential interest). As previously stated,
Carpatsky's proportionate share of net revenues in the RC field on September 30,
1999 was 40%. On October 1, 1999, Carpatsky's proportionate share of net
revenues was effectively reduced to 32% when its Ukrainian partner increased
their equity position through an additional capital contribution to the joint
account. The Ukrainian partner, a government-owned oil and gas company, advised
Carpatsky that it had until December 31, 1999 to make an additional contribution
of approximately $2.9 million. A failure to do so would have diluted Carpatsky's
interest in the RC field even further and would have precluded Carpatsky from
participating in the next two wells to be drilled. Carpatsky vigorously pursued
various sources of financing to meet this obligation and preserve its rights in
the RC field. On December 30, 1999, Carpatsky issued 95.45 million shares of
preferred stock, plus warrants for $4.0 million. A portion of the proceeds have
been, and will continue to be, used to satisfy Carpatsky's obligation to make
additional capital contributions or the RC field and maintain Carpatsky's
maximum ownership interest. Should Carpatsky be unable to maintain its NRI in
the RC field, the future capital requirements would be adjusted down on a
pro-rata basis.
80
<PAGE>
Carpatsky expects that the Ukrainian projects will develop cash flow
sufficient to fund Carpatsky's operations sometime in 2000 but exactly when, or
if, this will actually occur cannot be accurately projected. Therefore, the
amount of future capital that will be required cannot be accurately determined
at this time. If additional capital is required, there can be no assurance given
that the necessary capital can or will be raised under terms acceptable to the
Carpatsky. If additional sources of financing are not ultimately available,
Carpatsky may have to consider other alternatives, including selling a portion
of its interest in the Ukrainian assets.
The most significant item affecting Carpatsky's operations is the receipt
of payment for the sale of its oil and gas in Ukraine. Historically, payment for
oil or condensate has not been an issue. Until September 1999, substantially all
of the company's gas was sold to Naftogazukrainy ("NAK"), a Ukrainian national
joint stock company. NAK was formed to meet the natural gas needs of the entire
population of Ukraine (similar to the responsibilities of a US public utility).
Ukraine is a "cash poor" country and, as a result, many of the country's natural
gas consumers have been unable to meet their financial obligations in hard
currency on a timely basis. Therefore, with NAK not being paid by the country's
consumers, it is not in a position to pay producers such as Carpatsky.
Accordingly, Carpatsky has provided a substantial allowance for doubtful
accounts for its historical operations and consequently incurred substantial
operating losses arising from the non-payment for natural gas sold.
To circumvent this payment problem with NAK, in September 1999 Carpatsky
began selling a portion its natural gas through a public auction market directly
to end users. This process is similar to the spot market nominating auctions
that take place in the United States and provides a viable alternative to NAK.
In addition, this process enables Carpatsky to set the specific terms and assess
the creditworthiness of each of its prospective customers prior to any sale.
Since participating in the auction market, Carpatsky has been receiving payment
for most of its natural gas deliveries.
In addition, Carpatsky is vigorously exploring the possibility of exporting
its natural gas for sale to foreign companies. Carpatsky believes that an export
contract with a large credit worthy customer(s) could virtually eliminate the
historical problem with regard to payment. It is not known at this time whether
or not an export contract will successfully be negotiated or if the appropriate
authorizations to transport the gas outside of Ukraine can be obtained on a
long-term basis. In any case, Carpatsky believes that either the continued
success of the public auction market or an export contract will significantly
improve future payments and results of operation.
Results of Operations
Overview
Carpatsky's largest source of operating revenue is from the sale of
produced oil, natural gas, and natural gas liquids in Ukraine. Therefore, the
level of Carpatsky's revenues and earnings are affected by prices at which
natural gas, oil and natural gas liquids are sold. In addition, as previously
discussed Carpatsky historically has not been paid for a substantial portion of
its natural gas sold. Accordingly, Carpatsky's operating results for any prior
period are not necessarily indicative of future operating results because of the
fluctuations in natural gas, oil and natural gas liquid prices, the lack of
predictability of those price fluctuations, changes in production levels and the
amount of payment received, or expected to be received, for the hydrocarbons
sold.
81
<PAGE>
Oil and Gas
Operating statistics for oil and gas production for the periods presented
are as follows:
<TABLE>
<CAPTION>
For the Nine Months For the Year Ended
Ended September 30, Ended December 31,
---------------------------- ---------------------------
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Production:
Oil (Bbls)
Bitkov field .............................. 8,770 7,807 10,741 5,334
RC field .................................. 10,998 -- 683 --
----------- ----------- ----------- -----------
Total ................................... 19,768 7,807 11,424 5,334
=========== =========== =========== ===========
Gas (Mcf)
Bitkov field .............................. 39,067 30,294 45,425 11,237
RC field .................................. 1,781,744 162,323 426,744 --
----------- ----------- ----------- -----------
Total ................................... 1,820,812 192,617 472,169 11,237
=========== =========== =========== ===========
Mcfe (1:6)
Bitkov field .............................. 91,686 77,135 109,869 43,241
RC field .................................. 1,847,735 162,323 30,842 --
----------- ----------- ----------- -----------
Total ................................... 1,939,421 239,458 540,710 43,241
=========== =========== =========== ===========
Average Sales Price:
Oil (per Bbl)
Bitkov field .............................. $ 9.24 $ 12.16 $ 11.34 $ 14.62
RC field .................................. $ 10.39 N/A $ 12.60 N/A
----------- ----------- ----------- -----------
Total ................................... $ 9.88 $ 12.16 $ 11.41 $ 14.62
=========== =========== =========== ===========
Gas (per Mcf)
Bitkov field .............................. $ 0.97 $ 1.86 $ 1.79 $ 1.84
RC field .................................. $ 0.87 $ 1.21 $ 1.31 N/A
----------- ----------- ----------- -----------
Total ................................... $ 0.87 $ 1.32 $ 1.35 $ 1.84
=========== =========== =========== ===========
Per Mcfe (1:6)
Bitkov field .............................. $ 1.30 $ 1.96 $ 1.85 $ 2.28
RC field .................................. $ 0.90 $ 1.21 $ 1.31 N/A
----------- ----------- ----------- -----------
Total ................................... $ 0.92 $ 1.46 $ 1.42 $ 2.28
=========== =========== =========== ===========
Operating Margins:
Revenue -
Total Sales .................................. $ 768,851 $ 98,683 $ 1,778,258 $ 348,572
Less Doubtful Account Allowance .............. (543,186) (13,050) (1,617,752) (196,313)
----------- ----------- ----------- -----------
Net Revenue ............................. 225,665 85,632 160,506 152,259
Operating Cost ................................. (307,561) (82,351) (736,096) (187,938)
----------- ----------- ----------- -----------
Operating Margin ............................... $ (81,896) $ 3,281 $ (575,590) $ (35,679)
=========== =========== =========== ===========
Operating Costs per Mcfe: ...................... $ 0.57 $ 1.91 $ 0.38 $ 0.78
</TABLE>
The increased production between the periods presented can be substantially
attributed to production in the RC field. All of the production, revenue and
costs in 1997 were derived from operations of the Bitkov field. Currently, there
are three wells producing in the RC field which commenced production in August
1998, March 1999 and May 1999, respectively.
Amortization of Debt Discount
In connection with the debt issued in 1997 and 1998, Carpatsky issued
warrants to purchase 8.8 million shares of common stock at $0.25 per share. For
financial statement reporting purposes, $797,272 was the estimated fair value of
these warrants which was amortized, using the interest method, over the original
term of the loans. Accordingly, Carpatsky recognized a charge of $657,895 and
$139,377 for the years ended December 31, 1998 and 1997, respectively, in
connection with this amortization.
82
<PAGE>
Net Monetary Position
Ukraine has suffered with a highly inflationary economy, as it has been
transitioning from a socialistic state to a market economy. Even though the
inflation rates in the last few years have reduced significantly, the political,
social, and economic instability leaves the future inflation rates unpredictable
at this time. Accordingly, for accounting purposes, the functional currency of
Carpatsky's Ukrainian operations is the U.S. dollar. Consequently, adjustments
resulting from translation of foreign currency monetary assets (generally
current assets and liabilities) are adjusted as of each balance sheet date and
non-monetary assets (consisting principally of the Company's investment in its
oil and gas properties) are translated at the historical exchange rate. The net
effect of these transaction adjustments are reflected as a separate component of
the statement of operations along with exchange gains and losses in foreign
currency transactions. During 1998 and 1999, this has resulted in a substantial
gain due to the current liabilities being significantly greater than current
assets during the periods presented.
Barter Income
As is customary in many cash poor countries, in Ukraine Carpatsky routinely
enters into bartered transactions in order to monetize certain assets. These
transactions principally consist of exchanging goods in satisfaction of accounts
receivable and then selling those goods for hard currency to another party. The
following is a summary of the bartered transactions for the periods presented:
For the Nine Months For the Year Ended
Ended September 30, Ended December 31,
------------------ -------------------
1999 1998 1998 1997
---- ---- ---- ----
Gross barter income ........ $ 62,540 $ 82,952 $ 104,302 $ 40,468
Costs of bartered goods .... (16,005) (46,618) (99,592) (6,642)
--------- --------- --------- ---------
Net barter income .......... $ 46,535 $ 36,334 $ 4,710 $ 33,826
========= ========= ========= =========
Income Taxes
Carpatsky incurred a Ukrainian Corporate Profit tax of $132,388 for the
year ended December 31, 1998 and an additional $335,205 during the first nine
months of 1999. These were incurred despite a reported loss under U.S. generally
accepted accounting principals primarily because the tax is computed using the
Ukrainian's statutory records which gives no consideration to the allowance for
doubtful accounts.
Year 2000 Issue
Carpatsky's U.S. accounting systems are currently being maintained by
Pease. However, Carpatsky has not performed a detailed evaluation of the systems
used for its joint venture operations in Ukraine. As Carpatsky is substantially
dependent on its joint venture partners, this could result in a significant
problem for Carpatsky.
Carpatsky is materially dependent on a subsidiary of its Ukrainian partner
in the RC field for the delivery and payment of the natural gas. This subsidiary
in turn may be dependent on various third party vendors for delivery and
payment. Carpatsky has requested written assurances that the subsidiary has
examined its Year 2000 issues. Carpatsky has not received a response. Carpatsky
will continue to request such assurance but it should be emphasized that no
assurance can be given at this time that the subsidiary or the third party
vendors are or will be Year 2000 compliant.
83
<PAGE>
In the event that one or more of the Ukraine operations partners or vendors
were to have a material Year 2000 problem, Carpatsky believes that the
foreseeable consequences would be a temporary delay in revenue collection caused
by an interruption in computerized billing (and not an interruption in the
actual flow of the joint ventures' oil or natural gas), which may have a
substantial impact on the Company's ability to conduct operations. We do not
expect that we will be in a position to finally determine whether there were
Year 2000 problems incurred in Ukraine until early 2000. Carpatsky does not have
any contingency plan to address this possibility.
To date the Year 2000 problem has not posed a material operations problem
for the Company.
84
<PAGE>
PEASE OIL AND GAS COMPANY
PRO FORMA COMBINED FINANCIAL INFORMATION
On September 1, 1999, Pease and Carpatsky entered into an Agreement and
Plan of Merger ("Merger Agreement") to combine their respective businesses. The
Merger Agreement was amended on December 30, 1999 when Carpatsky issued 95.45
million shares of preferred stock and warrants for $4.0 million. Accordingly,
the Amended Merger Agreement was revised to: a.) commit Pease to issue a similar
class of preferred stock to the Carpatsky investor upon consummation of the
merger; b.) revise the share exchange ratio so that Pease's shareholders will
retain, in the aggregate, 12.5% in the merged entity after giving effect to the
additional financing; and c.) modify certain other terms as necessary to take
recent events into account.
Pursuant to the terms of the amended merger agreement, Pease will acquire
all the outstanding stock of Carpatsky in exchange for 44,959,557 common shares
of Pease plus 102,410,000 shares of a newly designated preferred stock that will
be convertible into 28,920,984 shares of common stock subject to future
adjustments. The preferred stock will not have a preferential dividend but will
have provisions that provide for majority voting rights in the post merger
corporation.
For accounting purposes, the acquisition of Carpatsky will be accounted for
as a "reverse acquisition" of Pease by Carpatsky. Carpatsky will be considered
to be the acquiring entity for financial reporting purposes. However, Pease will
be the surviving legal entity after the exchange. Carpatsky's Board of
Directors, shareholders and management will have control of the combined entity
after the exchange. Therefore, the assets and liabilities of Pease will be
recorded at their estimated fair values in the exchange. The fair values of the
oil and gas properties, are lower than their adjusted historical cost bases. The
lower valuation for Pease's oil and gas properties is determined based on the
valuation of common shares to be issued in the exchange. This valuation was the
same per share amount paid in the recent capital infusion in Carpatsky, assuming
such preferred shares issued were converted into Pease common stock.
The accompanying unaudited pro forma balance sheet combines the September
30, 1999 balance sheet of Pease and Carpatsky, as if the transaction had
occurred on that date and also assumes the $4.0 million capital infusion from
the issuance of preferred stock, as well as other transactions associated with
that financing, also occurred on that date.
The accompanying unaudited pro forma statements of operations combine the
operations of Pease and Carpatsky for the year ended December 31, 1998 and the
nine months ended September 30, 1999, as if the merger transaction had occurred
as of the beginning of the periods presented. The 1999 Statement of Operations
also reflects adjustments associated with the issuance of common stock to
officers and directors at the time of the $4.0 million infusion into Carpatsky
from the issuance of preferred stock.
These statements are not necessarily indicative of future operations or the
actual results that would have occurred had the transaction been consummated at
the beginning of the periods indicated. The unaudited pro forma combined
financial statements should be read in conjunction with the historical financial
statements and notes thereto, included elsewhere in this document.
85
<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
Historical Pro Forma Historical Pro Forma
Carpatsky Adjustments Carpatsky Pease Adjustments Combined
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and equivalents ............. $ 128,414 4,000,000 (a)$ 3,128,414 $ 777,835 (269,065)(b) $ 3,479,272
(1,000,000)(a) (157,912)(c)
Stock subscriptions receivable ... 237,500 237,500 -- 237,500
Trade receivables, net ........... 56,796 56,796 341,966 398,762
Inventories ...................... 118,214 118,214 -- 118,214
VAT refundable ................... 112,147 112,147 -- 112,147
Prepaid expenses and other ....... 27,344 27,344 81,544 108,888
------------ ------------ ------------ ------------
Total current assets ............. 680,415 3,680,415 1,201,345 4,454,783
------------ ------------ ------------ ------------
Oil and Gas Properties, at cost
using the full cost method ....... 10,008,626 10,008,626 20,276,999 (16,939,756)(d) 13,595,869
250,000 (c)
Less accumulated amortization .... (385,297) (385,297) (14,664,073) 14,664,073 (d) (385,297)
------------ ------------ ------------ ------------
Net oil and gas properties ....... 9,623,329 9,623,329 5,612,926 13,210,572
------------ ------------ ------------ ------------
Other Assets:
VAT refundable ................... 405,853 405,853 -- 405,853
Deferred acquisition costs ....... 92,088 92,088 -- (92,088)(c) --
Loan to Ukrainian JV partner ..... 71,486 71,486 -- 71,486
Office equipment and vehicles, net 30,497 30,497 59,257 89,754
Debt issuance costs, net ......... -- -- 218,874 (218,874)(d) --
Deposits and other ............... -- -- 7,493 7,493
------------ ------------ ------------ ------------
Total other assets ............... 599,924 599,924 285,624 574,586
------------ ------------ ------------ ------------
Total Assets ..................... $ 10,903,668 $ 13,903,668 $ 7,099,895 $ 18,239,941
============ ============ ============ ============
</TABLE>
See accompanying notes to these pro forma financial statements.
86
<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY
PRO FORMA COMBINED BALANCE SHEET (continued)
SEPTEMBER 30, 1999
(Unaudited)
Historical Pro Forma Historical Pro Forma
Carpatsky Adjustments Carpatsky Pease Adjustments Combined
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Current Liabilities:
Current maturities of debt ..... $ 548,914 $ 548,914 $ 5,741 $ 554,655
Accounts payable, trade ........ 3,624,695 (500,000)(a) 3,124,695 206,185 3,330,880
Taxes payable .................. 885,589 (500,000)(a) 385,589 -- 385,589
Accrued expenses ............... 257,289 257,289 151,161 408,450
Due to officers and directors .. 184,928 184,928 -- 184,928
----------- ------------ ------------ ------------
Total current liabilities ...... 5,501,415 4,501,415 363,087 4,864,502
----------- ------------ ------------ ------------
Long-Term Debt, less current
maturities ..................... -- -- 2,453,506 328,994(d) 2,782,500
----------- ------------ ------------ ------------
Stockholders' Equity
Preferred Stock - Series B ..... -- -- 1,058 (1,058)(e) --
Preferred Stock - Series A ..... -- 4,000,000(a) 4,000,000 -- 4,000,000
Common Stock ................... 9,174,921 200,000(f) 9,434,921 173,140 (4,052,399)(e) 5,555,662
60,000(g)
Additional paid-in capital ..... -- -- 37,636,191 (32,297,181)(e) 5,339,010
Accumulated deficit ............ (3,772,668) (260,000)(f&g) (4,032,668) (33,527,087) 33,527,087(e) (4,301,733)
----------- ------------ ------------ ------------
Total stockholders' equity ..... 5,402,253 9,402,253 4,283,302 10,592,939
----------- ------------ ------------ ------------
Total Liabilities and
Stockholders Equity ............ $10,903,668 $ 13,903,668 $ 7,099,895 $ 18,239,941
=========== ============ ============ ============
</TABLE>
See accompanying notes to these pro forma financial statements.
87
<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
Historical Pro Forma Historical Pro Forma
Carpatsky Adjustments Carpatsky Pease Adjustments Combined
---------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues, net ............... $ 160,506 $ 160,506 $ 1,504,145 $ 1,664,651
------------ ------------ ------------ ----------
Operating Costs and Expenses:
Oil and gas production ...... 736,096 736,096 276,014 1,012,110
General administrative ...... 742,081 200,000 (f) 1,002,081 729,355 1,731,436
60,000(g)
Depreciation, depletion and
amortization ................ 273,263 273,263 798,278 (168,390)(h) 903,151
------------ ------------ ------------ ------------
Total operating costs and
expenses .................... 1,751,440 2,011,440 1,803,647 3,646,697
------------ ------------ ------------ ------------
Loss from Operations ........ (1,590,934) (1,850,934) (299,502) (1,982,046)
------------ ------------ ------------ ------------
Other Income (Expense):
Interest expense ............ (236,042) (236,042) (269,859) 60,064(i) (445,837)
Interest income ............. -- -- 33,590 33,590
Net barter income ........... 46,535 46,535 -- 46,535
Gain on net monetary position 859,293 859,293 -- 859,293
------------ ------------ ------------ ------------
Total other income (expense) 669,786 669,786 (236,269) 493,581
------------ ------------ ------------ ------------
Loss Before Taxes ........... (921,148) (1,181,148) (535,771) (1,488,465)
Income Tax .................. (335,205) (335,205) -- (335,205)
------------ ------------ ------------ ------------
Net Loss .................... $ (1,256,353) $ (1,516,353) $ (535,771) $ (1,823,670)
============ ============ ============ ============
Net Loss Applicable to Common
Stockholders ................ $ (1,256,353) $ (1,516,353) $ (713,588) (177,817)(j) $ (1,823,670)
============ ============ ============ ============
Net Loss Per Share .......... $ (0.03) $ (0.04) $ (0.43) $ (0.03)
============ ============ ============ ============
Weighted Average Number of
Shares Outstanding .......... 40,796,246 40,796,246 1,668,400 55,556,620
============ ============ ============ ============
</TABLE>
See accompanying notes to these pro forma financial statements.
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<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
Historical Historical Pro Forma
Carpatsky Pease Adjustments Combined
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues, net .................... $ 225,665 $ 2,916,982 $ 3,142,647
------------ ------------
Operating Costs and Expenses:
Oil and gas production ........... 307,561 1,049,563 1,357,124
Gas plant, service and supply .... -- 571,013 571,013
General administrative ........... 552,391 1,834,136 2,386,527
Impairment ....................... -- 7,592,771 (7,592,771)(k) --
Depreciation, depletion and
amortization ..................... 85,385 2,241,092 (959,932)(h) 1,366,545
------------ ------------ ------------
Total operating costs and expenses 945,337 13,288,575 5,681,209
------------ ------------ ------------
Loss from Operations ............. (719,672) (10,371,593) (2,538,562)
------------ ------------ ------------
Other Income (Expense):
Interest expense ................. (318,512) (399,218) 29,299(i) (688,431)
Amortization of Debt Discount .... (657,895) -- (657,895)
Interest and other income ........ -- 143,340 143,340
Net barter income ................ 4,710 -- 4,710
Gain on net monetary position .... 1,477,213 -- 1,477,213
------------ ------------ ------------
Total other income (expense) ..... 505,516 (255,878) 278,937
------------ ------------ ------------
Loss Before Taxes ................ (214,156) (10,627,471) (2,259,626)
Income Tax ....................... (132,388) -- (132,388)
------------ ------------ ------------
Net Loss ......................... $ (346,544) $(10,627,471) $ (2,392,014)
============ ============ ============
Net Loss Applicable to Common
Stockholders ..................... $ (346,544) $(12,694,965) (2,067,494)(j)$ (2,392,014)
============ ============ ============
Net Loss Per Share ............... $ (0.01) $ (7.99) $ (0.04)
============ ============ ============
Weighted Average Number of
Shares Outstanding ............... 40,796,246 1,588,000 55,556,620
============ ============ ============
</TABLE>
See accompanying notes to these pro forma financial statements.
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<PAGE>
PEASE OIL AND GAS COMPANY
PRO FORMA ADJUSTMENTS
(a) To reflect the $4.0 million capital infusion into Carpatsky from the
issuance of Preferred stock as well as the use of $1.0 million of those
proceeds immediately after the infusion.
(b) To reflect the accrual and payment of the severance due Pease's employees,
including amounts due its President/CFO.
(c) To reflect the accrual and payment of the external costs associated with
the Pease acquisition estimated to be incurred subsequent to September 30,
1999.
(d) To reflect the transaction as a reverse acquisition whereby Pease's assets
and liabilities are adjusted to their estimated fair value based on the
value of the shares exchanged.
(e) To reflect the exchange of 44,959,557 common shares of Pease for 100% of
the outstanding common shares of Carpatsky; 8,865,665 common shares for
conversion of the Pease preferred stock and 102,410,000 shares of Pease
preferred shares for Carpatsky preferred shares.
(f) To reflect the issuance of 2.0 million shares to an officer of Carpatsky
for services rendered in connection with the $4.0 million capital infusion
and services performed in connection with the contemplated merger with
Pease.
(g) To reflect the issuance of 600,000 shares to Carpatsky's Board of
Directors. These shares were issued in connection with the change in the
Board composition as a result of the $4.0 million capital infusion and the
contemplated merger with Pease.
(h) To reflect the reduction in depletion and amortization expense associated
with Pease's oil and gas properties that are attributable to a lower
valuation that will be assigned to those assets upon consummation of the
merger transaction.
(i) To reflect the reduction in interest expense related to historical
amortization of Pease's deferred loan costs and debt discount. The related
debt will be recorded at its fair value, which equals its face amount in
the acquisition. Therefore, costs recorded in connection with the issuance
of warrants associated with this debt (recorded as debt discount) and other
deferred loan costs will not be valued in the acquisition, resulting in
lower pro forma interest expense.
(j) To eliminate the dividend (both paid or accrued and the non-cash imputed
dividend attributable to the beneficial conversion feature) associated with
Pease's existing Series B Preferred stock.
(k) To eliminate the historical impairment expense associated with Pease's oil
and gas properties.
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<PAGE>
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<PAGE>
BUSINESS OF PEASE
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."
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. Our current and future business strategy will focus on
expanding our reserve base and future cash flows by continuing to develop the
proven properties, nurturing the strategic alliances and exploiting exploration
opportunities in the Gulf Coast Region. Specifically, we plan to execute this
strategy by focusing our immediate exploration efforts and resources on what we
consider our three core areas in the Gulf Coast, which are:
o The East Bayou Sorrel Field in Iberville Parish, Louisiana, operated
by National Energy Group, Inc.;
o The Maurice Field in Vermillion Parish, Louisiana, operated by Amerada
Hess; and
o The Formosa, Texana and Ganado 3-D seismic exploration prospects,
encompassing 130,000 acres in and around Jackson County, Texas,
operated by Parallel Petroleum.
In addition, we have emphasized the following precepts in seeking to
implement our strategy:
o Make disciplined use of advanced exploration technologies-such as 3-D
seismic and computer-aided exploration ("CAEX") technology;
o Developing alliances with experienced and competent technical
personnel that have been trained by major oil companies and can
demonstrate a successful track record;
o Reinvesting future operating cash flows into development drilling and
recompletion activities;
o Pursue the acquisition of properties and/or potential merger
candidates that could build upon and enhance Pease's existing asset
base;
We have recognized that our ability to implement our business strategies
has been largely dependent upon finding a suitable merger candidate and/or
raising additional debt or equity capital to fund acquisitions, exploration,
drilling and development activities.
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<PAGE>
Operations
As of December 31, 1998, we had varying ownership interests in 10 gross
(.76 net) non-operated wells located in Southern Louisiana and Texas.
The following table presents oil and gas reserve information within our
major operating area as of December 31, 1998:
Net Proved Reserves
-----------------------------------
Region Bbls Mcf BOE (6:1)
- ------ ---- --- --------
Gulf Coast - 275,000 1,368,000 503,000
principally in S. Louisiana
We are a non-operator in the oil and natural gas prospects we pursue in the
Gulf Coast region.
Principal Oil and Gas Interests
Developed Acreage - Our producing properties as of December 31, 1998 are
located in the areas shown in the following table:
<TABLE>
<CAPTION>
OIL GAS
-------------------- ------------------- Developed Acreage
Gross Net Gross Net -----------------
Fields State Wells(1) Wells(2) Wells(1) Wells(2) Gross Net(2)
- ---------------- -------------- ------- ------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
East Bayou Sorrel Louisiana 3 .27 - - 368 33
South Lake Arthur Louisiana - - 1 .21 349 73
Maurice Louisiana - - 3 .21 196 14
Austin Bayou Texas - - 3 .07 505 11
--- ---- --- ---- ----- -----
Grand Total 3 0.27 7 0.49 1418 131
=== ===== === ==== ===== =====
</TABLE>
(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 Pease's 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 which we hold 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, 1998 is as
follows:
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<PAGE>
Undeveloped Acreage
-------------------
Prospect Description State Gross Net
-------------------- ----- ----- ---
East Bayou Sorrel .......... Louisiana 1,110 111(1)
Maurice Prospect ........... Louisiana 843 2,350(2)
Parallel 3-D Program-Leases Texas 18,797 76(2)
Parallel 3-D Program-Options Texas 13,938 1,742(3)
Austin Bayou ............... Texas 694 15(2)
------ ------
Totals: ............... 35,382 4,294
====== ======
- -------------------------
(1) Substantially all of these leases will expire in 2001 unless
production has been obtained.
(2) Substantially all of these leases will expire in 2000 unless
production has been obtained.
(3) Substantially all of these leases/options will expire in 1999 unless
production has been obtained.
Gulf Coast Properties and Prospects
Overview - The U.S. Gulf Coast, although it has been actively explored,
remains a prolific area with excellent upside potential for exploration due to
modern proprietary 3-D seismic surveys. 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.
East Bayou Sorrel - During 1997, Pease acquired a 10% working interest and
a 7.125% after prospect payout leasehold interest in the 1996 discovery of a new
oil and gas field, East Bayou Sorrel Field located in Iberville Parish,
Louisiana. Subsequently, this field has been explored with other well tests and
a 3-D seismic survey was completed in February 1998. As of September 30, 1999,
the production from the three producing wells in this field represents
approximately 75% 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.
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. The producing wells representing approximately 25%
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 wells. Five wells were drilled on this acreage in
1999 of which four were dry holes.
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.
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<PAGE>
Title to Properties
A limited, only a 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 1997 reserve information for the Rocky
Mountains is based upon an engineering evaluation by McCartney Engineering, Inc.
The estimated proved reserves information for the Gulf Coast for both 1997 and
1998 is based upon an engineering evaluation by Netherland, Sewell & Associates,
Inc. The estimated proved reserves represent forward-looking statements and
should be read in connection with the disclosure on forward-looking statements
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.
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.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1998 1997
---- ------------------------------------
Gulf Coast Rocky Mtns Total
---------- ---------- -----
<S> <C> <C> <C> <C>
Estimated Proved Oil Reserves (Bbls) .............. 275,000 308,000 777,000 1,085,000
Estimated Proved Gas Reserves (Mcf) ............... 1,368,000 1,360,000 3,175,000 4,535,000
Estimated Future Net Revenues ..................... $ 4,054,000 $ 5,796,000 $ 8,575,000 $14,371,000
Present Value of Estimated Future Net Revenues .... $ 2,951,000 $ 4,460,000 $ 5,218,000 $ 9,678,000
Prices used to determined reserves:
Oil (per Bbl) ..................................... $ 10.15 $ 17.11 $ 16.15
Gas (per Mcf) ..................................... $ 2.43 $ 2.61 $ 1.78
</TABLE>
Net Quantities of Oil and Gas Produced
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:
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<PAGE>
Year Ended December 31,
------------------------
1998 1997
---- ----
Oil (Bbls)
Gulf Coast ........................ 58,000 43,000
Rocky Mtns ........................ 51,000 80,000
------- -------
Total ........................... 109,000 123,000
======= =======
Gas (Mcf)
Gulf Coast ........................ 320,000 91,000
Rocky Mtns ........................ 230,000 392,000
------- -------
Total ........................... 550,000 483,000
======= =======
The average sales price per barrel of oil and Mcf of gas, and average
production costs per barrel of oil equivalent ("BOE") excluding depreciation,
depletion and amortization were as follows:
Average Sales Prices Average
Year Ended ---------------------- Production
December 31 Oil (Bbls) Gas (Mcf) Per BOE Cost Per BOE
- ----------- ---------- -------- ------- ------------
1998:
Gulf Coast $ 12.19 $ 2.22 $ 12.73 $ 2.17
Rocky Mtns $ 12.11 $ 1.39 $ 10.50 $ 9.04
Combined Avg. $ 12.16 $ 1.87 $11.74 $ 5.22
1997:
Gulf Coast $ 19.15 $ 2.94 $ 18.76 $ 2.84
Rocky Mtns $ 18.75 $ 1.46 $ 14.25 $ 9.09
Combined Avg. $ 18.89 $ 1.74 $ 15.54 $ 7.29
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
------------ ---------------- --------------
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
Wells Drilled
Exploratory
Oil 1 .13 1 .09 1 .10
Gas 1 .07(1) 4 .14 1 .08
Non-productive 4 .50 3 .32 6 .77
-- ---- --- ---- --- ----
Total 6 .70 8 .55 8 .95
== ==== === ==== == ====
Development
Oil - - - - - -
Gas - - - - - -
Non-productive - - - - - -
---- ---- ---- ---- ---- ---
Total - - - - - -
===== ==== ==== ==== ==== ===
</TABLE>
- -----------------
(1) This well located in the Maurice field, was successfully completed in the
Bol Mex formation in March 1999. However, that interval was plugged during
the fourth quarter of 1999 due to mechanical failure down-hole. Another
formation up-hole in that well bore will be recompleted in January 2000.
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<PAGE>
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 approximately 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.
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
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<PAGE>
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 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
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<PAGE>
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.
Administration
Office Facilities - We currently rent approximately 3,400 square feet in
an office facility in Grand Junction, Colorado. The rental rate is $29,000 per
year through May 31, 2000.
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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BUSINESS OF CARPATSKY
History and Overview
Carpatsky Petroleum Corporation was formed as a Texas corporation by Leslie
C. Texas and other organizers on November 17, 1992 to acquire rights to engage
in exploration and development of oil and gas properties in the Republic of
Ukraine. In April 1994 Carpatsky Petroleum organized a Texas limited partnership
in which it was general partner. The partnership entered into a joint venture
with a Ukraine state-owned oil and gas company to develop oil and natural gas
reserves in an oil field in western Ukraine described below.
Carpatsky Petroleum formed United Kiev Resources, Inc. under the laws of
the province of Alberta, Canada in October 1994 to fund capital requirements.
United Kiev then acquired all the partnership interests and stock of Carpatsky
Petroleum in exchange for shares of United Kiev, the result of which was that
United Kiev held Carpatsky Petroleum as a subsidiary which in turn held the
interest in the Ukraine joint venture. In May 1995, United Kiev completed a
merger with an Alberta Stock Exchange listed corporation and became a
publicly-traded company. In July 1996, United Kiev formed a Delaware subsidiary
corporation and caused Carpatsky Petroleum to be merged into the subsidiary.
United Kiev in May 1997 changed its name to Carpatsky Petroleum Inc. Carpatsky
now holds its interest in the Ukraine oil and natural gas properties described
below through its wholly-owned subsidiary corporation.
Carpatsky and its predecessors have raised necessary capital through a
series of private placements of debt and equity, commencing in early 1996 and
continuing through the present. In 1996, approximately US $667,000 in equity and
US $500,000 in debt was raised. In 1997, Carpatsky raised an additional US $2.9
million in equity and US $1.0 million in debt. In 1998, Carpatsky borrowed
approximately US $1.2 million in a series of convertible loans from Torch Energy
Advisors, Inc.
During 1999, Carpatsky raised US $5.0 million in additional equity,
inclusive of the Bellwether transaction described elsewhere in this document.
Also during 1999, US $880,000 of unpaid principal of debt incurred in 1996 and
1997 and interest thereon was exchanged for Carpatsky common stock and the debt
obligation to Torch Energy Advisors was converted into Carpatsky common stock.
Further, Carpatsky satisfied approximately US $200,000 of payables and other
obligations to third parties with the issuance of common stock.
All private placements of equity and convertible debt and the issuance of
stock purchase warrants to a number of the investors were pre-approved by the
Alberta Stock Exchange and its predecessor in accordance with applicable
procedures.
Carpatsky, through its subsidiary corporation, owns a 45% interest in
Ukrcarpatoil, Ltd., a Ukrainian joint venture company, which was created for the
purpose of exploitation and production of the Bitkov field located in
southwestern Ukraine. Ukrcarpatoil entered into a license agreement which
describes Carpatsky's rights to profits and other obligations. Basically,
Carpatsky's right to profits are limited to the incremental hydrocarbon
production above a level of "baseline" production defined in the license
agreement.
Carpatsky also has entered into a joint activity agreement, as amended,
through which it participates in revenues and costs in the RC field located in
eastern Ukraine. Under the joint activity agreement, Carpatsky has the right to
receive up to 45% of the net revenue, subject to its payment of 50% of the costs
in the RC field. The interest in net revenue is determined by: (a) dividing
Carpatsky's total capital contributions to the activity by the total capital
contributions; and (b) multiplying this percentage by 90%. As of September 30,
1999 Carpatsky's interest in the joint activity was approximately 45%,
representing an interest of approximately 40.5% in net revenues.
The RC Field Protocol. Approximately 96% of Carpatsky's estimated net
proved reserves as of December 31, 1998, on a barrel of oil equivalency basis,
were located in the RC field in the Ukraine. Carpatsky's interest in this field
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is based on a joint activities agreement between Carpatsky and Ukrnafta, the
Ukranian state oil company. Ukrnafta owns the license issued by the Ukranian
government to explore the RC field.
As of December 31, 1999, Carpatsky owed approximately $3.2 million to a
joint account established under the joint activities agreement to fund
operations in the RC field. Carpatsky used a portion of the proceeds of the
issuance of preferred stock and warrants to pay $1.0 million that Carpatsky owed
under the joint account. In connection with this payment, Carpatsky and Ukrnafta
entered into a protocol in which Carpatsky agreed to pay the balance of $[2.2
million] under the joint account and Ukrnafta agreed to assist Carpatsky in
amending the RC field license to either specifically name Carpatsky or reference
the joint activities agreement. Without this amendment to the license, the
Ukranian government is not expected to recognize Carpatsky's interest in the RC
field. Carpatsky agreed to pay the balance owed to the joint account when the
license was amended. If the license is not amended by the end of the first
quarter, Carpatsky and Ukrnafta agreed to met to review the protocol.
Business Strategy
We intend to increase production from the existing two fields while
evaluating other properties with a view to expanding oil and gas operations in
Ukraine. To accomplish these objectives, Radiant Energy expects that it will
engage in additional capital raising activities in order to timely fund its
obligations. Such capital raising activities will be based principally upon
seeking equity financing opportunities and approaching multi-lateral banks and
financial institutions such as the European Bank for Reconstruction and
Development, the IMF, OPIC and the World Bank. The principal obstacle which we
will face in convincing prospective investors to provide capital for our
Ukrainian projects is demonstrating our ability to contract with reliable
customers who will pay for our production on a timely basis.
We intend to seek out and contract with foreign end-users to whom we will
export our gas, as permitted under current Ukrainian law. Radiant Energy will
also participate in government sanctioned monthly gas auctions described in the
section entitled "Markets and Gas Marketing," commencing at page 101. The cash
and cash flow available to Radiant Energy after the merger will be allocated to
pay immediate post-merger capital requirements of our U.S. and Ukrainian
projects.
Carpatsky management believes that Ukraine offers potential which, because
of its history and current status, has been overlooked both as an oil and gas
province as well as its location as a vital transportation link to Western
Europe. When measured by the geographical boundaries of Europe - east to west -
the Ural mountains (separating Europe from Asian countries) to the Atlantic
Ocean and - north to south - from the Baltic Sea to the Black Sea, Western
Ukraine is in the exact center of Europe. Therefore, its position serving as the
predominant gas carrying corridor should continue to be enhanced as Western
Europe's dependency on natural gas continues to increase. In the early 1990s,
Russia supplied Western Europe with natural gas to fuel 7.5% of its then
electrical power generation. As reported in a trade publication, a recently
concluded study by Andersen Consulting found that not only will Western Europe's
need for gas increase in coming years but the percentage of Eastern European gas
fueling Western Europe will increase to 30% - 40% of electric power generation
in Western Europe by 2015. Most of the growth is expected from co-generation
plants that are projected to be 90% efficient when producing electric power and
heat simultaneously. The combination of the availability of gas at commercially
reasonable prices coupled with the efficiency of co-generation plants are
expected to make electricity generated by the plants very competitive. These
anticipated events will cause a heightening of competition, new gas-processing
technologies and lifting of restrictions on trade in electricity that are
expected to cause sweeping changes in the electricity industry.
While the oil and gas industry in Ukraine commenced in the last century,
the country's oil and gas provinces are generally under-explored. Soviet-era
policy funneled essentially all capital allocated to the energy business into
the development of the enormous oil and gas fields of Western Siberia, leaving
Ukraine's known reserves partially undeveloped and its exploration potential yet
to be evaluated. We believe that the primary focus of Radiant Energy's
operations should remain in Ukraine and efforts be made to obtain interests in
additional energy-related projects in that country. We also believe that Radiant
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Energy will be well positioned to add to its Ukrainian oil and gas asset base
after the merger because of Carpatsky's reputation within the Ukrainian oil and
gas industry for providing capital and technology based upon its past
performance at the Bitkov and RC fields and Carpatsky's experience, knowledge
and relationships within Ukraine and its governmental agencies.
In addition, Radiant Energy will seek to develop a larger U. S. property
base as opportunities arise by the acquisition of interests in select fields or
projects or by the acquisition of independent companies unable to realize the
value of their assets through property divestitures or stock market values. This
will, to some degree, offer a balance in Radiant Energy's portfolio and modestly
reduce the overall exposure to the country risk of Ukraine.
Operations
Carpatsky's Oil and Gas Properties
Rudovsko-Chervonozavodskoye gas condensate field (RC field)
The RC field is located approximately 150 miles east of Kyiv in the Poltava
District of central Ukraine in the Dnieper-Donets basin. The basin is an
asymmetric, Paleozoic rift 500 miles by 125 miles in size, formed in three
different stages of development. The pattern and the formation of traps for
hydrocarbon accumulation is very similar to the Gulf of Mexico province, but the
basin fill is much older. Exploration commenced in the 1970s and to date more
than 200 oil and natural gas and gas condensate fields have been discovered.
However, a great number of prospective anticlinal structures between 14,760' and
18,000' remain as targets for further exploration.
RC field is the largest onshore natural gas and gas condensate field in
Ukraine. It lies in an area of low geographic relief at an elevation of 500 feet
above sea level. It consists of ten independent hydrocarbon bearing sandstone
reservoirs of Lower Carboniferous age between the depths of 13,776' and 18,696'.
From its discovery in 1987 to year end 1998, the field has produced some 61 Bcf
of gas and over 2 MMbls of condensate.
The joint activity has drilled and completed three wells. In August 1998,
production commenced with well No. 106 turned to sales at 7 MMcf/d. In February
1999, the second well, No. 109 was tested at rates that exceeded 10 MMcf/d and
was turned to sales on April 1st at 7 MMcf/d. The third well, No. 102 which
tested the deepest horizon in the field at depths greater than 19,000', was
perforated in May 1999 and tested under stabilized flow pressures in June at
rates up to 27.75 MMcf/d. This well was also turned to sales at 7 MMcf/d, which
flow rate, according to the Oil and Gas Institute of Ukraine, will allow for the
greatest ultimate recovery from the formation. A greater production level would
also strain the capacity of the field gathering system. An average of 56-58 bls
of condensate per day are being produced from wells Nos. 106 and 109. The
produced gas from all three wells is free of hydrogen sulfide, but contains 2-4
% carbon dioxide and 1-2% of nitrogen. Three other wells are currently being
drilled by the joint activity. Of these, two wells are in various stages of
completion and are expected to be put on production in 2000. The third well is
drilling in the western part of the field toward a proposed depth of 18,045'. It
is projected that the full development of the RC field will require the drilling
of more than 20 additional wells, each to the depths of approximately 17,000'.
The RC field is being developed under a joint activity agreement between
Carpatsky and Ukrnafta. Ukrnafta holds an exploration and pilot production
license to the approximately 46,700 acre RC field which will expire on March 30,
2003. The joint activity is managed by an eight member managing committee, four
members of which are nominated by Carpatsky and four by Ukrnafta. Composition of
the management committee is to be revised in every second year. Carpatsky is
entitled to receive 45% of the revenue subject to its payment of 50% of costs.
The actual percentage of Carpatsky's right to revenues is calculated quarterly,
based on the relative cumulative contributions of the participants as recorded
in the books of the joint activity. The contributions can be made in the form of
cash or in kind (materials, equipment and specific services rendered) to the
joint activity. Only the wells which were jointly drilled by the partners are
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included in the joint activity arrangement; however certain of the 14 previously
drilled wells in the field currently being operated and produced by a subsidiary
of Ukrnafta can be added to the joint activity in the future on the basis of
well by well agreements once these wells need workovers and investment to fund
such operations is provided by Carpatsky. We can make no assurance that these
wells will be added to the joint activity.
Bitkov-Babchensky oil field (Bitkov Field)
The Bitkov field is located in the western part of Ukraine, some 350 miles
east of Vienna, Austria. The geological term for this area is the Precarpathian
foredeep, extending from Poland in the northwest to Romania on the southeast.
The foredeep was formed by subsidence and has accumulated over 30,000' of
sedimentary cover. Over 40 oil and 50 gas fields were discovered in the region
during the 1950 to 1970 period. Most of the fields are associated with complex
over-thrusted anticlinal features and were discovered on the basis of surface
geology, gravity and magnetic surveys. The area is the oldest oil producing
region in Ukraine.
Bitkov field has the largest in place oil reserves in Ukraine, and has
produced approximately 60 MMbls to date. The reservoirs are mostly Oligocene
sandstones with various degrees of permeability and porosity which, in some
parts of the field, have been enhanced by natural fracture development. The
field's current daily production (baseline) is approximately 1,000 bls of oil
and 6 MMcf of associated gas. The largest single reservoir, holding
approximately 74% of the initial in place reserves, is the Glubinnaya fold, an
anticlinal structure at depths between 6,000 and 7,800 feet. Bitkov field is
complex, containing multiple sandstone reservoirs producing under a depletion
drive reservoir mechanism. The oil has high paraffin and asphaltine content
which has caused paraffin clogging in most of the producing wells.
Operations in the Bitkov field are carried on through Ukrcarpatoil Ltd., a
joint venture which was registered on April 18, 1995 to redevelop the field.
Owners of Ukrcarpatoil Ltd. are Ukrnafta and Carpatsky. A license to conduct a
20 year exploitation of the program was awarded to Ukrcarpatoil on July 27,
1995. According to the terms of the joint venture agreement the present
production (baseline) remains the property of Ukrnafta and 80% of the
incremental oil and associated gas production is the property of Ukrcarpatoil.
The profit from the sale of incremental production is to be shared 45% to
Carpatsky and 55% by Ukrnafta. During the first 10 years of the venture the
remaining 20% of production is allocated to Carpatsky in recognition of cost
recovery. There are various opportunities to increase production by workovers,
drilling new infill wells and by implementing a secondary recovery program.
Daily production to the joint venture interest is approximately 100 bbls oil and
500 Mcf of gas.
Office Facilities
Carpatsky currently maintains limited temporary office space on a rent free
basis at 1331 Lamar, Suite 1450, Houston, Texas 77010, provided by Bellwether.
Upon completion of the merger, the corporate offices will be located at the same
address and terms pursuant to which Radiant Energy will pay rent will be
determined.
In Ukraine, Carpatsky maintains the registered office of its subsidiary in
Kyiv at the offices of Ukrcarpatoil Ltd. The offices are at 7, Kudryovsky spusk,
254053 Kyiv, Ukraine. The rental costs of this office are included as an
operating cost of Ukrcarpatoil Ltd.
Competition
Competitive conditions in Ukraine are complicated by the country's evolving
political, legal and financial environment. Most major international oil
companies are awaiting the introduction of new oil and gas legislation which
will include a production sharing law and a new legal and tax framework. For the
near term, Radiant Energy's principal competitors include certain small foreign
independent oil and gas companies, mainly Canadian, and newly emerging local
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companies. As political, legal, tax and financial conditions in Ukraine become
stabilized and more favorable for foreign investment, Radiant Energy can
reasonably expect to face increased competition from other foreign firms.
In addition, the marketing of gas in Ukraine is heavily influenced by RAO
Gazprom, the Russian national gas company and the world's largest gas company.
RAO Gazprom currently provides 80% of the gas consumed in Ukraine and a
significant portion of the gas consumed in western Europe. Because of its market
share, gas prices in Ukraine can be effectively set by RAO Gazprom, whose export
prices are, in turn, influenced by the prices it charges for gas delivered to
western Europe.
Markets and Gas Marketing
During the 1992-1996 period, gas sales in Ukraine were conducted by state
enterprises including Ukrgrazprom (a state-owned monopoly of gas exploration,
production, transportation and marketing) and Ukrnafta (a partially privatized
monopoly of oil exploration, production and marketing). Ukrgrazprom sold all the
Russian and Turkmen gas deliveries to the country, its own production and a
portion of the gas produced by Ukrnafta. Ukrnafta sold directly to end users
only the gas it produced which was not marketed by Ukrgrazprom.
In 1996 the marketing of gas was conditionally demonopolised. A group of
established companies with wide commercial activities among which were the sale
of oil, refined products and lubricating products, started marketing gas. The
Cabinet of Ministers decided to divide the market among these companies by
geographical regions. Because most payments were in the form of barter, which
required the goods received in payment for natural gas sold, each company was
required to create dealer organizations to sell gas produced as well as dispose
of bartered goods received.
The privatization resulted in improved payments to RAO Gazprom, to the
detriment of Ukrnafta, Ukrgrazprom and others because, while the payments to RAO
Gazprom reduced Ukraine's debt to Russia, payments for gas produced by local
Ukrainian companies entirely stopped. In 1998 the Cabinet of Ministers suspended
regulation of regional market distribution creating intense competition among
the distributors.
In mid 1998 the Ukrainian government formed "Naftogazukrainy" (NAK), a
national joint stock company, to meet the gas needs of the entire population of
Ukraine and not only to settle and pay amounts due to suppliers in Russia and
companies producing gas in Ukraine, including Carpatsky, but also to provide for
payment of future deliveries in a timely manner. This has yet to be fully
accomplished and to date the joint activity has only received UAH 450,000 of
approximately UAH 11.0 million owed by NAK and its predecessor for gas purchased
by it from August 1998 to June 30, 1999.
Carpatsky has begun to use alternative marketing arrangements. One such
arrangement is a monthly gas auction market in Ukraine. This facility was
approved by the Council of Ministries and began operating in early 1999.
Ukrcarpatoil, Ltd. started selling Bitkov and RC field gas in August 1999 for
September deliveries and has become the second largest seller of gas in the
auction market. The joint activity gas from the RC field is marketed by
Ukrcarpatoil on a fee base arrangement. This facility is necessary because the
joint activity is not a legal entity and therefore is restricted from selling
gas at auction or dealing directly with end users. Ukrnafta, Carpatsky's partner
in the RC field, has been restricted by NAK, its parent company, from selling
its gas at auction, requiring it to sell all gas produced to NAK for which
payment has not been forthcoming. Since participating in the auction program,
Ukrcarpatoil has sold 45.5 million m3 (1.6 Bcf) of the joint venture's gas,
including December 1999 production of gas at an average price of UAH 122.0 per
1,000 m3 net of VAT ($0.77 per Mcf) of which it has received UAH 3.7 million
($822,200) in payments through November 23, 1999. While the monthly auction has
become a viable alternative to sell and receive payment for gas and continues to
grow in volume and prestige throughout Ukraine, it is not without problems.
During October 1999, Ukrcarpatoil sold approximately $250,000 of joint activity
gas to a major manufacturer who then filed the equivalent of bankruptcy.
Ukrcarpatoil's claim has been lodged with the appropriate authorities and a
payments program is now being negotiated.
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Carpatsky has been negotiating with gas purchasers in several foreign
countries to export its gas to them. This would help circumvent payment and
other problems. Officially NAK does not have authority to prohibit the export of
gas which is permitted by Ukraine law. However, an impediment arises in securing
transportation on the country's pipeline system. Ukrtransgaz, the carrier of gas
throughout the country, is a wholly-owned subsidiary of NAK and therefore NAK
indirectly controls gas exports. Ukrcarpatoil has secured approval from NAK to
transport the RC field gas to the borders of several surrounding countries
during 1999. Carpatsky expects approvals for 2000 and later years on similar
terms when applied for. Negotiations of a gas sales contract are ongoing with
major marketers and end users in Poland, Turkey and Hungary. In addition to the
price at which the gas is to be sold and the monthly volumes to be delivered,
these discussions also focus on liability for the Ukrainian pipeline
(transportation) fees and delivery points. Ukrcarpatoil intends to conclude a
gas sales contract with an internationally recognized, financially reputable and
operationally capable firm during 2000.
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REPUBLIC OF UKRAINE
Key Statistics
The following information regarding the Republic of Ukraine was derived
from sources believed to be accurate.
Official name: Republic of Ukraine
Total area: 233,000 Sq. Miles
Population: 50.09 million
Official language: Ukrainian(although Russian is mainly used in business)
Neighboring states: Russia, Moldova, Belarus, Poland, Romania, Slovakia,
Hungary
Currency: Hryvna (UAH)
Exchange rate: UAH 5.18=US$1
(National Bank of Ukraine official exchange rate,
December 31, 1999)
Current Status
Although Ukraine embraced the opportunity for national independence offered
by the collapse of the Soviet Union, it has been less willing to jettison the
political and economic practices of the Soviet era. In particular, parliament
and successive governments have been reluctant to back the structural reforms
required to transform the economy. As a result of mistakes in budget policy and
unfavorable government policy regarding foreign investors, the country has
endured seven consecutive years of steeply declining Gross Domestic Product
("GDP") and real incomes.
Officially, foreigners have the same rights to invest in Ukraine as
Ukrainian individuals and legal entities. Investments are protected against
illegal expropriation and foreign investors are guaranteed prompt and unimpeded
rights to repatriate profits. Foreign investors can participate in privatization
on the same basis as Ukrainian entities and individuals, however, restrictions
may be placed on all entities attempting to invest in stategic industries.
Although foreign investors have the right to participate in privatization
directly or through a licensed intermediary, privatization is dominated by
political considerations and the rules especially those governing foreign
participation, are often contradictory. In that there are more particular cases
than general cases, there is considerable scope for political interference in
the privatization process.
Ukraine - Political and Economic Context
Recent history
Ukraine became a part of the Soviet Union after the Russian Revolution.
Starting with President Khrushchev in the late 1950s, successive leaders sought
to improve the performance of the Soviet economy in the face of mounting
evidence of its inherent inefficiency. Limited reforms failed to address
systemic weaknesses, the economy stagnated, and living standards fell further
behind the West. Mikhail Gorbachev became leader of the Soviet Union in March
1985 and launched a series of far-reaching political and economic reforms known
as glasnost (openness) and perestroika (restructuring). However, the gradual
abandonment of central planning and other changes introduced under perestroika
led to worsening shortages and an intensification of inflationary pressure,
while discussion of political issues allowed under glasnost contributed to a
wider appreciation of the shortcomings of the Soviet system and more open
expression of nationalist aspirations. President Gorbachev tried to meet the
growing demands for independence by proposing the formation of a confederation
of quasi-independent states under Russian control (the Commonwealth of
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Independent States). Ukraine refused to join, stepped up its campaign for full
independence and on August 24, 1991 Ukraine proclaimed its independence. A
referendum on independence was held on December 1, 1991 with 90% of participants
in the referendum voting in favor of independence and the Republic of Ukraine
was established.
Political institutions
The Constitution of the new state was adopted in June 1996, when it was
ratified by Ukraine's parliament. The Constitution defines Ukraine as a unitary
democratic State and guarantees human and property rights. It establishes a
balance of power between the Executive and the Legislature (Parliament) with the
country headed by a President elected by popular vote for a maximum of two
consecutive five-year terms.
In terms of foreign policy, Ukraine focuses on fostering closer integration
with the West while preserving its traditional links with the countries of the
former Soviet Union. For defense purposes Ukraine is aligned with neither Russia
nor NATO. Soon after independence Ukraine proclaimed itself a nuclear weapons
free state and removed nuclear weapons sited on its territory. Reflecting its
importance and size, Ukraine is a member of the United Nations, the IMF, the
World Bank, the EBRD and the Council of Europe. It is also a member of NATO's
Partnership for Peace.
Greater ties with Russia have been one of the principal issues since the
break-up of the Soviet Union. In February 1999 Russia's Federation Council, the
upper house of parliament, ratified the "Treaty on Friendship, Co-operation and
Partnership," which recognizes the territorial sovereignty of Ukraine. On March
24, 1999, Ukraine's Parliament ratified an agreement with Russia regarding
Russia's Black Sea Fleet that officially allows Russia to use Sevastopol, the
deep water port on the Black Sea.
The most serious ethnic issue concerns the constitutional status of Crimea.
Crimea was part of the Russian Federation until 1954 when Soviet Union Premiere
Khrushchev transferred it to Ukraine to mark 300 years' union between the two
countries. In May 1992, the Crimean legislature adopted a new constitution
proclaiming the territory's independence but this was rescinded after Ukraine's
parliament threatened to impose an economic blockade. A new Constitution for the
Crimean peninsula was approved by Ukraine's parliament on January 12, 1999
allowing Crimea is to create its own national anthem, flag and crest. From time
to time there have also been ethnic conflicts between the residents of eastern
Ukraine who are predominantly native Russian speakers who have traditionally
been members of the Orthodox Church and the residents of western Ukraine who
have aggressively promoted the Ukrainian language and have traditionally been
members of the Eastern Rite Catholic Church.
Political developments
Initially Ukraine was slow to reform its political and economic system.
This was largely due to the conservative attitudes of members of the Soviet era
parliament and the country's former communist president. Although some
pro-reform policies were adopted, they were not always implemented because of
political differences between the president and parliament or because of
opposition from powerful interest groups such as managers of large state-owned
enterprises. In addition, there were frequent shifts in policy, and reforms were
obstructed and legislation distorted to favor certain interests.
Since his election in July 1994, President Leonid Kuchma has pushed a
comprehensive economic reform program, maintained financial discipline, and
tried to remove almost all remaining controls over prices and foreign trade.
Implementation of the President's economic agenda encountered considerable
resistance from parliament, entrenched bureaucrats, and industrial interests.
The March 1998 elections resulted in the largest group within the new
parliament being the Communists with 125 seats; although they do not have a
majority in parliament, they can block certain parliamentarian decision. At
present, the majority party in Parliament is unstable and depends on the
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temporary interests of other factions and groups. President Kuchma was reelected
in November 1999 for a six year term.
Administrative and economic reforms during the first eight months of 1998
saw an end to Ukraine's economic decline. Then, the turmoil in Asia and the
financial crisis in Russia caused a new regression in the economy. Tactics by
the government to counter the situation and the National Bank of Ukraine turned
out to be efficient; Ukraine managed to control the hryvna devaluation, avoid
the financial collapse that occurred in Russia and avoid bankruptcy.
Economic Context
Ukraine experienced severe macroeconomic instability during the first five
years of independence. GDP, industrial output and agricultural production all
fell steeply, and inflation was exceptionally high. In spring 1998, Ukraine was
cut off from its US$542 million IMF standby program as it failed to carry out
reforms. Thereafter, President Kuchma started to issue economic decrees to
reform the economy including agreement to implement the IMF requirements. On
September 10, 1998 the IMF disbursed the first US$257 million tranche of a new
US$2.2 billion, three-year loan. The disbursement of this first tranche allowed
the National Bank of Ukraine to strengthen its reserves.
Monetary Stabilization
Monetary policy was tightened in 1995 leading to a steady fall in the
monthly inflation rate during 1996 and 1997. Lower inflation, increasing foreign
currency reserves and growing confidence in the currency contributed to a stable
nominal exchange rate during the period January 1996 to September 1998. As a
consequence of the country's close links with Russia in combination with
incomplete reforms led, in September 1998, to a sharp drop in currency
valuation, high interest rates and rising inflation.
Privatization
The government and parliament have found it difficult to compromise on the
privatization of Ukraine's strategic enterprises, despite the obvious need to
generate cash for the budget and to improve industrial efficiency. The State
Property Fund ("SPF") has responsibility for, among other things, state-owned
companies currently undergoing privatization.
Mass privatization as practiced in Ukraine has attempted to avoid some of
the pitfalls that faced Russia's mass privatization "voucher" auction program:
o all the enterprises still owned by the state are divided into several
groups with different priority and rules of procedure for privatization.
o at present authorization for privatization certificates (equivalent to
Russian vouchers) is nearly accomplished. The SPF is forced by the
government to collect cash for the enterprises put on public bids.
o the positions of the workers of the enterprises are reasonably protected
and in many cases, workers or organizations established control the
ownership of companies.
o enterprise directors are limited to the preferential purchase of only 5% of
shares for certificates - plus an additional 5% for cash if they fulfil the
conditions of their privatization plans as approved by the SPF. This has
resulted in broadly dispersed ownership of Ukraine's major industrial
enterprises and has prevented enterprise directors from easily gaining a
controlling interest in their enterprises as happened in Russia.
o As Ukraine's mass privatization program took longer to complete than
Russia's program, this allowed the government to establish an independent
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Securities Commission in 1995 and, over the three years, to develop a legal
and regulatory framework to promote the rule of law in corporate
governance, stockholder rights and the secondary share market.
o Stockholders created through the mass privatization program are covered by
regulations governing the registration of share ownership.
o The international lenders - particularly the US government, the World Bank
and the IMF have been able to tie their loan conditions and technical
assistance directly to specific privatization targets, which the government
of Ukraine must meet in order to secure such financing and assistance.
The impact of Ukraine's mass privatization program can be assessed in terms
of the following strategic changes to Ukraine's economy:
o The State has given up majority ownership of 90% of its industrial
enterprises. Eighteen million Ukrainian citizens have become stockholders
and 60% of Ukraine's labor force work for privatized enterprises.
o In many cases, the new generation of investment fund managers who have
become major stockholders via the mass privatization program are putting in
place new enterprise directors and managers to replace holdovers from the
Soviet era and to introduce new management techniques
o State budget support for unprofitable enterprises has been greatly reduced
since the beginning of the mass privatization program.
o The shares of thousands of privatized enterprises have served as the basis
for the development of Ukraine's capital market including the establishment
of five stock exchanges and an active over-the-counter trading system.
The 1999 Privatization Program is intended to openly appeal to foreign
investors. The program's fundamental objectives are to "increase the level of
interest of international investors in Ukrainian enterprises" and to "establish
just and fair terms of privatization that would attract private, strategic
investors with long-term interests in developing and improving the performance
of Ukrainian enterprises."
Foreign Investment
General
In accordance with the Law of Ukraine On Foreign Investment Regime
effective April 25, 1996 the national regime of investment and business activity
applies to foreign investors. In most instances the law provides for the equal
treatment of foreign and Ukrainian-owned businesses, with restrictions applying
to certain industries. A company with foreign investments is defined as a
company where at least 10% of the paid up capital belongs to the foreign
investor.
Investment protection
Under current Ukrainian legislation the following guarantees are available
to foreign investors:
o protection for a period of 10 years against adverse changes to the
investment guarantees contained in the law;
o investments cannot normally be expropriated except for rescue
operations in the event of a national emergency. If such expropriation
does occur, foreign investors have a right to compensation based on
market prices and/or an auditor's evaluation;
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<PAGE>
o compensation for losses due to the negligence of state bodies; and
o the right to repatriate the original investment free of customs duty
in the event of termination of the investment.
Profit repatriation
Foreign investors are entitled to repatriate profit, income or other funds
relating to investments without any restrictions, after payment of any taxes due
on the profits. Foreign investors are guaranteed the right to the prompt and
unimpeded repatriation of profits and other funds from their investments in
Ukraine. Conversion of funds for repatriation is effected through the Ukrainian
Inter-bank Currency Exchange subject to the possession of a foreign registration
statement and confirmation of the amount of profit earned.
Environmental protection
Ukraine has adopted laws to prevent or reduce industrial pollution and
control harmful substances. Under the 1991 Environment Protection Act, companies
are required to keep records of harmful substances into the environment, their
compliance with targets for pollution control and the use of natural resources.
In general, legal entities usually have a duty to:
o conduct environmental audits before beginning industrial activity;
o comply with established environmental regulations and discharge
limits, including rules governing the disposal and handling of waste
and harmful substances; and
o pay compensation for use of natural resources and for pollution or
other damage caused to the natural environment.
Government Recognized Business Entities
Joint ventures
A joint venture can take the form of a company, which has a distinct legal
personality, or an unincorporated entity, which does not. However, it is treated
separately for tax purposes and its operating partner is required to file
separate reports in respect of the JV's operation. The activities of the
venture, the use of the property contributed by the parties to the JV, and the
distribution of profits generated by the venture are to be governed by the terms
of the JV agreement.
If an un-incorporated joint venture agreement is concluded between a
resident and a foreign entity, it must be registered with the state authorities.
The management of the venture is normally delegated to one of the parties.
Profits of a JV are subject to 30% withholding tax, and profits distribution is
treated as dividend payments for Ukrainian tax purposes.
Joint stock companies
A joint stock company is legal entity whose capital is divided into a
specified number of shares and which must have at least two shareholders. There
are two types of joint stock companies: "open" joint stock companies and
"closed" joint stock companies. Shares in an open joint stock company may be
offered to the general public and traded on a stock exchange, whereas ownership
of shares in a closed joint stock company is limited to the founding members.
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Limited liability companies
A limited liability company does not have shares in the usual sense.
Participants in the company own a percentage of the company's capital on the
basis of a written agreement between at least two founding members.
Representative offices
A foreign company can set up a representative office in Ukraine, which is
similar to an unincorporated branch, subject to registration with the state
authorities. The representative office does not constitute a legal entity and
operates in Ukraine on behalf of the foreign company it represents. A
non-resident company operating a representative office is deemed to be
conducting business activity in Ukraine through a permanent establishment and
may be subject to corporate profits tax unless protected by a double taxation
treaty.
Taxation
Ukraine's tax system is undergoing reforms, which are expected to be
completed by the year 2000 when a new tax code will be introduced. Currently,
the main business taxes include a corporate profits tax and a Value-Added Tax.
There are also numerous special charges and local taxes.
Introduction
A major reform of the tax system was undertaken in 1997. The reform aimed
at increasing government revenues by reducing the number of special tax
exemptions and simplifying and streamlining compliance procedures. Currently,
the principal business tax and compulsory payments in Ukraine include:
o Corporate profits tax;
o Value added tax;
o Various taxes on oil and gas;
o Payroll taxes;
o Excise taxes;
o Land tax; and
o Innovation fund charges.
In addition, there are 16 different local taxes that may be introduced,
rated and levied at the discretion of local authorities.
Corporate Profits Tax
The current corporate profits tax regime was introduced by the Corporate
Profits Tax Law effective July 1, 1997. Under the law, a uniform tax at the rate
of 30% applies to taxable profits earned by resident entities and permanent
establishments of foreign companies.
Taxable profits
Taxable profits are defined as adjusted gross income less allowable gross
expenses and depreciation charges. Gross income includes any sales income
received or accrued within a reporting period (i.e. quarter). Gross incomes is
deemed to be received at the earlier of shipping the goods or rendering services
to the customer, and receiving payment from the customer. Gross expenses include
any expense actually incurred or accrued in respect of the taxpayer's business
excluding non-allowable expenses specified by the law. Gross expenses are
recognized either at the date of payment to a supplier of the goods or services
or at the date of obtaining ownership of the same.
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Permanent establishments
The Ukrainian definition of a permanent establishment is a Ukrainian
resident business entity which has the authority to act in the name of a
non-resident entity and which results in civil rights and obligations for the
non-resident entity. A resident is defined as a legal entity or business entity
without a status of a legal entity (representative office) incorporated and
acting in accordance with Ukrainian legislation. Taxable profits of a Ukrainian
permanent establishment can be determined by the difference between the gross
taxable income (i.e. income attributable to the permanent establishment received
onshore or offshore) and allowable expenses incurred by the permanent
establishment (i.e. expenses incurred onshore).
Tax accounting loss carry forward
Tax returns must be filed on a quarterly basis. Resident taxpayers, are
required to pay tax in advance in monthly installments followed by the final
payment by the 20th day of the month following the reporting quarter. Resident
taxpayers can carry forward losses incurred during the reporting period to a
future reporting period for twenty quarters commencing with the quarter when the
loss occurred.
Value-added Tax ("VAT")
Subject to certain exceptions, a VAT is payable on the sale of goods, works
or services in Ukraine; and import of goods, works or services into Ukraine.
Generally, there is no VAT payable on the on export of natural gas, goods and
provision of works or services to be used outside Ukraine; sales of coal,
electricity and imported natural gas.
Accordingly, VAT is incurred at a rate of 16.67% for the value of the oil
and gas production sold (creating a VAT payable) and amounts paid for equipment,
drilling contractors and materials creating VAT credits. There is no VAT
obligation for the production sold outside of the borders of Ukraine (e.g.,
exported sales). Once a completed well is producing all the VAT paid for its
drilling and completion will be a credit against VAT due on revenues from
production sales. Thereafter, VAT on production (VAT payable) will not be due
until the producer fully offsets the accumulated VAT credits.
Tax reporting, liability and credit
A taxpayer's VAT liability equals the total amount of VAT collected within
a reporting period calendar month and arises on the earlier of the date of
shipping goods to a customer or the date of receiving payment from the customer.
A VAT credit is the amount that a taxpayer is entitled to offset against his VAT
liability in a reporting period. Rights to VAT credits will arise on the earlier
of the date of payment to the supplier or the date the VAT invoice is received.
Taxation on Oil and Gas
The following table summarizes the basic taxes applied to oil and gas
production in Ukraine.
<TABLE>
<CAPTION>
UAH per US equivalent per
-------------------------- ---------------------------
Ukraine Tax 1000m3 of gas Ton of Oil Mcf of gas bbl of oil
- ----------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Rental Payment .......................... 5.00 3.00 $ 0.142 $ 0.409
Minerals ................................ 0.67 1.64 $ 0.019 $ 0.224
Geologic Research and Exploration ....... 20.07 9.95 $ 0.568 $ 1.357
</TABLE>
Other taxes called: Innovation fund: calculated as 1% of production income
minus VAT:
Road fund: 1.2% of production income minus the VAT.
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Transportation cost of natural gas
There are two tiers of transport fees for gas. For export the
transportation cost is UAH 1.75 per 1000 M3 (or $.05 per Mcf) per each 100km
distance to the metering station at the border. If the gas is sold domestically,
the cost of transportation is UAH 10.63 per 1000 M3 (or $0.30/Mcf), regardless
of the distance transported. Other Taxes and Charges
Payroll taxes
Employers are required to pay the following payroll taxes for their
employees in Ukraine based on gross salary:
o 32% of an employee's gross salary to the Pension Fund;
o 4% of an employee's gross salary to the Social Security Fund; and
o 1.5% to the Unemployment Insurance Fund.
Currently the amount of salary exceeding UAH 1,000 per month is not subject
to payroll taxes.
Excise tax
An excise tax is applied to certain goods imported into, or produced in,
Ukraine, including gasoline and diesel fuel.
Land tax
Land tax is paid by the owners or users of land. The rate depends on the
nature and location of the land and is paid monthly in advance.
Innovation Fund charge
An Innovation Fund charge is paid by business entities monthly at the rate
of 1% of sales.
Special taxes
To raise funds for the payment of outstanding pensions at the end of 1998 a
1% charge based on the value of a foreign exchange transaction and payable to
the State Pension fund was introduced. The charge is payable by legal entities
and individuals carrying out foreign exchange transactions.
Repatriation tax
Five percent for those countries having a tax treaty with Ukraine and 15%
for those who do not. In that the U.S. Congress has yet to approve the treaty,
the expatriation tax with the United States is 15%.
Double Taxation Treaties
The Ukraine and the United States have entered into a double taxation
treaty which has not as yet been approved by the U.S. Congress in part because
Ukraine allows the existence of anonymous accounts. However, Ukraine continues
to honor the double taxation treaties of the former Soviet Union, including its
treaty with the United States.
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MATERIAL CONTRACTS BETWEEN PEASE AND CARPATSKY
On October 1, 1999 Pease and Carpatsky entered into an agreement whereby
Pease agreed to provide Carpatsky bookkeeping services and staff assistance with
regard to the accumulation and compilation of Carpatsky accounting records and
consolidated financial statements for the periods commencing January 1, 1996 and
ending September 30, 1999 or thereafter. The services provided by Pease will be
billed at agreed rates as provided in the agreement, plus out-of-pocket
expenses, only in the event the contemplated merger between Pease and Carpatsky
fails to close for any reason. This amount would be due and separate from any
amount that may be due by either party pursuant to the terms of the Merger
Agreement should the contemplated transaction fail to occur.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF PEASE
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.
<TABLE>
<CAPTION>
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)
- --------------------------- ---------------------- -------------------
<S> <C> <C>
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%
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)
</TABLE>
- ---------------------
(1) Shares are owned directly and beneficially unless stated otherwise.
(2) Includes 8100 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.
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<PAGE>
(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) Includes the holders' portion of the 8,865,665 shares of common stock which
will be issued in exchange for outstanding Series B convertible preferred
stock upon consummation of the merger with Carpatsky. There are presently
105,828 shares of Series B preferred outstanding which would be convertible
into 25,197,143 shares of Pease common stock under the conversion
provisions of our Articles of Incorporation applicable to the Series B
preferred stock. The Conversion Price would be based on a 25% discount to
the reported sales price of common stock, immediately prior to the time of
conversion.
(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.
(13) Percentages shown for the 10 beneficial owners of the Series B preferred
stock assume that the outstanding preferred stock is exchanged for
8,865,665 shares of common stock
DIRECTORS AND EXECUTIVE OFFICERS OF PEASE
Directors and Executive Officers
The following table sets forth the names and ages of our current directors
and executive officers, the principal offices and positions held by each person
and the date such person became a director or executive officer. The executive
officers 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
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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:
<TABLE>
<CAPTION>
Served as
Name Age Position With Pease Director Since
---- --- ------------------- --------------
<S> <C> <C> <C>
Patrick J. Duncan 37 President, Chief Financial Officer, 1995
and Director (Term Expires 2000)
Steve A. Antry 43 Director (Term Expires 2001) 1996
Stephen L. Fischer 40 Director (Term Expires 2001) 1997
Homer C. Osborne (2) 69 Director (Term Expires 2001) 1994
James C. Ruane (1)(2) 64 Director (Term Expires 2001) 1980
Clemons F. Walker (2) 59 Director (Term Expires 2000) 1996
</TABLE>
- -----------------------
(1) Member of the Audit Committee of the board of directors.
(2) Member of the Compensation Committee.
Pease's board of directors held 12 meetings during 1998. One meeting was
held by unanimous written consent signed by all directors without an actual
meeting and eleven were actual meetings at which all directors attended except
for Steve A. Antry who missed two meetings.
The Pease audit committee, consisting of James C. Ruane and then-director
William F. Warnick met once in 1998. 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.
The compensation committee of the Pease board of directors, consisting of
James C. Ruane, Homer C. Osborne, Clemons F. Walker and William F. Warnick, met
once in 1998. The functions of the compensation committee are to review
compensation of officers and employees and administer and award options under
all stock option plans of Pease.
Patrick J. Duncan has been the President of Pease since November 1998 and
Chief Financial Officer of Pease since September 1994, and Pease's 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 titles. Mr. Duncan was
an Audit Manager with HEIN + ASSOCIATES LLP, Certified Public Accountants, from
1991 until joining Pease as Pease's Controller in April 1994. From 1988 until
1991, Mr. Duncan was an Audit Supervisor with Coopers & Lybrand, Certified
Public Accountants. Mr. Duncan received a B.S. degree from the University of
Wyoming in 1985.
Steve A. Antry is founder and president of Beta Capital Group, Inc., a
financial consulting firm located in Newport Beach, California. Beta specializes
in advising emerging oil and gas exploration companies that have both capital
needs and market support requirements and was President until June 1997. In June
1997, Mr. Antry founded Beta Oil & Gas, Inc. and became its Chairman and
President. Prior to forming Beta Capital in 1992, Mr. Antry was an executive
officer of Benton Oil & Gas Company from 1989 to 1992 and a Marketing Director
for Swift Energy's income funds from 1987 to 1989. Mr. Antry is also a
registered representative with Signal Securities, Inc., a registered
broker/dealer, and has B.B.A. and M.B.A. degrees from Texas Christian
University.
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<PAGE>
Stephen L. Fischer joined Beta Capital Group, Inc., a financial consulting
firm located in Newport Beach, California, in March 1996 as Vice President.
Between 1991 and prior to joining Beta in 1996, Mr. Fischer was a Registered
Representative of Peacock, Hislop, Staley & Given, an Arizona based investment
banking firm. Since 1983, Mr. Fischer has held various positions in the
financial services industry in investment banking, retail, and institutional
sales, with a special emphasis on the oil and gas exploration sector. Mr.
Fischer has been a private investor in the oil and gas industry for over a
decade.
Homer C. Osborne was an officer and director of Garrett Computing System,
Inc., a petroleum engineering and computing firm, from 1967 until 1976, at which
time he organized Osborne Oil Company as a wholly-owned subsidiary of Garrett
Computing Systems, Inc. Mr. Osborne operated Osborne Oil Company as a separate
entity from 1976 until 1998, when he sold it. Mr. Osborne is currently retired.
James C. Ruane has owned and operated Goodall's Charter Bus Service, Inc.,
a bus chartering business representing Grey Line in the San Diego area, since
1958. Mr. Ruane has been an oil and gas investor for over 20 years.
Clemons F. Walker has been an independent financial consultant since August
of 1996. Prior to that he was employed as an investment banker and stockbroker.
Between 1978 and August 1995 Mr. Walker worked for Wilson Davis in Las Vegas,
Nevada when Presidential Brokerage purchased the Wilson Davis office in Las
Vegas and he continued to work for the surviving entity until August of 1996.
Since 1978 Mr. Walker has focused his efforts in investment banking by
supporting small-cap companies through assistance in private placements, public
offerings and other capital raising efforts. During his career, Mr. Walker has
organized, advised, facilitated, sold and participated in numerous debt and
equity transactions (both public and private) in a variety of industries,
including the oil and gas industry. Mr. Walker has a bachelor of arts degree in
Business Administration from Brigham Young University with a concentration in
Finance.
Executive Compensation
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 (1) Bonus Compensation Awards Options/SARs(#)
- --------------------- ----- ----------- ----- ---------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Patrick J. Duncan 1998 $104,370 None None None None
President and CFO (6) 1997 $ 79,791 $ 5,000 None None 24,500
1996 $ 65,548 $ 5,000(3) None None 2,900
Willard H. Pease, Jr. 1998 $108,303 $ 25,000 $150,000(4) None None
Former President and 1997 $ 93,270 $ 5,000 None None 25,000
Chief Executive Officer(4) 1996 $ 78,530 $ 5,000(3) $101,250(2) None 11,040
J.N. Burkhalter 1998 None None None None None
Former V.P. Engineering 1997 $ 84,790 None $138,050(5) None 3,500
and Production (5) 1996 $ 68,690 $ 5,000(3) None None 2,700
</TABLE>
- -----------------
(1) Includes $240 contributed by Pease each year to a qualified 401(k)
retirement plan.
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<PAGE>
(2) At December 31, 1995 Pease owed $60,000 to Mr. Pease. This loan was
unsecured, bore interest at 8% per annum and was originally due on January
31, 1996. On March 9, 1996 the board of directors agreed to change the
terms of the note to allow the note to be convertible into Pease's common
stock at $10.00 per share, the then current market rate, in exchange for a
one-year extension on the note. On December 16, 1996 Mr. Pease elected to
convert the note in its entirety, the note was canceled and Mr. Pease was
issued 6,000 shares of Pease's restricted common stock. The $101,250 shown
as other annual compensation represents the difference between the closing
sales price as reported by NASDAQ on December 16, 1996 and the conversion
price of $10.00 per share. No additional amounts have been shown as Other
Annual Compensation because the aggregate incremental cost to Pease of
personal benefits provided to Mr. Pease did not exceed the lesser of
$50,000 or 10% of his annual salary in any given year.
(3) On March 9, 1996 the board of directors granted Messrs. Duncan, Pease and
Burkhalter 500 shares each of Pease's common stock for prior services. The
shares were valued at $5,000, or $10.00 per share, which represented the
market price of Pease's common stock on the date of grant. The shares are
fully vested.
(4) In December 1998 Mr. Pease's employment with Pease was terminated. In
accordance with his amended employment agreement, Mr. Pease received a cash
payment of $150,000 for severance.
(5) Effective January 1, 1998, Mr. Burkhalter resigned his position as Pease's
V.P. of Engineering and Production in light of Pease's anticipated sale of
the Rocky Mountain assets. In connection with his resignation, Mr.
Burkhalter received total severance of $138,050 consisting of office
equipment and one vehicle valued at $5,850, and a future cash obligation of
$132,200. The cash obligation will be paid in monthly installments through
August 2000. This severance was granted by Pease, in part, pursuant to the
terms of an employment agreement dated December 27, 1994.
(6) Mr. Duncan was appointed by the board of directors as Pease's President on
an interim basis to succeed Pease. No additional amounts have been shown as
Other Annual Compensation because the aggregate incremental cost to Pease
for personal benefits provided to Mr. Duncan did not exceed the lesser of
$50,000 or 10% of his annual salary in any given year.
Option Grants in the Last Fiscal Year
There were no grants of stock options to the Named Executive Officers
pursuant to Pease's Stock Option Plans during the fiscal year ended December 31,
1998.
Aggregated Option Exercises in the Last Fiscal Year and the Fiscal Year-End
Option Values
Set forth below is information with respect to the unexercised options to
purchase Pease's common stock held by Named Executive Officers at December 31,
1998. No options were exercised during fiscal 1998.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
---- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Patrick J. Duncan None None 35,000/35,000 $0/0(1)
President and
Chief Financial Officer
Willard H. Pease, Jr. None None 50,000/50,000 $0/0(1)
Former President and
Chief Executive Officer
</TABLE>
- ------------------
(1) The value of the unexercised In-the-Money Options was determined by
multiplying the number of unexercised options (that were in other money on
December 31, 1998) by the closing sales of 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, 1998.
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<PAGE>
Option and Warrant Repricing
In February 1998 the board of directors repriced 20,000 options that had
been previously granted to Mr. Duncan from $27.50 to $17.50 per share. In
November of 1998 the board of directors repriced 10,000 options that had
previously been granted to Mr. Duncan from $17.50 to $5.00 per share.
In connection with the termination agreement with Willard H. Pease, Jr.,
the board of directors repriced 20,000 warrants previously granted to him from
$27.50 to $5.00 per share.
Employment Contract
Willard Pease, Jr.'s employment with Pease was terminated on December 7,
1998. Mr. Pease had been our President and Chief Executive Officer. Pursuant to
his amended employment agreement, Mr. Pease was paid $150,000 for severance and
signed a formal Severance and Termination Agreement which canceled any further
commitment.
We reaffirmed our Employment Agreement at an annual salary of $97,500 with
Patrick J. Duncan as our President and Chief Financial Officer dated December
27, 1994 by a letter agreement dated January 11, 1999. Upon termination or
change of control, Pease is obligated to pay Mr. Duncan two year's salary and to
repurchase all Pease stock then owned by Mr. Duncan at the higher of $25,000 Mr.
Duncan's cost, or the present fair market value.
Compensation of Directors
Our 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. All fees are paid with
our restricted common stock. Outside directors serving on the Executive
Committee receive a cash fee for the lesser of $75 per hour or $600 per day.
Effective August 31, 1999 we issued a total of 42,700 shares of common stock to
our non-employee directors as compensation for service through the date of
issuance. The number of shares issued was determined as a predetermined amount
for each meeting attended, which amount was then divided by the reported market
price for our common stock as of the date of the meeting.
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 A. 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 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 our common stock for $7.50 per share. For financial
reporting purposes, these warrants were valued at $294,000. Beta subsequently
assigned 40,000 of those warrants to other parties, including 10,000 to a
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<PAGE>
Richard Houlihan, a former director of Pease and 20,670 to Stephen Fischer, a
current director of Pease (Fischer is also a principal of Beta). In March 1997,
Pease granted Beta warrants to purchase an additional 10,000 shares of Pease's
common stock at $37.50 per share. For financial statement reporting purposes,
those warrants were valued at $60,000. All the warrants granted Beta expire in
April 2001.
Transactions with Other Directors During the Last Fiscal Year
In July 1998 our board of directors established an Executive Committee
designed to manage the significant aspects of Pease's business on a committee
basis. 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. Payments to
Mr. Warnick totaled $23,857 in 1999.
In May 1997 we entered into a consulting agreement with R. Thomas Fetters,
Jr., who also became a director of Pease in May 1997. The terms of the
consulting agreement provide for monthly cash payments of $4,000 plus
reimbursement for out-of-pocket expenses. Total amounts paid to Mr. Fetters in
1997 were $74,610 and $43,112 in 1998. In addition to the cash compensation Mr.
Fetters also received warrants to purchase 1,500 shares of our common stock at
$12.50 per share and warrants to purchase an additional 10,000 shares at $30.00
per share. The contract was terminated in August 1998 and Mr. Fetters resigned
as a Director in November 1998.
In July 1997, we acquired a 0.1% overriding royalty interest in the East
Bayou Sorrel Field from an entity that Homer Osborne, a director, was a
principal. The interest was acquired for $50,000, consisting of $40,000 cash and
315 shares of our common stock valued at $10,000. Mr. Osborne received all of
the common shares and $7,000 cash in the transaction.
Transactions with Former Officers
On December 7, 1998, our employment agreement with Willard H. Pease, Jr.
was terminated. Mr. Pease had been 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, J. N. Burkhalter resigned as our V.P. of
Engineering and Production in light of the anticipated sale of the Rocky
Mountain assets. In connection with this resignation, we entered into a
Retirement, Severance and Termination of Employment Agreement with Mr.
Burkhalter that provided for total severance of $138,050. The severance
consisted of office equipment and one vehicle valued at $5,850 and a cash
obligation of $132,200, paid in monthly installments through August 2000.
ELECTION OF DIRECTORS AT THE PEASE SPECIAL STOCKHOLDERS' MEETING
The following persons will be nominated for election to serve as directors
of Radiant Energy following the merger:
o B. Dee Davis
o Dr. Jack Birks
o Steve A. Antry
o Roland E. Sledge
o David A. Melman
o Leslie C. Texas
o J. P. Bryan
The business background of Mr. Antry is set forth on page 114 and the
business backgrounds of Messrs. Melman, Texas, Bryan and Dr. Birks are set forth
beginning on page 122.
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<PAGE>
B. Dee Davis. Mr. Davis joined Torch Energy Advisors Incorporated in 1990
and today is the Director-International Business Development. Beginning in 1976
and until joining Torch Energy, he has served in various financial and
administrative positions with privately and publicly held companies focused on
the oil and gas industry. He is a graduate of the University of Texas (B.B.A.,
1975) and the University of Houston (M.B.A., 1987). Mr. Davis is __ years of
age.
Roland E. Sledge. Mr. Sledge has been employed by Torch Energy Advisors
Incorporated as general counsel since 1983, and as a managing director (a
position equivalent to an executive vice president) and member of the board of
directors since 1996. Mr. Sledge is __ years of age.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF CARPATSKY
The following table sets forth certain information regarding the beneficial
ownership of Carpatsky's common stock and its Series A convertible preferred
shares, its only classes of voting securities as of January 1, 2000, by (i) each
of Carpatsky's directors and officers, and (ii) each person or entity who is
known to Carpatsky to own beneficially more than 5% of the outstanding common
stock or preferred stock with the address of each such person or entity.
<TABLE>
<CAPTION>
NAME, POSITION AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF OFFICER OR DIRECTOR BENEFICIAL OWNERSHIP(1) VOTING CLASS(2)
- -------------------------- ---------------------- --------------
<S> <C> <C>
J. P. Bryan, Chief Executive officer, director 113,450,520(3)(7) 60.78%
1331 Lamar Suite 1450
Houston, Texas 77010
Leslie C. Texas, President, director 4,569,987 2.64%
1331 Lamar Suite 1450
Houston, Texas 77010
David A. Melman, Executive Vice President, 3,310,833(4) 1.91%
director
1331 Lamar Suite 1450
Houston, Texas 77010
James D. Thomson, director 100,000 0.06%
1210, 606 4th St. SW
Calgary, Alberta T2P 1T1
Dr. Jack Birks, director 113,450,520(5)(7) 60.78%
1331 Lamar Suite 1450
Houston, Texas 77010
Robert Bensh, Vice President - 0 - 0.00%
1331 Lamar Suite 1450
Houston, Texas 77010
All Officers and Directors as a group 121,431,340(6)(7) 64.94%
(nine persons)
Bellwether Exploration Co. 113,450,520(7) 60.78%
1331 Lamar, Suite 1450
Houston, Texas 77010
James Calaway 5,094,400(8) 2.89%
1023 Heritage Drive
Carbondale, Colorado 81623
Carpe Fund 8,976,000(9) 5.12%
127 Peachtree St., Ste. 1551
Atlanta, Georgia 30303
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<PAGE>
<CAPTION>
NAME, POSITION AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF OFFICER OR DIRECTOR BENEFICIAL OWNERSHIP(1) VOTING CLASS(2)
- -------------------------- ---------------------- --------------
<S> <C> <C>
Eurosecurities Ltd. 4,787,570(10) 2.74%
c/o Grosvenor Trust Co.
Grosvenor House
33 Church Street
Hamilton, Bermuda HM12
Green Acres Enterprises, Inc. 9,011,186(11) 5.13%
7/F California Entertainment Bldg.
34-36 D'Aguilar Street, Central
Hong Kong, PRC
Torch Energy Advisors, Inc. 13,605,528(12) 7.58%
1221 Lamar, Ste. 1600
Houston, Texas 77010
Attention: B. D. Davis, Jr.
</TABLE>
- -----------------------
(1) Shares are owned directly and beneficially unless stated otherwise.
(2) Preferred stock and common stock vote together as a single class.
Accordingly, the percentages shown represent the percent of the total
voting shares outstanding, which consists of the sum of both the
common stock (77,728,263 shares) and the preferred stock (95,450,000
shares) outstanding, or 173,178,263 total shares.
(3) Mr. Bryan is Chairman, Chief Executive Officer and a director and
shareholder of Bellwether. He may be deemed to be a beneficial owner
of the Bellwether common and preferred stock, although he disclaims
any direct beneficial ownership.
(4) Includes 357,500 shares underlying a presently exercisable warrant.
(5) Dr. Birks is a director of Bellwether and may be deemed to
beneficially own the shares held by Bellwether. He disclaims direct
beneficial ownership of the Bellwether shares.
(6) Includes 12,156,544 shares owned directly, 357,500 shares underlying
presently exercisable warrants, and 95,450,000 shares of preferred
stock held by Bellwether held indirectly.
(7) Includes 4,569,987 common shares, 13,467,296 shares underlying
presently exercisable warrants and 95,450,000 shares of Series A
convertible preferred stock (100% of the outstanding shares in the
class) all of which Bellwether owns. The preferred stock entitles
Bellwether to 95.45 million votes.
(8) Includes 300,000 shares underlying presently exercisable warrants and
2.2 million shares issuable upon exchange of Series 1 Debenture and
880,000 shares underlying warrants which would be presently
exercisable only upon debenture exchange.
(9) Includes 2,000,000 shares underlying presently exercisable warrants.
(10) Includes 1,305,700 shares underlying presently exercisable warrants.
(11) Includes 2,529,586 shares underlying presently exercisable warrants.
(12) Includes 6,207,808 shares underlying presently exercisable warrants.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF CARPATSKY
Directors and Executive Officers
The following table sets forth the names and ages of the current directors
and executive officers of Carpatsky, the principal and positions with Carpatsky
held by each person and the date such person became a director or executive
officer of Carpatsky. Each year the stockholders elect all directors. The
executive officers of Carpatsky are elected annually by the Board of Directors
and 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 and any other person pursuant to which any
person was selected as an executive officer.
The directors and executive officers of Carpatsky are as follows:
<TABLE>
<CAPTION>
Name Age Position with Carpatsky Served as Director Since
---- --- ----------------------- ------------------------
<S> <C> <C> <C>
J. P. Bryan Chairman, Chief Executive Officer 1999
Dr. Jack Birks Director 1999
David A. Melman 57 Director 1999
Leslie C. Texas 59 President and Director 1995
James D. Thomson 46 Director 1997
</TABLE>
Bellwether has the right to appoint three additional directors to the
Carpatsky board under the terms of the agreement pursuant to which it acquired
the Carpatsky preferred stock.
Carpatsky's Board of Directors held three meetings during 1998. One meeting
was held by unanimous written consent signed by all directors without an actual
meeting and two were meetings attended by all directors.
Carpatsky has no other Board committees.
J. P. Bryan. Mr. Bryan has served as Chief Executive Officer of Bellwether
Exploration Company since 1999, and as a Director of Bellwether since 1997. Mr.
Bryan has been a director of Carpatsky since December 1999. From January 1995 to
February 1998, Mr. Bryan was Chief Executive Officer of Gulf Canada Resources
Limited. He was Chairman of the Board of Nuevo Energy Company from March 1990 to
December 1997, and was Chief Executive Officer of Nuevo from March 1990 to
January 1995. Mr. Bryan was also Chairman of the Board and Chief Executive
Officer of Torch and its predecessor from January 1985 to May 1997 and since
October 1998 has served as the Senior Managing Director of Torch. Mr. Bryan is
also a member of the Board of Directors of Republic Waste Industries.
Leslie C. Texas. Mr. Texas was born in Hungary and educated at Lorand
Eotvos University of Science in Budapest (MS Geology) and was employed as a
geologist with the Hungarian Oil & Gas Trust from 1964 to 1966. In 1967, he
moved to the US and studied Geophysics at Rice University, Houston. His
professional experience includes working for Signal Oil and Gas Company, Getty
Oil Company and, in 1978, creating and then managing L. Texas Petroleum, Inc., a
London Stock Exchange listed oil and gas company, which was sold in 1985. Mr.
Texas founded the predecessor of the Company in 1992. He is a certified
petroleum geologist and a certified professional geologist. He speaks Hungarian,
English, Russian, Ukrainian, Portuguese, Spanish and Italian.
Dr. Jack Birks. Dr. Birks has been a Director of the Bellwether Exploration
Company since 1988 and of Carpatsky since December 1999. He was Chairman of the
Board of Midland & Scottish Resources Plc. until September 30, 1997. He is life
President of British Marine Technology Limited. Dr. Birks served as Chairman of
the Board of North American Gas Investment Trust Plc. from 1989 until his
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<PAGE>
retirement in 1995; as Chairman of the Board of Charterhouse Petroleum Plc from
1982 to 1986; as Chairman of the Board of London American Energy Inc. from 1982
to 1988; as Vice Chairman of the Board of Petrofina (UK) Limited from 1986 to
1989; and as a Managing Director of the Board of British Petroleum Company Plc
from 1978 until his retirement in March 1982. He was appointed as a Director of
Gulf Indonesia Resources Limited in August 1997.
David A. Melman. Mr. Melman has served as a consultant to Carpatsky from
October, 1998 until completion of Carpatsky's, US $1 million private placement
in September 1999, when he was appointed Executive Vice President-Chief
Corporate Officer. He served as Executive Vice President and Director of XCL,
Ltd., a Louisiana based exploration and development company with properties and
operations in the People's Republic of China (1984- 1997). From June 1997 until
October 1998 Mr. Melman was an independent consultant to Cadiz Land Co. Inc.
(NASDAQ) and Saba Oil Company (AMEX). He has been a member of the boards of
directors of oil and gas companies listed on the American Stock Exchange, the
London Stock Exchange, the Canadian Venture Exchange and NASDAQ. Melman holds a
B.S. (Economics and accounting) from Queens College of the City University of
New York, a law degree from Brooklyn Law School (J.D.) and a Masters of
Law-Taxation from New York University Graduate School of Law (LLM).
James D. Thomson. Mr. Thomson is Canadian legal counsel to Carpatsky and
holds the degree of BA. History from the University of Calgary and LLB from the
University of Alberta. From June 1978 to October 1995 he was successively a
student-at-law, associate lawyer and partner of McManus Miles Davison,
Barristers and Solicitors (and predecessor firms), Calgary, Alberta, and from
November 1995 to present he has been a partner of McManus Thomson, Barristers
and Solicitors, of Calgary, Alberta.
In Ukraine Carpatsky maintains an office in Kyiv staffed with ten people,
all experienced oil and gas professionals. Included are petroleum engineers,
economists, geologists, gas marketing administrators and support staff. The
following is background information regarding the key employees in Ukraine:
A.V. Peday. Mr. Peday, age 47, General Director-Ukrcarpatoil Ltd. He is a
graduate of Kyiveconomic University with a degree in economics. Prior to joining
Ukrcarpatoil Ltd. in 1997 he worked for the Ukrainian Oil and Gas Institute
rising to the rank of head of the technical-economic department. Mr. Peday is
the author of most of the joint venture, joint activity and licensing agreements
in Ukraine created after 1991, including Carpatsky's Bitkov joint venture
licensing and RC field joint activity agreements. His present duties include the
general management of Ukrcarpatoil Ltd., the planning and economic analysis and
supervision of the joint activity operations, leading negotiations to comply and
resolve various issues between Carpatsky Ukrainian partners and government
organizations (Committee of Geology, Committee of Oil and Gas and its NAK). He
assists in all practical and bureaucratic matters (reporting, filings, tax
payments, etc.) relating to Carpatsky's representative office operations in
Ukraine.
A. F. Zamulko. Mr. Zamulko, age 47, is a graduate of Ivano Frankovsr
Institute of Oil and Gas and received his post graduate degree from the All
Soviet Oil Institute in Moscow, Russia, specializing in the development of oil
and gas fields in 1974. His entire career prior to joining Ukrcarpatoil Ltd. was
spent with the Oil and Gas Institute of Ukraine managing the department in
charge of the Pricarpathian oil and gas fields development. He joined
Ukrcarpatoil in 1996. His duties include analyzing well log, test data,
formulating development and drilling plans, calculating reserves, evaluating
various reservoir characteristics and providing the technical supervision for
the workover and development of the Bitkov field as well as the RC field
drilling and production operations. He coordinates this work with his former
colleagues, specialists at the Oil and Gas Institute.
M. V. Dvorsky. Mr. Dvorsky, age 60, graduated from the Iyano-Frankovsk
University with a degree in mechanical engineering (oil industry equipment) in
1967. Prior to joining Ukrcarpatoil in 1997 he was head of the Fuel-Energy
Department of the State Shareholding Co.-Ukrresource. His primary duties are the
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<PAGE>
marketing of gas and oil production from both fields. This involves locating
credit worthy buyers, selling gas and monitoring collection activities for
delivered gas. He also organizes and contracts transportation with Ukrtransgaz,
submits documentation to the National Commission which regulates electric energy
in the country and seeks approvals from NAK and other state organizations on
each transaction on a monthly basis, etc.
V.I. Kalitzun. Mr. Kalitzun, age 33, is a graduate of the Lvov State
University in 1990. He joined Ukrneft after graduation and became the head of
their marketing department. He joined Ukrcarpotoil in 1995 and was its first
Ukrainian employee as office manager and official representative of Carpatsky's
representative office in Kyiv. His office manager duties include the preparation
of visas and lodging for overseas technicians, personnel and other guests. He is
in charge of all purchases of office supplies, equipment and materials. He also
handles all customs declarations, duty payments, clearances, money transfers,
investment registration issues, preparation and translation of various
contracts, agreements, manuals and technical instructions. He also manages the
bartering of goods and the transportation, storage and sale of such of bartered
goods.
Executive Compensation
The Summary Compensation Table below shows certain compensation information
for services rendered in all capacities during each of the last three fiscal
years by the Chief Executive Officer and the only executive officer who received
salary, bonus or other compensation in excess of $100,000 (this individual is
collectively referred to herein as the "Named Executive Officer"). Mr. Texas was
the Chief Executive Officer until December 30, 1999 at which time he was
replaced as Chief Executive Officer by Mr. J. P. Bryan, Chief Executive Officer
of Bellwether. Mr. Bryan did not receive any compensation from the company in
1999. The following information for the Named Executive Officer 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> <C> <C> <C> <C>
Leslie C. Texas(1) 1998 $ 107,000 None None(2) None None
CEO and President 1997 $ 85,000 None None(2) None 400,000
1996 $ 60,000 None None(2) None None
</TABLE>
- ---------------------
(1) Mr. Texas was replaced as Chief Executive Officer by Mr. J. P. Bryan
on December 30, 1999. Mr. Texas remained as President.
(2) No additional amounts have been shown as Other Annual Compensation
because the aggregate incremental cost to Carpatsky for personal
benefits provided to Mr. Texas did not exceed the lessor of $50,000 or
10% of his annual salary in any given year.
Option Grants in the Last Fiscal Year
There were no grants of stock options to the Named Executive Officer
pursuant to Carpatsky's Stock Option Plans during the fiscal year ended December
31, 1998.
Aggregated Option Exercises in the Last Fiscal Years and the Fiscal Year-End
Option Values
Set forth below is information with respect to the unexercised options to
purchase Carpatsky's common stock held by the Named Executive Officer at
December 31, 1998. No options were exercised during fiscal 1998.
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<PAGE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End(#) at FY-End(#)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise(#) ($) Unexercisable Unexercisable
- ---- --------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Leslie C. Texas None None 261,112 $0/0(1)
</TABLE>
- ---------------------------
(1) The value of the unexercised In-the-Money Options was determined by
multiplying the number of unexercised options (that were in other money on
December 31, 1998) by the closing sales of Carpatsky's common stock on
December 31, 1998 (as reported by the Albert stock Exchange) and from that
total, subtracting the total exercise price. No options were in-the-money
at December 31, 1998. In December 1999, all outstanding options held by
officers or directors, including options held by Mr. Texas, were
surrendered and canceled. See "Certain Relationships and Related
Transactions."
Employment Contracts
There are no employment contracts between Carpatsky and its officers or
employee.
Compensation of Directors
Directors of Carpatsky do not receive compensation for acting as such.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General and Overview
All existing loans or similar advances to, and transactions with, officers
and their affiliates were approved or ratified by the independent and
disinterested directors. Any future material transactions with officers,
directors and owners of 5% or more of Carpatsky's outstanding common stock or
any affiliate of any such person shall be on terms no less favorable to
Carpatsky than could be obtained from independent unaffiliated third parties and
must be approved by a majority of the independent disinterested directors.
Transactions with Directors
Commencing in early 1996 Fred Hofheinz, who was then a director of
Carpatsky, extended a series of loans to Carpatsky and made payments directly to
creditors of Carpatsky. The loan balance reached a maximum of $637,368 in
December 1997 and was repaid from time to time as funds were made available to
Carpatsky. Mr. Hofheinz resigned as a director on November 30, 1999 and all
amounts due to him have been repaid.
Effective September 30, 1999 Clive Richards, a director of Carpatsky,
exchanged a debenture in the amount of $308,100 (inclusive of accrued interest
to February 28, 1999) for (1) 2,464,800 shares of common stock, (2) a warrant to
acquire 535,934 shares of common stock at U.S. $.20 per share on or before
December 31, 2000, and (3) as additional consideration, existing warrants to
acquire 1,040,000 shares of common stock were modified to (a) extend the
expiration date to December 31, 2000 and (b) reduce the exercise price from U.S.
$.25 to U.S. $.20. The terms of this exchange were the same as those offered to
all holders of Carpatsky's Series 1 Debentures, pursuant to which $780,000 of
the $1 million of principal value of outstanding debentures were converted into
an aggregate of 7,394,400 shares of common stock and warrants to purchase up to
3,900,000 additional shares. Mr. Richards resigned as a director on December 30,
1999 in connection with the Bellwether transaction.
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<PAGE>
Effective September 30, 1999, Torch Energy Advisors, Incorporated, to which
Carpatsky owed $1,391,368, including accrued interest under a convertible loan,
accepted Carpatsky's offer to reduce the conversion price in the loan agreement
from $.20 to $.125 per share and the loan was converted into 11,130,944 shares
of common stock. In connection with the guarantee of $500,000 of Torch's loan to
Carpatsky and a payment thereon, Torch assigned 4,533,224 shares of common stock
to Bellwether. At that same time, Torch received 800,000 shares of common stock
in payment of $100,000 in fees incurred for financial and administrative
services performed by Torch for Carpatsky over an 18 month period. Torch holds
9.5% of Carpatsky's common stock and, Carpatsky committed to add B. Dee Davis,
Jr., to its board of directors as a representative of Torch. As additional
consideration for conversion of the debt, Carpatsky issued a warrant entitling
Torch to purchase 2,375,104 shares of common stock at $.20 per share on or
before December 31, 2000. Torch assigned a warrant to acquire 967,296 of those
shares to Bellwether.
In the year ended December 31, 1998, Carpatsky paid fees of $61,000 to the
law firm of McManus and Thompson, of which Mr. Thompson, a director of
Carpatsky, is a senior partner.
On September 17, 1999, Messrs. Fred Hofheinz, Leslie C. Texas, Andrew
Burges and Larry Braun, then all directors of Carpatsky, purchased 583,334,
583,334, 1,000,000, and 1,000,000 shares of common stock respectively, in
Carpatsky's private placement at $0.075 per share. On September 30, 1999,
Messrs. Hofheinz and Texas, directors of Carpatsky, each purchased 1,583,333
shares of common stock at $0.075 per share to complete the private placement
described above. The shares received are restricted from re-sale for a period of
one year.
Upon completion of the private placement in 1999, David Melman received a
fee, computed in accordance with Canadian Venture Exchange guidelines, of
953,333 shares of common stock and warrants to purchase 357,500 shares of common
stock at $0.20 per share expiring on December 31, 2000. At that same time the
board of directors of Carpatsky (1) elected Mr. Melman as Executive Vice
President/Chief Corporate Officer, (2) awarded Mr. Melman cash compensation of
$72,500 in recognition of his services in arranging debt to equity exchanges and
conversions of which $20,000 has been paid and (3) committed to issue to 2
million shares of Carpatsky common stock to Mr. Melman upon completion of the
merger with Pease. Subsequently, and with approval of the Canadian Venture
Exchange, Carpatsky issued these shares to Mr. Melman in connection with the
Bellwether transaction.
In December 1999 Carpatsky issued a total of 600,000 common shares to its
then current and one former director as compensation for past services. As a
condition of the issuance, all stock options held by the directors were
surrendered. The transaction was approved by the Canadian Venture Exchange.
In December 1999, Bellwether Exploration Company purchased 95.45 million
shares of a newly issued class of Carpatsky preferred shares and warrants to
purchase 12.5 million Carpatsky common shares for one year at an exercise price
of US$.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. The preferred shares vote as a class with the common shares
of Carpatsky on all matters submitted to stockholders, 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 as temporary
members of Carpatsky's board of directors to comply with applicable law which
requires that a majority of the directors of an Alberta corporation be residents
of Canada. Mr. Bryan also was elected Carpatsky's Chief Executive Officer.
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<PAGE>
In the re-domestication and merger, the Bellwether preferred shares will be
converted into 102.41 million shares of Radiant Energy preferred stock. 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 Radiant Energy
stockholders, 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 following completion of the merger.
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DESCRIPTION OF CAPITAL STOCK
Pease is presently authorized to issue 4,000,000 shares of $0.10 par value
common stock and 830,000 shares of preferred stock, $0.01 par value of which
145,300 shares are designated as Series B 5% PIK Cumulative Convertible
Preferred Stock ("Series B preferred"), and 684,700 shares are undesignated. As
of the date of this proxy statement and prospectus there were outstanding
1,731,398 shares of common stock, warrants to purchase up to 222,831 shares of
common stock, 105,828 shares of Series B preferred and options to purchase up to
78,230 shares of common stock.
Following the merger and adoption of the Amended and Restated Articles of
Incorporation, Radiant Energy will be authorized to issue 150,000,000 shares of
common stock, of which approximately 55.4 million shares will be issued and
outstanding and 200,000,000 shares of undesignated preferred stock of which
102.41 million share will be designated as Class A preferred and will be
outstanding and held by Bellwether.
Common Stock
Holders of shares of common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders. Except as may be required by
applicable law, holders of common stock will not vote separately as a class, but
will vote together with the holders of other classes of capital stock. There is
no right to cumulate votes in the election of directors. A majority of the
issued and outstanding common stock constitutes a majority of the outstanding
shares is required to effect certain fundamental corporate changes such as
liquidation, merger or amendment of the Articles of Incorporation.
Holders of shares of common stock are entitled to receive dividends, if,
as, and when declared by the board of directors out of funds available therefor,
after payment of dividends required to be paid on outstanding shares of
preferred stock. Upon liquidation, holders of shares of common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to the liquidation preference rights of any outstanding shares of
preferred stock. Holders of our common stock have no conversion, redemption or
preemptive rights. The rights of the holders of common stock will be subject to,
and may be adversely affected by, the rights of the holders of preferred stock.
The outstanding shares of common stock are and all shares of common stock issued
in the merger and the exchange will be, fully paid and nonassessable.
Preferred Stock
The board of directors has the power, and will have the power under the
Amended and Restated Articles of Incorporation, without further action by the
holders of the common stock, to designate the relative rights and preferences of
our preferred stock, when and if issued. Such rights, privileges 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
the Series B preferred, all of which will be exchanged and retired upon
completion of the merger.
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 other rights or qualifications as are determined by
resolution of the board of directors of Radiant Energy. The board of directors
of Pease has designated the Class A preferred stock which will be issued to
Bellwether in the merger, once the Amended and Restated Articles of
Incorporation are filed and become effective.
Series B Preferred
We designated 145,300 shares of Series B preferred in 1997. There are
105,828 shares issued and the balance are reserved for issuance as 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
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amount may be paid, at our election, in cash or in kind. Each share issued as a
PIK dividend shall be valued at $50. The dividend is cumulative to the date of
payment. The Series B preferred has a liquidation preference equal to $50 per
share plus any unpaid dividends ("Liquidation Preference").
The Series B preferred is convertible at the option of a holder into a
number of shares of our common stock determined by dividing the Liquidation
Preference by the Conversion Price in effect at the time of conversion. The
effective "Conversion Price" at the time of any conversion is the lowest
reported public sales price for our common stock during the five trading days
prior to receipt of a notice of conversion from a holder, reduced by a discount
of 25%. Based on the applicable provisions, the outstanding Series B preferred
would be convertible into approximately 25,197,143 shares of Pease common stock
as of December 31, 1999, using the applicable reported sales price for common
stock of Pease.
The Series B preferred is non-voting and must be redeemed by us on December
31, 2002 at a price equal to the Liquidation Preference. We may require holders
of all outstanding Series B preferred to convert their shares into our common
stock at any time in accordance with the above provisions relating to
conversion.
Under certain circumstances, upon a decision by a holder to convert Series
B preferred shares into our common stock at a time when the average last sale
price for common stock for the 20 trading days prior to conversion is lower than
$1.75, we will have the option to repurchase the preferred stock being
converted. Upon such election, the repurchase price would be (a) $50 per share
of Series B preferred with certain adjustments, (b) any accumulated unpaid
dividends through the date of repurchase and (c) a premium equal to $50 times
the discount set forth above.
Pursuant to the terms of Exchange Agreements dated August 31, 1999, the
holders of the Series B preferred have agreed (i) that dividends will not
cumulate or be paid through the completion of the merger and (ii) that the
holders will exchange their shares of Series B preferred for an aggregate of
8,865,665 shares of common stock of Radiant Energy at or before the effective
time of the merger. After the exchange, there will be no Series B preferred
outstanding and we will retire all the stock of the class.
Class A Preferred
In the merger, we will issue 102,410,000 shares of Radiant Energy's newly
created and designated Class A preferred stock to Bellwether.
We will pay dividends on the Class A preferred stock on an as "converted
basis." This means that if we declare a dividend to our common stockholders, we
will declare a dividend to the holders of preferred stock equal to the amount
they would have been entitled to receive if they had converted their preferred
stock.
Holders of the Class A preferred stock will vote as a class with the
holders of our common stock on all matters submitted to our stockholders. Each
holder will be entitled to one vote for each share of preferred stock owned.
Because there are more shares of preferred stock outstanding than common stock,
the holders of preferred stock will control all matters submitted to Radiant
Energy stockholders. If we issue additional shares of common stock, we are
obligated to issue, as a dividend to holders of preferred stock, the same number
of shares of preferred stock. Therefore, the holders of the preferred stock will
have the right to vote a majority of shares submitted to holders of common
stock. We have agreed not to issue capital stock with voting rights other than
our common stock and the Class A preferred stock.
The preferred stock is convertible into common stock. Initially, the
preferred stock will be convertible into 28,920,984 shares of our common stock,
representing approximately 34.25% of our shares of common stock if all of our
outstanding convertible securities, options and warrants were converted into
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common stock. The number of shares of common stock to be received upon
conversion of the preferred stock will be adjusted if
o we split or recombine our common stock;
o we issue shares of our common stock or shares convertible into
our common stock at less than the market price of the stock;
or
o we merge or consolidate with another entity.
The preferred stock may be converted only if a majority of the holders of
preferred stock agree to convert their shares. If a majority elect to convert
their shares, all shares of preferred stock must be converted. In addition, the
preferred stock automatically converts into common stock on December 30, 2004,
unless converted prior to that date. Bellwether will hold all of the outstanding
preferred stock following the merger.
If we dissolve, the holders of preferred stock are entitled to a nominal
preference payment, and then they will participate in the liquidating
distribution on an as converted basis.
Certain Provisions of the Articles of Incorporation, Bylaws and Nevada Law
Our board of directors will have the authority to issue shares of new
classes of preferred stock and to determine the rights, preferences, privileges,
designations and limitations of any preferred stock it may issue, including the
dividend rights, dividend rate, conversion rights, voting rights, terms of
redemption and other terms or conditions. This authority could make it more
difficult for a person to engage in, or discourage a person from engaging in, a
change in control transaction without the cooperation of management of Radiant
Energy.
Our Amended and Restated Articles of Incorporation contain a provision,
authorized under Nevada law, which limits the liability of our directors or
officers for monetary damages for breach of fiduciary duty as an officer or
director other than for intentional misconduct, fraud or a knowing violation of
law or for payment of a dividend in violation of Nevada law. Such provision
limits recourse for money damages which might otherwise be available to Radiant
Energy or stockholders for negligence by individuals while acting as officers or
directors. The Amended and Restated Articles of Incorporation do not provide for
the elimination of, or any limitation on, the personal liability of directors
for:
o Any breach of the director's duty of loyalty to Radiant Energy or its
stockholders,
o Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o Unlawful corporate distributions, or
o Any transaction from which such director derives an improper personal
benefit.
Although this provision would not prohibit injunctive or similar actions
against directors or officers, the practical effect of such relief would be
limited.
Our Amended and Restated Articles of Incorporation and our bylaws also
contain provisions requiring Radiant Energy to indemnify officers, directors and
certain employees for certain liabilities incurred in connection with actions
taken on behalf of Radiant Energy, including expenses incurred in defending
against such liabilities. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of Radiant Energy pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
The merger agreement provides that Radiant Energy will, from and after the
effective date of the merger, indemnify, defend, and hold harmless the present
and former officers, directors, employees, and agents of Carpatsky and of Pease
in respect of acts or omissions occurring on or before the effective date of the
merger, in each case to the full extent Radiant Energy is permitted under Nevada
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law, the amended and restated articles of incorporation, Carpatsky articles of
incorporation, or the Carpatsky bylaws or any indemnification agreement to which
Carpatsky is a party, in each case as in effect on the date of the merger
agreement.
Anti-Takeover Statutes
The Nevada General Corporation Law ("Nevada GCL") contains two provisions,
described below as "Combination Provisions" and the "Control Share Act," that
would make more difficult the accomplishment of unsolicited or hostile takeover
transactions.
Restrictions on Certain Combinations Between Nevada Resident Corporations
and Interested Stockholders. The Nevada GCL includes certain provisions (the
"Combination Provisions") prohibiting certain "combinations" (generally defined
to include certain mergers, disposition of assets transactions, and share
issuance or transfer transactions) between a resident domestic corporation and
an "interested stockholder" (generally defined to be the beneficial owner of 10%
or more of the voting power of the outstanding shares of the corporation),
except those which are approved by the board of directors before the interested
stockholder first obtained a 10% interest in the corporation's stock. There are
additional exceptions to the prohibition, which apply to combinations if they
occur more than seven years after the interested stockholder's date of acquiring
shares. The Combination Provisions apply unless the corporation elects against
their application in its original articles of incorporation or an amendment
thereto, or in its bylaws. Radiant Energy's Amended and Restated Articles of
incorporation contain a provision electing not to be covered by the Combination
Provisions of the Nevada law.
Nevada Control Share Act. Nevada's Control share Acquisition Act (the
"Control Share Act") imposes procedural hurdles on and curtails greenmail
practices of corporate raiders. The Control Share Act temporarily
disenfranchises the voting power of "control shares" of a person or group
("Acquiring Person") purchasing a "controlling interest" in an "issuing
corporation" (as defined in the Nevada GCL) not opting out of the Control Share
Act. In this regard, the Control Share Act will apply to an "issuing
corporation" unless, before an acquisition is made, the articles of
incorporation or bylaws in effect to the 10th day following the acquisition of a
controlling interest provide that it is inapplicable. Radiant Energy's Amended
and Restated Articles of Incorporation currently contain a provision electing
not to be covered by the Control Share Act of the Nevada law.
Under the Control Share Act, an "issuing corporation" is a corporation
organized in Nevada which has 200 or more stockholders, at least 100 of whom are
stockholders of record (which for this purpose includes registered and
beneficial owners) and residents of Nevada, and which does business in Nevada
directly or through an affiliated company. The status of Radiant Energy and its
stockholders at the time of the occurrence of a transaction governed by the
Control Share Act (assuming that Radiant Energy's Amended and Restated Articles
of Incorporation have theretofore been amended to delete the opting out
provisions) would determine whether the Control Share Act is applicable.
The Control Share Act requires an Acquiring Person to take certain
procedural steps before he or it can obtain the full voting power of the control
shares. "Control shares" are the shares of a corporation (1) acquired or offered
to be acquired which will enable the Acquiring Person to own a "controlling
Interest, " and (2) acquired within 90 days immediately preceding that date. A
"Controlling interest" is defined as the ownership of shares which would enable
the Acquiring Person to exercise certain graduated amounts (beginning with 1/5)
of all voting power of the corporation. The Acquiring Person may not vote any
control shares without first obtaining approval from the stockholders not
characterized as "interested stockholders" (as defined in the act).
The Control share Act permits a corporation to redeem the control shares in
the following two instances, if so provided in the articles of incorporation or
bylaws of the corporation in effect on the 10th day following the acquisition of
a controlling interest: (1) if the Acquiring Person fails to deliver the
Offeror's Statement to the corporation within 10 days after the Acquiring
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Person's acquisition of the control shares; or (2) an Offeror's Statement is
delivered, but the control shares are not accorded full voting rights by the
stockholders. Radiant Energy's Amended and Articles of Incorporation and Bylaws
do not address this matter.
Transfer Agent and Registrar
American Securities Transfer & Trust, Inc., Denver, Colorado, 80201, serves
as the transfer agent and registrar for our common stock and will be the
transfer agent for Radiant Energy common stock. Radiant Energy will act as the
initial transfer agent for the Radiant Energy preferred stock.
MARKET FOR PEASE'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Market Price Information
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. Carpatsky stock is listed for trading on the Canadian
Venture Exchange under the symbol "KPY." The following table sets forth the high
and low reported closing prices per share of Pease common stock and for
Carpatsky common stock for the quarterly periods indicated, which correspond to
the fiscal quarters for financial reporting purposes.
<TABLE>
<CAPTION>
Pease Carpatsky
Common Stock(a) Common Stock(b)
------------------- ------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1997:
First quarter............................................. 35.63 25.00 0.26 0.11
Second quarter ........................................... 38.44 21.88 0.29 0.17
Third quarter ............................................ 30.63 24.38 0.30 0.19
Fourth quarter ........................................... 35.00 15.00 0.29 0.08
1998:
First quarter ............................................ 19.69 8.44 0.25 0.14
Second quarter ........................................... 13.75 6.56 0.24 0.10
Third quarter ............................................ 7.50 1.25 0.17 0.04
Fourth quarter ........................................... 3.13 0.81 0.14 0.04
1999:
First quarter ............................................ 1.00 0.41 0.07 0.03
Second quarter ........................................... 0.70 0.41 0.14 0.03
Third quarter ............................................ 0.63 0.44 0.14 0.03
Fourth quarter ........................................ 0.45 0.25 0.14 0.03
2000:
First quarter through ________ ...........................
</TABLE>
- ----------------
(a) Adjusted to give effect to a 10 into 1 reverse stock split in the fourth
quarter of 1998.
(b) Adjusted to reflect U.S. dollars using the applicable exchange rate in
effect at the end of each quarter.
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Neither Pease nor Carpatsky has paid dividends nor is there any intention
to pay dividends in the foreseeable future. As of January 1, 2000, Pease had
approximately 1,100 registered holders of its common stock and Carpatsky had 164
registered holders of its common stock.
COMPARISON OF RIGHTS OF HOLDERS OF CARPATSKY, PEASE AND
RADIANT ENERGY COMMON STOCK
The following is a summary of the material differences between the rights
of holders of Carpatsky common stock and the rights of holders of common stock
of Pease prior to the merger and of Radiant Energy following the merger.
Carpatsky is organized under the laws of the province of Alberta, Canada and
Pease presently is, and Radiant Energy will be, organized under the laws of the
state of Nevada. As a result, there are differences between the respective state
laws and various provisions in their respective corporate charters and bylaws.
Upon completion of the merger, holders of Carpatsky common stock will become
stockholders of Radiant Energy (except to the extent any such holders may be
compensated through the exercise of appraisal rights), at which time their
rights will be governed by Nevada law, the Amended and Restated Articles of
Incorporation of Radiant Energy and the Radiant Energy bylaws. The bylaws of
Pease before the merger will be the bylaws of Radiant Energy following the
merger.
This summary is not intended to be an exhaustive or detailed description of
the provisions discussed. The summary is qualified in its entirety by reference
to the Nevada General Corporation Law and the Business Corporations Act
(Alberta). See "Description of Capital Stock" for a summary of a number of other
rights relating to Radiant Energy common and preferred stock.
The material differences that affect the rights and interests of
stockholders of Carpatsky and Pease are as follows:
Authorized capital stock
The authorized capital stock of Pease presently is 4,000,000 shares of
common stock, par value $0.10 per share, and 830,000 shares of preferred stock,
par value $0.01 per share, of which 145,300 have been designated as Series B 5%
PIK Convertible Preferred Stock.
Carpatsky is authorized to issue an unlimited number of common and
preferred shares without par value.
Under the Amended and Restated Articles of Incorporation of Radiant Energy,
the authorized capital stock will be 150,000,000 shares of common stock, par
value $0.001 per share and 200,000,000 shares of preferred stock without par
value.
Number of directors
Under Nevada law, a corporation's board of directors consists of at least
one person, and the number of directors must be set forth in either the Bylaws
or the Articles of Incorporation and may be either a fixed or variable number.
The Articles of Incorporation for Pease presently specify that there should be
no fewer than three nor more than eleven directors, as fixed in the Bylaws.
Pease presently has eight directors and one vacancy. The Amended and Restated
Articles of Incorporation for Radiant Energy provide that there shall be no
fewer than five nor more than eleven directors and the Bylaws specify a board of
directors of seven members.
Under the law of Alberta, a corporation's board of directors consists of at
least one person and the number of directors must be set forth in the Articles
of Incorporation and may be either a fixed or variable number. Under the law of
Alberta, a corporation that has distributed securities to the public must have
at least three directors, at least two of whom are neither officers nor
employees of the corporation or its affiliates. Carpatsky presently has seven
directors.
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Classified board
Nevada law provides that the board may be divided into one to four classes
with one class of directors elected at each annual meeting of stockholders. The
number of classes must be stated in either the articles or the bylaws. The Pease
Articles presently provide, and the Amended and Restated Articles of Radiant
Energy will provide, that the directors, other than directors who may be elected
by the holders of any outstanding series of preferred stock, shall be classified
into three classes, as nearly equal in number as possible. Each class will be
elected for a term expiring in the third year after election. As a result of the
classification, holders of Radiant Energy common stock will in the future elect
approximately one-third of the directors at each annual meeting of stockholders
for a three year term.
Alberta law permits the Articles of Incorporation to provide for the
election of directors for terms expiring not later than the close of the third
annual meeting of shareholders following their election and for the election of
directors by creditors or employees of the corporation or by a class or classes
of those creditors or employees. The Articles of Carpatsky contain no such
provisions therefore all incumbent directors cease to hold office at the close
of the annual general meeting of shareholders following their appointment unless
successor directors are not elected at the meeting, in which case the incumbent
directors continue to hold office until their successors are elected.
Vacancies on the board.
Nevada law provides that, unless the governing documents control the
filling of vacancies and newly-created directorships, these positions may be
filled by a majority of the remaining directors then in office (though less than
a quorum of the directors). If the articles of incorporation allow any class or
classes of stock to elect one or more directors, vacancies and newly-created
directorships within a class may be filled by a majority of the remaining
directors elected by that class or by the sole remaining director of that class.
If a corporation has no directors in office, then any officer or any stockholder
or any person or entity responsible for a stockholder may call a special meeting
of stockholders, or may apply to the district court for a decree ordering an
election.
The Pease Bylaws provide that vacancies on the Pease board of directors
will be filled by a vote of the majority of the remaining directors.
Under the law of Alberta, a quorum of directors may fill a vacancy among
the directors, except a vacancy resulting from an increase in the number or
minimum number of directors or from a failure to elect the number or minimum
number of directors required by the articles. If there is not a quorum of
directors, or if there has been a failure to elect the number or minimum number
of directors required by the articles, the directors then in office must
forthwith call a special meeting of shareholders to fill the vacancy and, if
they fail to call a meeting or if there are no directors then in office, the
meeting may be called by any shareholder.
Removal of directors
Nevada law provides that any director or the entire board may be removed,
with or without cause, by the holders of a two-thirds majority of the shares
then entitled to vote at an election of directors, unless a larger percentage is
specified in the Articles.
The Pease Articles of Incorporation provide, and the Amended and Restated
Articles of Incorporation of Radiant Energy will provide, that subject to the
rights, if any, of any series of outstanding preferred stock to elect directors
and to remove any director whom the holders of such stock have the right to
elect, any director (including persons elected by directors to fill vacancies in
the board of directors) may be removed from office only for cause. The term
"cause" with respect to the removal of any director shall mean (i) conviction of
a felony or plea of nolo contendere after a charge of felony, (ii) declaration
of unsound mind by an order of a court of competent jurisdiction, (iii) gross
dereliction of duty, (iv) commission of action involving moral turpitude, or (v)
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commission of an action which constitutes intentional misconduct or a knowing
violation of laws, if such action in either event results in a material injury
to the corporation.
Alberta law provides that any director or the entire board may be removed,
with or without cause, by ordinary resolution (a resolution passed by a majority
of the votes cast by the shareholders who voted in respect of the resolution) at
a special meeting of shareholders unless otherwise provided in the Articles or
any unanimous shareholders agreement. There is no unanimous shareholders
agreement governing Carpatsky and its Articles do not contain any provisions
relating to the removal of directors.
Action by written consent of stockholders
Nevada law provides that unless other provisions in the articles of
incorporation, any action that may be taken at a meeting of stockholders may
take action without a meeting, without prior notice and without a vote, if the
holders of outstanding stock have a not less than minimum number of votes that
would be necessary to authorize such action at a meeting at which all shares
entitled to vote thereon were present and vote sign a written consent setting
forth the action taken. The Pease Articles and Bylaws and the Amended and
Restated Articles of Radiant Energy contain no provision limiting the right of
stockholders to take action by written consent.
Under Alberta law, shareholders may pass a resolution without a meeting,
without prior notice and without a vote, if all the shareholders entitled to
vote on that resolution sign a resolution in writing.
Special meeting of stockholders and shareholders
Nevada law permits special meetings of stockholders to be called by the
board of directors and such other persons, including stockholders, as provided
in the articles of incorporation or bylaws. Pease Bylaws provide that a special
meeting of stockholders may be called for any purpose by either:
o the chairman of the board, the president or the Pease board of
director; or
o the president or secretary upon written request of either a majority
of the directors or stockholders holding at least 10% of the issued
and outstanding shares entitled to vote.
Alberta law provides that the board of directors must call an annual
meeting of shareholders not later than 15 months after the holding of the last
preceding annual meeting and may at any time call a special meeting of
shareholders. In addition, the holders of not less than 5% of the issued shares
of a corporation that carry the right to vote at a meeting sought to be held may
requisition the directors to call a meeting of shareholders for the purposes
stated in the requisition. On receiving the requisition, the directors must,
except in limited circumstances, call a meeting of shareholders within 21 days,
in default of which any shareholder who signed the requisition may call a
meeting. Meetings of shareholders may also be called by the Court of Queen's
Bench of Alberta for any reason that the Court thinks fit.
Amendment of articles
Under Nevada law, a corporation's board and its stockholder may amend the
corporation's articles of incorporation if:
o The board of directors set forth the proposed amendment in a
resolution, declares the advisability of the amendment and directs
that it be submitted to a vote at a meeting of stockholders; and
o The holders of at least a majority of shares of stock entitled to vote
thereon approve the amendment, unless the articles require the vote of
a greater number of shares.
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The Pease Articles of Incorporation do not, and the Amended and Restated
Articles of Incorporation of Radiant Energy will not, include any limitation to
the above provisions nor increase the voting requirements as to any particular
matter.
Alberta law provides that subject to any special provisions set out in the
Articles of Incorporation regarding amendments to Articles and to the right of
separate classes of shareholders to vote as a class in certain circumstances, a
corporation's Articles of Incorporation may be amended if the amendment is
approved by special resolution (a resolution passed by a majority of not less
than 2/3 of the votes cast by the shareholders who voted in respect of the
resolution). Where classes of shareholders are entitled to vote separately, the
amendment must be approved by a special resolution of each class. Carpatsky's
Articles contain no special provisions regarding the amendment of its articles.
Adoption, amendment or repeal of bylaws
Under Nevada law, holders of a majority of the voting power of a
corporation and, when provided in the articles of incorporation, the directors
of a corporation have the power to adopt, amend and repeal the bylaws of a
corporation. The Articles of Incorporation of Pease include, and the Amended and
Restated Articles of Radiant Energy will include, provisions which authorize the
directors to adopt, amend and repeal the bylaws, subject to bylaws, if any,
adopted by stockholders.
Alberta law provides that subject to any special provisions in the Articles
of Incorporation or a unanimous shareholder agreement regarding making, amending
or repealing by-laws, the directors may by resolution make, amend and repeal
by-laws. A new by-law or an amendment or a repeal of a by-law must be submitted
to the next meeting of shareholders and the shareholders may, by ordinary
resolution, confirm, reject or amend the by-law, amendment or repeal. A new
by-law, or an amendment or repeal of a by-law is effective from the date it is
approved by the resolution of the directors until it is confirmed, confirmed as
amended or rejected by the shareholders. If confirmed or confirmed as amended by
the shareholders, the by-law, amendment or repeal continues in effect in the
form in which it is so confirmed. If a by-law or an amendment or repeal of a
by-law is rejected by the shareholders, or if the directors do not submit a
by-law, or an amendment or a repeal of a by-law to the shareholders as required,
the by-law or amendment or repeal ceases to be effective and no subsequent
resolution of the directors to make, amend or repeal a by-law having
substantially the same purpose or effect is effective until it is confirmed or
confirmed as amended by the shareholders. There is no unanimous shareholder
agreement governing Carpatsky and its Articles do not contain any provisions
relating to making, amending or repealing bylaws.
Notice of stockholder proposals and nomination of directors
Neither Nevada law nor the Articles of Incorporation or Bylaws of Pease or
Radiant Energy limit or will limit the right of a stockholder to bring business
before the annual meeting of stockholders or to make nominations of directors at
stockholder meetings.
Alberta law does not limit the right of shareholders to make nominations of
directors however, the right of a shareholder to bring business before a meeting
is severely restricted if notice of the business was not given to all
shareholders . Alberta law prescribes a procedure for shareholders to give
notice to the corporation of any matter that he proposes to raise at an annual
meeting of shareholders. Except in limited circumstances, where a notice is
given the corporation must disclose in its proxy material a description of the
matter proposed to be raised (and if the proposing shareholder so requests, a
short statement regarding the proposal) and permit the shareholder to discuss
the matter at the meeting.
Voting rights in connection with certain business combinations
Under Nevada law a merger agreement, consolidation or disposition of all or
substantially all of a corporation's assets must be adopted by a resolution of
the board and approved by the holders of a majority of the outstanding voting
stock.
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Under Alberta law a statutory amalgamation or a disposition of all or
substantially all of the corporation's assets must be approved by a special
resolution (a resolution passed by a majority of not less than 2/3 of the votes
cast by the shareholders who voted in respect of the resolution).
Nevada law includes provisions relating to Acquisition of Controlling
Interest and Combinations with Interested Stockholders. These provisions would
apply to and limit transactions that involve a change of control or a
transaction with a stockholder which acquired a controlling interest within the
last three years, unless the board of directors consents to the transaction. The
Articles of Incorporation of Pease include a provision electing not to be
subject to the provisions limiting certain transactions with interested
stockholders. The Amended and Restated Articles of Incorporation of Radiant
Energy will include provisions which elect not to be subject to those provisions
and the limitations in Nevada law which would limit combinations with certain
stockholders, as is authorized by Nevada law.
Neither Alberta law nor the Articles of Carpatsky contain comparable
provisions.
Preemptive rights
Nevada law provides that stockholders of corporations organized before 1991
shall have the preemptive right to purchase additional securities of the
corporation unless the articles of incorporation expressly denies such right.
The Pease and Radiant Energy Charters contain and will contain express denials
of preemptive rights of stockholders.
Neither Alberta law nor the Articles of Carpatsky give shareholders the
preemptive right to purchase additional securities.
Voting rights
Each holder of Pease common stock is entitled, and each holder of Radiant
Energy common stock will be entitled, to one vote for each share and
stockholders may not cumulative votes for the election of directors. In
connection with any issuance of preferred stock, the board of directors is and
will be authorized to establish such voting and other rights in connection with
designating the rights and privileges of preferred stock as may be deemed
appropriate by the board of directors.
Voting at meetings of the shareholders of Carpatsky is by show of hands
unless a vote by ballot is called for by a shareholder or his proxy or is
directed by the chair. Each holder of Carpatsky common shares and each holder of
Carpatsky Convertible Preferred Shares, Series A is entitled to one vote on a
show of hands and to one vote for each share held on any vote by ballot.
Shareholders may not cast cumulative votes for the election of directors.
Appraisal Rights
Under Nevada law a holder of any class is entitled to dissent from, and
obtain payment of the fair value of his shares in the event of a merger
requiring approval by stockholders and the holder is entitled to vote on the
merger, or if the corporation is a subsidiary corporation of, and is merged
with, its corporate parent under certain circumstances, or if the corporation is
party to a plan of exchange and the stockholders' interest in the corporation
will be acquired, if the stockholder is entitled to vote on the plan of
exchange. Also, a stockholder may be entitled to dissent to any corporate action
taken pursuant to a vote of stockholders to the extent that the articles of
incorporation, bylaws or a resolution of the board of directors provides that
stockholders are entitled to dissent and obtain payment for their shares.
Under Alberta law a holder of shares of any class of stock of a corporation
is entitled to dissent if the corporation resolves to (a) amend its articles to
add, change or remove any provisions restricting or constraining the issue or
transfer of shares of that class, (b) amend its articles to add, change or
remove any restrictions on the business or businesses that the corporation may
carry on, (c) amalgamate with corporation other than a wholly owned subsidiary,
(d) be continued under the laws of another jurisdiction, or (e) sell lease or
exchange all or substantially all its property. In addition, holders of shares
of a particular class are entitled to vote separately as a class on any
resolution to make certain amendments (in general terms, amendments that change
140
<PAGE>
the terms of or affect the priority of the shares) to the Articles are entitled
to dissent from the resolution approving any such amendment. A shareholder who
exercises the right of dissent and otherwise complies with the procedures for
dissent prescribed by Alberta law is entitled, in addition to any other rights
that he may have, to be paid by the corporation the fair value of the shares
held by him. The right of payment is subject to the corporation being able to
meet certain financial tests.
Limitation of personal liability of directors
Nevada law provides that a corporation's charter may include a provision
limiting the personal liability of a director to the corporation or a
stockholder for monetary damage for breach of fiduciary duty as a director,
provided that no such provision can eliminate or limit the liability of a
director for:
o the breach of the directors's duty of loyalty to the corporation or
its stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
o willful or negligent violation of the laws governing the payment of
dividends or the purchase or redemption of stock; or
o any transaction from which the director derives an improper personal
benefit.
The Articles of Incorporation of Pease include and, the Amended and
Restated Articles of Incorporation of Radiant Energy will include, provisions
which expressly limit the personal liability of directors as permitted.
Alberta law includes no such right to limit personal liability or to limit
personal liability by including provisions to that effect in the Articles or
By-laws. Accordingly, directors of Carpatsky could face responsibility or
liability to the corporation or its shareholders under certain circumstances
where no such liability would arise under the Amended and Restated Articles of
Incorporation of Radiant Energy. Alberta law does, however, permit Carpatsky to
indemnify directors and officers against all costs, charges and expenses,
including an amount paid to settle an action or satisfy a judgment, reasonably
incurred by him in resect of any civil, criminal or administrative action or
proceeding to which he is made a party by reason of being or having been a
director or officer provided the director or officer acted honestly and in good
faith with a view to the best interests of the corporation and in the case of a
criminal or administrative action or proceeding that is enforced by a monetary
penalty, he had reasonable grounds for believing that his conduct was lawful.
Indemnity is also permitted in certain other circumstances. Carpatsky has given
its directors indemnity to the full extent permitted by Alberta law.
Conversion and redemption
Holders of common stock of neither Pease nor Carpatsky have or will have
any right to convert their shares into any other shares of capital stock of
Pease, Carpatsky or Radiant Energy or any other securities.
Holders of Pease's outstanding Series B Convertible Preferred Stock
presently have the right to convert outstanding Series B preferred into a number
of shares of Pease common stock which would equal in excess of 80% of the voting
power of Pease if such shares were converted and if Pease at the time had a
sufficient number of authorized but unissued shares of common stock. Under
applicable provisions in Pease's present Articles of Incorporation, Pease would
be obligated to seek stockholder approval to amend its Articles of Incorporation
to authorize a sufficient number of additional shares of common stock to permit
the Series B preferred stock to be converted.
In connection with the merger, all outstanding Series B Convertible
Preferred Stock of Pease will be exchanged for common stock of Radiant Energy.
The Amended and Restated Articles of Incorporation of Radiant Energy will
include authorization to issue a substantial number of shares of common stock in
excess of the shares which will be outstanding following the merger, and up to
141
<PAGE>
200,000,000 shares of preferred stock. The Amended and Restated Articles of
Incorporation will not include any provisions relating to any preferred stock
and the directors of Radiant Energy will be empowered, in the future, to
designate and to issue additional classes of preferred stock having such terms,
rights and privileges as may then be determined.
Options and warrants
Pease presently has issued and outstanding warrants entitling holders to
purchase up to 222,831 shares of common stock, and present and former employees
of Pease hold options entitling the holders to purchase up to an additional
78,230 shares at exercise prices ranging from $5.00 to $71.90. Outstanding Pease
options and warrants will not be modified as a result of the merger and present
holders who continue to have the right to purchase common stock of Radiant
Energy on the same terms and subject to the same conditions as are applicable to
Pease prior to the merger.
Carpatsky presently has outstanding options to purchase up to a total of
200,000 shares of Carpatsky common stock and outstanding warrants which entitle
the holders to purchase up to a total of 30,165,404 shares of Carpatsky common
stock at an exercise price of $0.20 per share. As a result of the merger, the
holders of the Carpatsky options will be entitled to purchase up to 115,684
shares of Radiant Energy common stock at an exercise price of $0.35 per share
and the holders of the outstanding Carpatsky warrants will be entitled to
purchase up to 17,448,263 shares of Radiant Energy common stock at an exercise
price of approximately $0.35 per share. Existing terms and conditions for the
Carpatsky options and warrants shall be applicable to the holders following the
merger.
142
<PAGE>
COMPARISON OF OIL AND GAS RESERVES
LEGAL OPINIONS
Legal matters in connection with the merger are being passed upon for Pease
by Alan W. Peryam, LLC, Denver, Colorado and for Carpatsky by Satterlee Stephens
Burke & Burke LLP, New York, New York, McManus and Thomson, Calgary, Alberta,
Canada and Feleski Flynn, Calbary, Alberta, Canada. Satterlee Stephens Burke &
Burke LLP will rely on the opinion of McManus and Thomson as to certain matters.
EXPERTS
The financial statements of Pease at December 31, 1998, and for each of the
two years ended December 31, 1998 and 1997, included in this proxy statement and
prospectus and the registration statement of which this proxy statement and
prospectus is part, have been audited by HEIN + ASSOCIATES LLP, independent
auditors, as set forth in their report appearing elsewhere in this proxy
statement and prospectus, and in the registration statement, and are included in
reliance upon that report given upon the authority of that firm as experts in
accounting and auditing.
The financial statements of Carpatsky at December 31, 1998, and for each of
the two years ended December 31, 1998 and 1997, included in this proxy statement
and prospectus and the registration statement of which this proxy statement and
prospectus is part, have been audited by HEIN + ASSOCIATES LLP, independent
auditors, as set forth in their report appearing elsewhere in this proxy
statement and prospectus, and in the registration statement, and are included in
reliance upon that report given upon the authority of that firm as experts in
accounting and auditing.
143
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
PEASE OIL AND GAS
Independent Auditor's Report................................................ F-2
Consolidated Balance Sheets - September 30, 1999 (Unaudited)
and December 31, 1998............................................. F-3
Consolidated Statements of Operations - For the Nine Months Ended
September 30, 1999 and 1998 (Unaudited) and the Years Ended
December 31, 1998 and 1997........................................ F-4
Consolidated Statements of Stockholders' Equity - For the Nine Months
Ended September 30, 1999 and 1998 (Unaudited) and For the Years
Ended December 31, 1998 and 1997.................................. F-5
Consolidated Statements of Cash Flows - For the Nine Months Ended
September 30, 1999 and 1998 (Unaudited) and the Years Ended
December 31, 1998 and 1997........................................ F-6
Notes to Financial Statements............................................... F-8
CARPATSKY PETROLEUM, INC.
Independent Auditor's Report............................................... F-26
Consolidated Balance Sheets - September 30, 1999 (Unaudited) and
December 31, 1998 ............................................... F-27
Consolidated Statements of Operations - For the Nine Months Ended
September 30, 1999 and 1998 (Unaudited), and the Years Ended
December 31, 1998 and 1997....................................... F-28
Consolidated Statement of Changes in Stockholders' Equity - For the Nine
Months Ended September 30, 1999 (Unaudited), and the Years Ended
December 31, 1998 and 1997....................................... F-29
Consolidated Statements of Cash Flows - For the Nine Months Ended
September 30, 1999 and 1998 (Unaudited), and the Years Ended
December 31, 1998 and 1997....................................... F-30
Notes to Consolidated Financial Statements................................. F-31
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Pease Oil and Gas Company
Grand Junction, Colorado
We have audited the accompanying consolidated balance sheet of Pease Oil and Gas
Company and subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pease Oil and Gas
Company and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1997
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. As discussed in Note 1 to the Financial Statements, the Company has
incurred net losses of $10.6 million in 1998 and $15.9 million in 1997. These
conditions and 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.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Denver, Colorado
March 5,1999
F-2
<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ -----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents ..................................................................... $ 777,835 $ 1,049,582
Trade receivables, net of allowance for bad debts of $13,645 ............................. 341,966 420,460
Prepaid expenses and other ............................................................... 81,544 170,687
------------ ------------
Total current assets .................................................................. 1,201,345 1,640,729
------------ ------------
ASSETS HELD FOR SALE ....................................................................... -- 100,000
------------ ------------
OIL AND GAS PROPERTIES, at cost (full cost method):
Unevaluated properties ................................................................... 3,061,987 2,816,475
Costs being amortized .................................................................... 17,215,012 16,834,274
------------ ------------
Total oil and gas properties .......................................................... 20,276,999 19,650,749
Less accumulated amortization ............................................................ (14,664,073) (13,883,174)
------------ ------------
Net oil and gas properties ............................................................ 5,612,926 5,767,575
------------ ------------
OTHER ASSETS:
Debt issuance costs, net of accumulated amortization of $430,287
(unaudited) and $326,610, respectively ................................................... 218,874 322,551
Office equipment and vehicles, net of accumulated depreciation of
$173,504 (unaudited) and $145,124, respectively .......................................... 59,257 74,623
Deposits and other ......................................................................... 7,493 7,493
------------ ------------
Total other assets .................................................................... 285,624 404,667
------------ ------------
TOTAL ASSETS ............................................................................... $ 7,099,895 $ 7,912,971
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ..................................................... $ 5,741 $ 5,825
Accounts payable, trade .................................................................. 206,185 310,447
Accrued expenses ......................................................................... 151,161 322,569
------------ ------------
Total current liabilities ............................................................. 363,087 638,841
------------ ------------
LONG-TERM DEBT, less current maturities .................................................... 2,453,506 2,293,261
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 3, 5, AND 9)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, 2,000,000 shares authorized,
105,828 (unaudited) and 107,336 shares of Series B 5% PIK Cumulative
Convertible Preferred Stock issued and outstanding, respectively (liquidation
preference of 5,313,145 at September 30, 1999) ........................................... 1,058 1,073
Common stock, par value $0.10 per share, 4,000,000 shares authorized,
1,731,398 (unaudited) and 1,601,062 shares issued and outstanding,
respectively ............................................................................. 173,140 160,106
Additional paid-in capital ................................................................. 37,636,191 37,811,006
Accumulated deficit ........................................................................ (33,527,087) (32,991,316)
------------ ------------
Total stockholders' equity ................................................................. 4,283,302 4,980,869
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................................. $ 7,099,895 $ 7,912,971
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
NINE MONTHS ENDED DECEMBER 31,
-------------------- -------------------
1999 1998 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Oil and gas sales ..................................... $ 1,504,065 $ 1,853,284 $ 2,359,905 $ 3,168,042
Gas plant, service and supply ......................... -- 528,418 528,106 1,398,888
Well administration and other income .................. 80 22,640 28,971 92,379
------------ ------------ ------------ -------------
Total revenue .................................... 1,504,145 2,404,342 2,916,982 4,659,309
------------ ------------ ------------ -------------
EXPENSES:
Oil and gas production costs .......................... 276,014 995,995 1,049,563 1,486,738
Gas plant, service and supply ......................... -- 564,832 571,013 1,040,309
General and administrative ............................ 691,605 1,071,555 1,587,013 1,487,236
Consulting expense-related party ...................... 37,750 189,386 247,123 437,236
Depreciation, depletion and amortization .............. 798,278 1,460,562 2,241,092 2,669,319
Impairment expense:
Oil and gas properties ........................... -- 2,739,043 7,278,818 3,946,733
Assets held for sale ............................. -- -- 313,953 8,965,972
------------ ------------ ------------ -------------
Total expenses ................................... 1,803,647 7,021,373 13,288,575 20,033,543
------------ ------------ ------------ -------------
LOSS FROM OPERATIONS ...................................... (299,502) (4,617,031) (10,371,593) (15,374,234)
------------ ------------ ------------ -------------
OTHER INCOME (EXPENSES):
Interest expense ...................................... (269,859) (398,746) (399,218) (701,377)
Interest and other income ............................. 33,590 167,695 139,785 180,774
Gain (loss) on sale of assets ......................... -- 2,957 3,555 (230)
------------ ------------ ------------ -------------
Total other income (expenses), net ............... (236,269) (228,094) (255,878) (520,833)
------------ ------------ ------------ -------------
NET LOSS .................................................. (535,771) (4,845,125) (10,627,471) (15,895,067)
------------ ------------ ------------ -------------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS ................................... $ (713,588) $ (6,569,779) $(12,694,965) $ (15,985,036)
============ ============ ============ =============
NET LOSS PER COMMON SHARE ................................. $ (0.43) $ (4.15) $ (7.99 $ (12.21)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES .................. 1,668,400 1,584,200 1,588,000 1,309,000
OUTSTANDING ============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999
PREFERRED STOCK COMMON STOCK
------------------- ------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCES, December 31, 1996 ................................. 179,938 $ 1,799 753,039 $ 75,304
Fair value of warrants granted for services .............. -- -- -- --
Issuance of common stock for:
Acquisition of oil and gas properties ................ -- -- 31,815 3,182
Exercise of stock options ............................ -- -- 4,268 427
Exercise of warrants ................................. -- -- 319,260 31,926
Services ............................................. -- -- 615 61
Cash in private placements ........................... -- -- 379,200 37,920
Conversion of 10% collateralized convertible
debentures, net of discount ....................... -- -- 34,166 3,417
Conversion of Series A preferred stock ............... (179,938) (1,799) 56,990 5,699
Issuance of Series B preferred stock ................. 113,333 1,133 -- --
Offering costs ....................................... -- -- -- --
Net loss ............................................. -- -- -- --
------------ ------------ ------------ ------------
BALANCES, December 31, 1997 ................................. 113,333 1,133 1,579,353 157,936
Purchase and retirement of Series B preferred stock ......... (4,500) (45) -- --
Issuance of common stock for:
Exercise of warrants .............................. -- -- 125 12
Conversion of Series B preferred stock ............ (1,497) (15) 21,584 2,158
Series B preferred stock dividends ................... -- -- -- --
Net loss ............................................. -- -- -- --
------------ ------------ ------------ ------------
BALANCES, December 31, 1998 ................................. 107,336 1,073 1,601,062 160,106
Purchase and retirement of Series B preferred stock
(unaudited) ....................................... (825) (8) -- --
Series B preferred stock dividends (unaudited) ....... -- -- -- --
Issuance of common stock for:
Conversion of Series B Preferred Stock (unaudited) (683) (7) 87,636 8,764
Services of directors in lieu of cash (unaudited) -- -- 42,700 4,270
Net loss (unaudited) ................................. -- -- -- --
------------ ------------ ------------ ------------
BALANCES, September 30, 1999 (Unaudited) .................... 105,828 $ 1,058 1,731,398 $ 173,140
============ ============ ============ ============
<PAGE>
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Capital Defiit Equity
----------- ----------- -------------
<S> <C> <C> <C>
BALANCES, December 31, 1996 ................................. $ 19,789,707 $ (6,468,778) $ 13,398,032
Fair value of warrants granted for services .............. 240,000 -- 240,000
Issuance of common stock for:
Acquisition of oil and gas properties ................ 881,818 -- 885,000
Exercise of stock options ............................ 44,964 -- 45,391
Exercise of warrants ................................. 3,880,287 -- 3,912,213
Services ............................................. 14,790 -- 14,851
Cash in private placements ........................... 9,442,080 -- 9,480,000
Converion of 10% collateralized convertible
debentures, net of discount ....................... 488,637 -- 492,054
Conversion of Series A preferred stock ............... (3,900) -- --
Issuance of Series B preferred stock ................. 5,665,517 -- 5,666,650
Offering costs ....................................... (2,147,446) -- (2,147,446)
Net loss ............................................. -- (15,895,067) (15,895,067)
------------ ------------ ------------
BALANCES, December 31, 1997 ................................. 38,296,454 (22,363,845) 16,091,678
Purchase and retirement of Series B preferred stock ......... (206,205) -- (206,250)
Issuance of common stock for:
Exercise of warrants .............................. 926 -- 938
Conversion of Series B preferred stock ............ (2,143) -- --
Series B preferred stock dividends ................... (278,026) -- (278,026)
Net loss ............................................. -- (10,627,471) (10,627,471)
------------ ------------ ------------
BALANCES, December 31, 1998 ................................. 37,811,006 (32,991,316) 4,980,869
Purchase and retirement of Series B preferred stock
(unaudited) ....................................... (51,305) -- (51,313)
Series B preferred stock dividends (unaudited) ....... (177,817) -- (177,817)
Issuance of common stock for:
Conversion of Series B Preferred Stock (unaudited) (8,757) -- --
Services of directors in lieu of cash (unaudited) 63,064 -- 67,334
Net loss (unaudited) ................................. -- (535,771) (535,771)
------------ ------------ ------------
BALANCES, September 30, 1999 (Unaudited) .................... $ 37,636,191 $(33,527,087) $ 4,283,302
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
NINE MONTHS ENDED DECEMBER 31,
------------------- --------------------
1999 1998 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $ (535,771) $ (4,845,125) $ (10,627,471) $ (15,895,067)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Provision for depreciation and depletion .............. 798,278 1,460,562 2,241,092 2,623,323
Amortization of intangible assets ..................... 268,180 396,742 396,742 622,309
Provision for impairment .............................. -- 2,739,043 7,592,771 12,912,705
Loss (gain) on sale of assets ......................... -- (2,957) (3,555) 230
Issuance of common stock and warrants for services .... 29,747 -- -- 74,851
Other ................................................. -- -- 12,255 --
Changes in operating assets and/or liabilities:
(Increase) decrease in:
Trade receivables ............................. 78,494 207,297 336,974 (157,786)
Inventory ..................................... -- 128,418 385,091 (156,822)
Prepaid eexpenses and other ................... 19,143 (33,902) 8,292 14,685
Increase (decrease) in:
Accounts payable .............................. (93,928) 145,521 (40,673) 9,068
Accrued expenses .............................. (66,736) (107,465) (512,971) (41,182)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities ....... 497,407 88,134 (211,453) 6,314
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment ....................... (638,597) (6,250,614) (7,364,232) (12,137,192)
Proceeds from sale of property and equipment .................. 100,000 2,987,150 3,823,286 66,056
Redemption (purchase) of CD ................................... 70,000 -- 25,000 (95,000)
------------ ------------ ------------ ------------
Net cash used in investing activities ..................... (468,597) (3,263,464) (3,515,946) (12,166,136)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ........................ -- -- -- 8,920,000
Proceeds from issuance of Series B Preferred .................. -- -- -- 5,099,985
Proceeds from stock options and warrants ...................... -- 939 939 3,957,604
Repayment of long-term debt ................................... (4,342) (1,201,327) (1,207,805) (391,407)
Series B preferred stock dividends ............................ (244,902) (141,357) (210,942) --
Offering costs ................................................ -- (146,765) (146,765) (874,416)
Purchase and retirement of Series B preferred stock ........... (51,313) (31,250) (206,250) --
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities ....... (300,557) (1,519,760) (1,770,823) 16,711,766
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS .................. (271,747) (4,695,090) (5,498,222) 4,551,944
CASH AND EQUIVALENTS, beginning of period ........................ 1,049,582 6,547,804 6,547,804 1,995,860
------------ ------------ ------------ ------------
CASH AND EQUIVALENTS, at end of period ........................... $ 777,835 $ 1,852,714 $ 1,049,582 $ 6,547,804
============ ============ ============ ============
</TABLE>
See accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
FOR THE YEARS ENDED
NINE MONTHS ENDED DECEMBER 31,
------------------- --------------------
1999 1998 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest ............................................................ $ 209,795 $ 299,646 $ 400,309 $ 505,523
========= ========== ============ ==========
Income taxes ........................................................ $ -- $ -- $ -- $ --
========= ========== ============ ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Fair value of warrants granted for oil and gas exploration
services ............................................................ $ -- $ -- $ -- $ 180,000
========= ========== ============ ==========
Conversion of long-term debt, net of discount, to common stock ....... $ -- $ -- $ -- $ 492,054
========= ========== ============ ==========
Debt incurred for purchase of vehicles ............................... $ -- $ 32,610 $ 32,610 $ 50,691
========= ========== ============ ==========
Increase (decrease) in payables for:
Oil and gas properties .......................................... $ (10,342) $ (725,456) $ (1,002,353) $1,077,266
========= ========== ============ ==========
Offering costs .................................................. $ -- $ -- $ (146,765) $ 146,765
========= ========== ============ ==========
Series B preferred stock dividends .............................. $ (67,085) $ 69,585 $ 67,085 $ --
========= ========== ============ ==========
Issuance of common stock for oil and gas properties .................. $ -- $ -- $ -- $ 885,000
========= ========== ============ ==========
Capitalized portion of amortized debt issuance/discount costs ........ $ -- $ 396,141 $ 485,534 $ --
========= ========== ============ ==========
Issuance of common stock for services ................................ $ 67,334 $ -- $ -- $ --
========= ========== ============ ==========
</TABLE>
See accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations - At December 31, 1998 the principal business of Pease Oil
and Gas Company (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
conducts its operations through the following wholly-owned subsidiaries:
Loveland Gas Processing Company, Ltd. (LGPCo); Pease Oil Field Services, Inc.;
Pease Oil Field Supply, Inc.; and Pease Operating Company, Inc. All the
subsidiaries are currently inactive.
Continuing Operations - Pease has incurred net losses of $10.6 million in 1998
and $15.9 million in 1997. As a result of continuing losses, Pease's working
capital has been reduced to $1.1 million at December 31, 1998 and stockholders'
equity is less than $5 million. At December 31, 1998, the liquidation preference
of the Series B Preferred stock is in excess of total stockholders' equity and
the hyperdilutive potential of the conversion feature has resulted in 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
$250,000 and $1,600,000. 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 2000. 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.
In response to historically poor financial results, a series of dry holes, and a
crippled oil commodity market, Pease began in August 1998 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 45 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 no more dividends shall accrue or
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
F-8
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
with Carpatsky is either completed or abandoned. Should a merger occur, Pease
will be obligated to pay out of its existing working capital approximately
$220,000 to the President/CFO of Pease. There is also a break-up fee of $250,000
payable by either defaulting party to the merger.
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, 1998 and
1997, capital expenditures include internal costs of $236,931 and $280,000,
respectively. Proceeds from sales of oil and gas properties are credited to the
full cost pool with no gain or lost recognized unless such adjustments would
significantly alter the relationship between capitalized costs and proved oil
and gas reserves.
Acquisition costs of unproved properties and costs related to exploratory
drilling and seismic activities are initially excluded from amortization. These
costs are periodically evaluated for impairment and transferred to properties
being amortized when either proved reserves are established or the costs are
determined to be impaired.
The capitalized costs related to all evaluated oil and gas properties are
amortized using the units of production method based upon production and
estimates of proved reserve quantities. Future costs to develop proved reserves,
as well as site restoration, dismantlement and abandonment costs, are estimated
based on current costs and are also amortized to expense using the units of
production method.
The capitalized costs of evaluated oil and gas properties (net of accumulated
amortization and related deferred income taxes) are not permitted to exceed the
full cost ceiling. The full cost ceiling involves a quarterly calculation of the
estimated future net cash flows from proved oil and gas properties, using
current prices and costs and an annual discount factor of 10%. Accordingly, the
full cost ceiling may be particularly sensitive in the near term due to changes
in oil and gas prices or production rates.
Impairment of Long-Lived Assets - 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 (see Note 11).
F-9
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
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
$328,164 and $429,012 for the years ended December 31, 1998 and 1997,
respectively.
The costs of normal maintenance and repairs are charged to operating expenses as
incurred. Material expenditures which increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of properties sold, or otherwise disposed of, and the related
accumulated depreciation or amortization are removed from the accounts, and any
gains or losses are reflected in current operations.
Non-compete Agreements - The costs of non-compete agreements were incurred in
connection with the 1993 acquisition of substantially all of Pease's Rocky
Mountain assets. These costs were being amortized over the terms of the two to
ten-year agreements on a straight-line basis. At December 31, 1997, the
remaining net book value of $260,682 was charged to impairment expense in
connection with the sale of assets discussed in Note 2.
Debt Issuance Costs - Debt issuance costs relate to the $5 million private
placement of convertible debentures discussed in Note 3. These costs are being
amortized using the interest method.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. The actual results could differ from those estimates.
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.
F-10
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
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 gas plant revenues and oil and gas sales
upon delivery to the purchaser. Revenues from oil field services are recognized
as the services are performed. Oil field supply and equipment sales are
recognized when the goods are shipped to the customer.
Net Loss Per Common Share -Net loss per common share is presented in accordance
with the provisions of Statement of Financial Accounting Standards (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 income or loss applicable to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
and resulted in the issuance of common stock. Basic and diluted EPS are the same
in 1998 and 1997 as all potential common shares were antidilutive.
Stock Split - Effective December 1, 1998, the Board of Directors declared a 1
for 10 reverse stock split related to 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.
Unaudited Information - Pease's balance sheet as of September 30, 1999 and the
statement of shareholders' equity for the period then ended as well as the
statement of operations and cash flows for the nine months ended September 30,
1999 and 1998 are prepared by management without audit. However, in the opinion
of management, such information includes all adjustments (consisting of normal
and recurring items) necessary for the fair presentation of Pease's financial
position and results of operations in conformity with generally accepted
accounting principals.
F-11
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
2. ASSETS HELD FOR SALE:
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 for impairment and recognized a charge
of $8,965,972 in 1997 to reduce the net carrying value of the assets to the
estimated fair value of $4,048,000. These assets were sold during 1998 for cash
proceeds of $3,054,000 and an additional payment of $100,000 was received in
April 1999.
The results of operations, exclusive of the impairment charge, related to the
Rocky Mountain assets are as follows:
1998 1997
---- ----
Revenues $ 1,488,843 $ 3,683,000
Operating costs and expenses (1,394,141) (2,368,000)
Depreciation and amortization (549,816) (1,606,000)
--------- ----------
Loss from operations $ (455,114) $ (291,000)
========= =========
Pease recognized an additional 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.
3. DEBT FINANCING ARRANGEMENTS:
Long-Term Debt - Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Convertible debentures, interest at 10%, due April 2001,
unsecured. $2,782,500 $2,782,500
Less unamortized discount (347,284) (511,787)
--------- ---------
Net carrying value 2,435,216 2,270,713
-------- ---------
Note payable to bank, interest at 8.5%, monthly payments of
$669, due March 2003, collateralized by vehicle 24,031 28,373
--------- ---------
Total long-term debt 2,459,257 2,299,086
Less current maturities (5,741) (5,825)
--------- ---------
Long-term debt, less current maturities $2,453,506 $2,293,261
========= ==========
</TABLE>
F-12
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
Aggregate maturities of long-term debt are as follows:
As of As of
September 30, December 31,
Years Ending December 31, 1999 1998
------------------------ ------------ ------------
(Unaudited)
1999 $ 1,483 $ 5,825
2000 6,340 6,340
2001 2,442,116 2,277,613
2002 7,510 7,510
2003 1,798 1,798
---------- -----------
$ 2,459,247 $ 2,299,086
========== ===========
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 provides 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 is treated as a discount and is being amortized using the
interest method. The debentures were initially collateralized by a first
priority interest in certain Rocky Mountain oil and gas properties owned and
operated by 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,
beginning at a premium of 110% of the original principal amount subject to
adjustment beginning on April 25, 1999. During the year ended December 31, 1997,
the holders of $1,025,000 of debentures elected to convert to 341,665 shares of
common stock. Effective October 1, 1998, the holders of the debentures voted to
amend the debentures to release the oil and gas properties which previously
collateralized this debt. In exchange for this release, 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.
Pease also agreed to pay the Consultant a fee equal to 2% of the net proceeds
from the private placement and up to 7% of the net proceeds from any warrants
which are exercised during the term of the agreement or up to six months after
F-13
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
termination in certain circumstances. All of the compensation paid to the
Consultant is limited to 15% of the gross proceeds generated from the private
placement, exercise of warrants, or other debt or equity financings that may be
consummated during the term of the agreement. In August 1996, a major
shareholder of the Consultant was elected to Pease's Board of Directors.
4. INCOME TAXES:
Deferred tax assets (liabilities) as of December 31, 1998 and 1997 are comprised
of the following:
1998 1997
---- ----
Long-term assets:
Net operating loss carryforwards ............... $ 7,897,000 $ 5,816,000
Property, plant and equipment .................. 1,178,000 229,000
Tax credit carryforwards ....................... 294,000 294,000
Percentage depletion carryforwards ............. 160,000 120,000
Other .......................................... 21,000 41,000
----------- ------------
Total ................................... 9,550,000 6,500,000
Less valuation allowance ....................... (9,550,000) (6,500,000)
----------- ------------
Net long-term asset ..................... $ -- $ --
=========== ===========
During the years ended December 31, 1998 and 1997, Pease increased the valuation
allowance by $3,050,000 and $5,865,000, respectively, primarily due to an
increase in the net operating loss carryforwards which are not considered to be
realizable. 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, 1998, Pease had net operating loss carryforwards for income tax
purposes of approximately $18.9 million, which expire primarily in 2008 through
2018. 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. 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 employment
agreements with Pease's executive officers. The agreements may be terminated by
the officers 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 officers their respective salaries for one to three years. If the
termination occurs following a change in control, Pease would be required to
make lump sum payments equivalent to two to three years salary for each of the
officers.
F-14
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
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 $5,401 and $5,669 for the years ended December 31, 1998 and 1997,
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.
Year 2000 Issue - Pease has conducted a review of its computer systems to
identify the systems that could be affected by the "year 2000" issue. The year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of Pease's programs that
have time-sensitive software may recognize a date using `00' as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations.
Pease does not believe that the year 2000 problem will pose a material
operations problem for Pease. Pease's computer software providers have assured
Pease that all of Pease's software is or will be year 2000 compliant (i.e., will
function properly in the year 2000 and beyond). Pease's accounting software
providers have asserted they will provide written assurance that its products
are or will be year 2000 compliant. To Pease's knowledge, after investigation,
no "imbedded technology" (such as microchips in an electronic control system) of
Pease poses a material Year 2000 problem.
Because Pease believes that it has no material internal year 2000 problems,
Pease has not expended and does not expect to expend a significant amount of
funds to address year 2000 issues. It is Company policy to continue to review
its suppliers' Year 2000 compliance and require assurance of Year 2000
compliance from new suppliers; however, such monitoring does not involve a
significant cost to Pease.
Pease is materially dependent on Plains Marketing, L.P. (Plains), National
Energy Group, Inc. (NEG) and Amerada Hess Corporation (AHC) for the delivery and
payment of Pease's oil and natural gas. These companies in turn are dependent on
various third party vendors for delivery and payment. Pease has or will request
written assurances from Plains, NEG and AHC that they have examined their year
2000 issues. However, as of the date of this report, Pease has not received a
response. Pease will continue to request such assurance but it should be
emphasized that no assurance can be given at this time that Plains, NEG or AHC,
or their third party vendors are or will be year 2000 compliant.
In the event that one or more of Pease's vendors, including Plains, NEG, AHC,
and their respective vendors, were to have a material Year 2000 problem, Pease
believes that the foreseeable consequences would be a temporary delay in revenue
collection caused by an interruption in computerized billing (and not an
interruption in the actual flow of Pease's oil or natural gas), which may have a
substantial impact on Pease's ability to conduct operations. Pease does not have
any contingency plan to address this possibility (see Note 11).
F-15
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
Bankruptcy of Third Party Operator - In December 1998, National Energy Group,
Inc. filed an Involuntary Petition for an Order and Relief under Chapter 11 of
Title 11 of the United States Bankruptcy Code in United States Bankruptcy Court
for the Northern District of Texas, Dallas Division. As operator of the East
Bayou Sorrel field, which represents 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 paid to National Energy Group, Inc. as
operator in connection with the drilling of existing wells. Collection of these
amounts may be delayed or may not occur, pending disposition of National Energy
Group, Inc.'s reorganization proceeding. The total claim is approximately
$80,000. However, no amount has been recorded in the financial statements as of
December 31, 1998.
Contingencies - 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.
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. 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 Petroleum,
Inc., 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 Petroleum,
F-16
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
Inc. 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 Petroleum, Inc. 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.
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. On
December 31, 1997, Pease issued 113,333 shares of Series B Preferred Stock for
$5,666,650.
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.
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 for stock options
that may be granted to officers, directors, employees, and consultants: 9,000
shares in June 1991; 27,732 shares in June 1993; 15,000 shares in June 1994;
34,000 shares in August 1996; and 100,000 shares in May 1997.
The plans permit the issuance of incentive and nonstatutory options and provide
for a minimum exercise price equal to 100% of the fair market value of 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, 1998 and 1997:
F-17
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
1998 1997
----------------------- -------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
Outstanding, beginning of year .... 118,880 $ 19.61 62,130 $ 10.20
Canceled ................... (46,350) 21.36 (2,483) 21.60
Expired .................... (1,500) 29.40 (500) 34.40
Repriced ................... (20,000) 26.90 -- --
Granted .................... 20,000 11.25 64,000 28.30
Exercised .................. -- -- (4,267) 10.60
-------- --------
Outstanding, end of year .......... 71,030 $ 13.85 118,880 $ 19.60
======== =======
There have been no significant changes to outstanding options other than 6,250
options expiring as a result of an employee and a director terminating with
Pease subsequent to December 31, 1998.
For all options granted during 1998 and 1997, the market price of Pease's common
stock on the grant date was approximately equal to the exercise price. All
options are currently exercisable and if not previously exercised, will expire
as follows:
<TABLE>
<CAPTION>
Range of Weighted
Exercise Prices Average
Year Ending December 31, --------------- Exercise Number
----------------------- Low High Price of Shares
--- ---- --------- ---------
<S> <C> <C> <C> <C>
2000 $ 7.00 $ 8.30 $ 7.84 25,432
2001 10.00 18.10 13.41 12,348
2002 5.00 5.00 5.00 10,000
2003 17.50 29.70 24.45 23,250
--------
$ 13.85 71,030
========
</TABLE>
F-18
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
Warrants and Non-Qualified Stock Options - Pease has also granted warrants and
non-qualified options which are summarized as follows for the years ended
December 31, 1998 and 1997:
1998 1997
<TABLE>
<CAPTION>
--------------------- ---------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year ......... 587,790 $ 43.11 721,659 $ 29.50
Granted to:
Beta Capital Group, Inc. (Note 4) .... -- -- 10,000 37.50
Consultants .......................... -- -- 5,000 15.00
Directors for services ............... -- -- 5,000 30.30
Former officer and directors for
severance ..................... 39,850 14.88 -- --
Brokers and underwriter in ........... -- -- 62,275 22.60
private placements
Issued to underwriter and former
holders of preferred stock
upon conversion .............. -- -- 103,116 57.10
Expired ............................. (57,444) 45.81 (500) 12.50
Exercised ........................... (125) 7.50 (318,760) 12.50
-------- ---------
Outstanding, end of year ............... 570,071 $ 40.87 587,790 $ 43.11
======== =========
</TABLE>
If not previously exercised, warrants and non-qualified options will expire as
follows:
Range of Weighted
Exercise Prices Average
Year Ending December 31, --------------- Exercise Number
------------------------ Low High Price of Shares
--- ---- -------- ---------
1999 $ 20.00 $ 60.00 $ 57.61 339,546
2000 5.00 71.90 18.58 66,845
2001 7.50 37.50 10.79 98,900
2002 17.50 30.30 22.05 64,780
--------
$ 40.87 570,071
========
Other than the 339,546 warrants expiring unexercised in 1999, there have been no
changes in warrants outstanding subsequent to December 31, 1998.
F-19
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
Pro Forma Stock-Based Compensation Disclosures - Pease 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 Pease'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 SFAS No. 123, Pease's net
loss and loss per share would have been changed to the pro forma amounts
indicated below.
Years Ended December 31,
------------------------
1998 1997
---- ----
Net loss applicable to common stockholders:
As reported ........................... $ (12,694,965) $(15,985,036)
Pro forma ............................. (13,171,965) (16,507,036)
Net loss per common share:
As reported ........................... $ (7.99) $ (12.20)
Pro forma ............................. (8.29) (12.60)
The weighted average fair value of options and warrants granted to employees for
the years ended December 31, 1998 and 1997 was $2.24 and $16.30, respectively.
The fair value of each employee option and warrant granted in 1998 and 1997 was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
Years Ended December 31,
-----------------------
1998 1997
---- ----
Expected volatility ............................ 80.0% 63.7%
Risk-free interest rate ........................ 5.6% 6.0%
Expected dividends ............................. -- --
Expected terms (in years) ...................... 2.2 4.0
8. FINANCIAL INSTRUMENTS:
SFAS No. 107 requires all entities to disclose the fair value of certain
financial instruments in their financial statements. Accordingly, at December
31, 1998, management's best estimate is that the carrying amount of cash,
receivables, notes payable to unaffiliated parties, accounts payable, and
accrued expenses approximates fair value due to the short maturity of these
instruments. Management estimates that fair value is approximately equal to
carrying value of the convertible debentures since market interest rates have
not changed significantly since the offering commenced.
F-20
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
9. SIGNIFICANT CONCENTRATIONS:
Substantially all of Pease's accounts receivable at December 31, 1998, result
from crude oil and natural gas sales to companies in the oil and gas industry.
This concentration of customers and joint interest owners may impact Pease's
overall credit risk, either positively or negatively, since these entities may
be similarly affected by changes in economic or other conditions. In determining
whether to require collateral from a significant customer or joint interest
owner, 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, 1998 and 1997, Pease had oil sales to a single
customer which accounted for 20% of total revenues.
Substantially all of Pease's cash and temporary cash investments are held at a
single financial institution. Pease 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, Pease entered into
agreements with unaffiliated parties for the purchase of a 10% working interest
in this prospect for $2.5 million.
Full Cost Amortization Expense - Amortization expense amounted to $1,914,262 and
$2,195,364 for the years ended December 31, 1998 and 1997, respectively.
Amortization expense per equivalent units of oil and gas produced amounted to
$9.52 and $10.77 for the years ended December 31, 1998 and 1997, respectively.
Natural gas is converted to equivalent units of oil on the basis of six Mcf of
gas to one equivalent barrel of oil.
Unevaluated Oil and Gas Properties - At December 31, 1998, unevaluated oil and
gas properties consist of the following (see Note 11):
Unproved property acquisition costs $ 1,096,030
Seismic and lease option costs 1,320,735
Interest cost 399,710
----------
$ 2,816,475
==========
F-21
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
All unevaluated costs were incurred during 1997 and 1998 and management expects
that planned activities will enable the evaluation of substantially all of these
costs by the end of 2000.
Capitalization of Interest - For the years ended December 31, 1998 and 1997,
Pease capitalized interest costs of $854,483 and $323,642, respectively, related
to unevaluated oil and gas properties and other exploration activities.
Full Cost Ceiling - During 1998, 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 is
substantially attributed to the expiration of certain previously unevaluated
leases, the continuing collapse of oil prices and one dry hole.
Costs Incurred in Oil and Gas Producing Activities - The following is a summary
of costs incurred in oil and gas producing activities for the years ended
December 31, 1998 and 1997:
1998 1997
---- ----
Property acquisition costs $ -- $ 4,266,955
Development costs 13,468 734,235
Exploration costs 6,799,382 9,499,572
---------- -----------
Total $6,812,850 $14,500,762
========== ===========
Results of Operations from Oil and Gas Producing Activities - Results of
operations from oil and gas producing activities (excluding natural gas
marketing and trading, well administration fees, general and administrative
expenses, and interest expense) for the years ended December 31, 1998 and 1997
are presented below.
1998 1997
---- ----
Oil and gas sales $ 2,360,000 $ 3,168,000
Production costs (1,050,000) (1,487,000)
Amortization expense (1,914,000) (2,195,000)
Impairment expense (7,279,000) (9,506,000)
----------- -----------
Results of operations from oil and
gas producing activities $(7,883,000) $(10,020,000)
=========== ============
Oil and Gas Reserve Quantities (Unaudited) - Proved oil and gas reserves are the
estimated quantities of crude oil, natural gas, and natural gas liquids which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed oil and gas reserves are those reserves
expected to be recovered through existing wells with existing equipment and
operating methods. The reserve data is based on studies prepared by Pease's
consulting petroleum engineers. Reserve estimates require substantial judgment
on the part of petroleum engineers resulting in imprecise determinations,
particularly with respect to new discoveries. Accordingly, it is expected that
the estimates of reserves will change as future production and development
information becomes available. All proved oil and gas reserves are located in
the United States. At December 31, 1997, approximately 70% of Pease's proved oil
F-22
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
and gas reserve quantities were located in the Rocky Mountain Region. As
discussed in Note 2, Pease has divested these properties. The following table
presents estimates of Pease's net proved oil and gas reserves, and changes
therein for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
--------------------- ----------------------
Oil Gas Oil Gas
(bbls) (mcf) (bbls) (mcf)
----- ----- ----- -----
<S> <C> <C> <C> <C>
Proved reserves, beginning of year ................ 1,085,000 4,535,000 1,175,000 4,833,000
Purchase of minerals in place .............. -- -- 165,000 209,000
Sale of minerals in place .................. (725,000) (2,848,000) (16,000) (45,000)
Extensions, discoveries, and other
additions ........................... 129,000 517,000 229,000 1,295,000
Revisions of previous estimates ............ (105,000) (286,000) (345,000) (1,274,000)
Production ................................. (109,000) (550,000) (123,000) (483,000)
---------- ---------- ---------- ----------
Proved reserves, end of year ...................... 275,000 1,368,000 1,085,000 4,535,000
========== ========== ========== ==========
Proved developed reserves, beginning of year ...... 930,000 3,833,000 1,034,000 4,078,000
========== ========== ========== ==========
Proved developed reserves, end of year ............ 261,000 920,000 930,000 3,833,000
========== ========== ========== ==========
</TABLE>
The downward revisions in both 1997 and 1998 were primarily attributable to: a.)
substantially lower oil and gas prices at their respective year ends when
compared to the prior year, and b.) previously recorded undeveloped reserves
were removed as a result of drilling dry holes.
Standardized Measure of Discounted Future Net Cash Flows (Unaudited) - SFAS No.
69 prescribes guidelines for computing a standardized measure of future net cash
flows and changes therein relating to estimated proved reserves. Pease has
followed these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are determined
by applying year-end prices and costs to the estimated quantities of oil and gas
to be produced. Estimated future income taxes are computed using current
statutory income tax rates including consideration for estimated future
statutory depletion and tax credits. The resulting future net cash flows are
reduced to present value amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and, as such, do not necessarily
reflect Pease's expectations for actual revenues to be derived from those
reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process, as discussed previously, are equally applicable to
F-23
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
the standardized measure computations since these estimates are the basis for
the valuation process.
The following summary sets forth Pease's future net cash flows relating to
proved oil and gas reserves as of December 31, 1998 and 1997 based on the
standardized measure prescribed in Statement of Financial Accounting Standards
No. 69.
<TABLE>
<CAPTION>
1998 1997
---- ---------------------------------------------
Gulf Gulf Rocky
Coast Coast Mountain Total
----- ----- -------- -----
<S> <C> <C> <C> <C>
Future cash inflows ............................ $ 6,117,000 $ 8,560,000 $ 18,202,000 $ 26,762,000
Future production costs ........................ (1,519,000) (1,237,000) (7,947,000) (9,184,000)
Future development costs ....................... (544,000) (1,527,000) (1,680,000) (3,207,000)
Future income tax expense ...................... -- -- -- --
------------ ------------ ------------ ------------
Future net cash flows ............ 4,054,000 5,796,000 8,575,000 14,371,000
10% annual discount for estimated timing of
cash flow ................................... (1,103,000) (1,336,000) (3,357,000) (4,693,000)
------------ ------------ ------------ ------------
Standardized measure of discounted future
net cash flows .............................. $ 2,951,000 $ 4,460,000 $ 5,218,000 $ 9,678,000
============ ============ ============ ============
</TABLE>
Changes in Standardized Measure (Unaudited) - The following are the principal
sources of change in the standardized measure of discounted future net cash
flows for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
Standardized Measure, beginning of year .................. 9,678,000 $ 11,980,000
Sale of oil and gas produced, net of production costs .... (1,310,000) (1,681,000)
Purchase of minerals in place ............................ -- 2,231,000
Sale of minerals in place ................................ (5,109,000) (121,000)
Net changes in prices and production costs ............... (1,031,000) (8,437,000)
Net changes in estimated development costs ............... 907,000 (185,000)
Revisions of previous quantity estimates ................. (2,874,000) (2,179,000)
Discoveries, extensions, and other additions ............. 1,722,000 3,214,000
Accretion of discount .................................... 968,000 1,198,000
Changes in income taxes, net ............................. -- 3,658,000
------------ ------------
Standardized Measure, end of year ........................ $ 2,951,000 $ 9,678,000
============ ============
</TABLE>
F-24
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
11. SUBSEQUENT EVENTS (UNAUDITED):
Pease is not aware of any significant computer malfunctions associated with Y2K
on January 1, 2000 with its internal operations or its major vendors.
F-25
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Carpatsky Petroleum, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Carpatsky
Petroleum, Inc. and subsidiary (Carpatsky), as of December 31, 1998, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of Carpatsky'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 Carpatsky Petroleum,
Inc. and subsidiary as of December 31, 1998, and the results of their operations
and their cash flows for the years ended December 31, 1998 and 1997 in
conformity with generally accepted accounting principles.
Carpatsky's principal operations are in Ukraine. As discussed in Note 1 to the
financial statements, there is a considerable degree of uncertainty in Ukraine
surrounding the likely future direction of its domestic economic policy,
regulatory policy, and political development. Further, the economy of Ukraine
has entered a period of economic and financial difficulty. The impact of these
difficulties, includes, but is not limited to, a significant devaluation of
Ukraine's currency and an increasing rate of inflation. Accordingly, there are
significant uncertainties within Ukraine that may affect the financial condition
of Carpatsky, its future operations, the recoverability of its assets and its
ability to maintain or pay its obligations as they mature. Carpatsky has been
affected and will likely, for the foreseeable future, continue to be affected by
prolonged economic instability in the Ukraine.
The accompanying consolidated financial statements have been prepared assuming
that Carpatsky 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, Carpatsky has
incurred substantial losses from operations and has a working capital deficit.
These conditions and other matters discussed in Note 1 raise substantial doubt
about Carpatsky's ability to continue as a going concern. Management's plans
with regard to these matters are also discussed in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Denver, Colorado
November 2, 1999
F-26
<PAGE>
<TABLE>
<CAPTION>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER,31,
1999 1998
------------ -----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents ...................................................... $ 128,414 $ 25,434
Stock subscriptions receivable ............................................ 237,500 --
Trade receivables, net of allowance for bad debts of $2,453,304
(unaudited) and $760,679, respectively ............................. 56,796 44,830
Inventories ............................................................... 118,214 47,356
VAT refundable ............................................................ 112,147 87,341
Prepaid expenses and other ................................................ 27,344 3,542
------------ ------------
Total current assets .............................................. 680,415 208,503
------------ ------------
OIL AND GAS PROPERTIES, using the full cost method:
Evaluated properties ...................................................... 10,008,626 9,113,863
Accumulated depreciation and depletion .................................... (385,297) (86,469)
------------ ------------
Net oil and gas properties .......................................... 9,623,329 9,027,394
------------ ------------
OTHER ASSETS:
VAT refundable ............................................................ 405,853 419,566
Deferred acquisition costs ................................................ 92,088 --
Loan to Ukrainian joint venture partner ................................... 71,486 55,000
Furniture and equipment, net of accumulated depreciation of 60,622
(unaudited) and $49,215 ............................................... 30,497 41,153
------------ ------------
Total other assets ................................................... 599,924 515,719
------------ ------------
TOTAL ASSETS .................................................................. $ 10,903,668 $ 9,751,616
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ...................................... $ 548,914 $ 548,914
Accounts payable .......................................................... 3,624,695 3,645,289
Taxes payable ............................................................. 885,589 290,508
Accrued expenses .......................................................... 257,289 325,145
Due to officers and directors ............................................. 184,928 40,018
------------ ------------
Total current liabilities ........................................... 5,501,415 4,849,874
LONG-TERM DEBT, less current maturities ....................................... -- 2,007,707
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 1, 5, 9, AND 11)
STOCKHOLDERS' EQUITY:
Common stock, no par value; unlimited authorized shares; 75,128,263
(unaudited) and 40,796,246 shares issued and outstanding, respectively ... 9,174,921 5,410,350
Accumulated deficit ......................................................... (3,772,668) (2,516,315)
------------ ------------
Total stockholders' equity ....................................... 5,402,253 2,894,035
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................................... $ 10,903,668 $ 9,751,616
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
<TABLE>
<CAPTION>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
NINE MONTHS ENDED DECEMBER 31,
-------------------- --------------------
1999 1998 1998 1997
---- ---- ---- ----
(Unaudited) Unaudited)
<S> <C> <C> <C> <C>
OIL AND GAS SALES
Total sales ........................................ $ 1,778,258 $ 348,572 $ 768,851 $ 98,683
Less allowance for doubtful accounts ............... (1,617,752) (196,313) (543,186) (13,050)
------------ ------------ ------------ ------------
Net oil and gas sales ......................... 160,506 152,259 225,665 85,633
OPERATING COSTS AND EXPENSES:
Oil and gas production costs ....................... 736,096 187,938 307,561 82,351
Depreciation, depletion and amortization ........... 273,263 39,527 85,385 19,204
General and administrative ......................... 742,081 501,463 552,391 805,218
------------ ------------ ------------ ------------
Total operrating costs and expenses ......... 1,751,440 728,928 945,337 906,773
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ................................... (1,590,934) (576,669) (719,672) (821,140)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income .................................... -- -- -- 6,462
Net barter income .................................. 46,535 36,334 4,710 33,826
Interest expense ................................... (236,042) (225,711) (318,512) (89,564)
Amortization of debt discount ...................... -- (657,895) (657,895) (139,377)
Gain on the net monetary position .................. 859,293 1,457,144 1,477,213 44,059
------------ ------------ ------------ ------------
Total other income (expenses) ................. 669,786 609,872 505,516 (144,594)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES ............................. (921,148) 33,203 (214,156) (965,734)
INCOME TAXES ........................................... (335,205) -- (132,388) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) ...................................... $ (1,256,353) $ 33,203 $ (346,544) $ (965,734)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE ............................ $ (0.03) $ * $ (0.01) $ (0.03)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING ........................................ 40,796,246 40,796,246 40,796,246 31,691,266
============ ============ ============ ============
</TABLE>
- ----------------------
* Less than $0.01 per share
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
<TABLE>
<CAPTION>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH SEPTEMBER 30, 1999
VOTING
COMMON STOCK
------------------------ ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ----------- -----
<S> <C> <C> <C> <C>
BALANCES, January 1, 1997 ............................... 24,074,677 $ 1,441,127 $(1,204,037) $ 237,090
Exercise of options and warrants .................... 1,501,161 279,006 -- 279,006
Issuance of stock in private placements ............. 14,681,108 2,914,000 -- 2,914,000
Issuance of stock in lieu of commission ............. 539,300 107,860 -- 107,860
Issuance costs ...................................... -- (226,475) -- (226,475)
Estimated fair value of warrants and
options issued ............................... -- 426,852 -- 426,852
Net loss ............................................ -- -- (965,734) (965,734)
----------- ----------- ----------- -----------
BALANCES, December 31, 1997 ............................. 40,796,246 4,942,370 (2,169,771) 2,772,599
Estimated fair value of warrants and
options issued ............................... -- 467,980 -- 467,980
Net loss ............................................ -- -- (346,544) (346,544)
----------- ----------- ----------- -----------
BALANCES, December 31, 1998 ............................. 40,796,246 5,410,350 (2,516,315) 2,894,035
Conversion of long-term debt to equity
(unaudited) .................................. 18,525,344 2,456,264 -- 2,456,264
Issuance of stock in private placements
(unaudited) .................................. 13,333,340 1,000,000 -- 1,000,000
Settlement of liabilities for stock
(unaudited) .................................. 1,520,000 220,000 -- 220,000
Issuance of stock in lieu of commission
(unaudited) .................................. 953,333 71,500 -- 71,500
Issuance costs (unaudited) ............................ -- (5,248) -- (5,248)
Estimated fair value of options issued
(unaudited) .................................. -- 22,055 -- 22,055
Net loss (unaudited) ............................... -- -- (1,256,353) (1,256,353)
----------- ----------- ----------- -----------
BALANCES, September 30, 1999
(Unaudited) .......................................... 75,128,263 $ 9,174,921 $(3,772,668) $ 5,402,253
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
<TABLE>
<CAPTION>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
NINE MONTHS ENDED DECEMBER 31,
------------------- --------------------
1999 1998 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................... $(1,256,355) $ 33,203 $ (346,544) $ (965,734)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and depletion ........................ 273,263 39,527 85,385 19,204
Estimated fair value of warrants and options
issued ...................................... 22,055 42,980 42,980 54,580
Amortization of debt issuance costs ............... -- 657,895 657,895 139,377
Provision for doubtful accounts ................... 1,617,752 196,313 543,185 13,050
Stock issued for services ......................... 195,500 -- -- --
Net monetary (gain) or loss ....................... (859,293) (1,457,144) (1,477,213) (44,059)
----------- ----------- ----------- -----------
Cash flow before working capital
adjustments .............................. (7,078) (487,226) (494,312) (783,582)
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables .......................... (1,779,174) (453,291) (931,191) (201,906)
Prepaid expenses and other ........... (20,645) 10,357 40,852 (33,228)
Inventory ............................ (70,732) 68,088 41,011 (73,014)
Increase (decrease) in:
Accounts payable ..................... 747,957 964,244 1,646,029 107,044
Accrued expenses ..................... 1,112,866 742,710 585,680 113,074
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities ... (16,806) 844,882 888,069 (871,612)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures principally for oil and gas activities (528,892) (1,491,860) (1,540,543) (3,449,211)
Loan to Ukrainian joint venture ........................... (16,486) (5,500) (5,500) (49,500)
Deferred acquisition costs ................................ (92,088) -- -- --
----------- ----------- ----------- -----------
Net cash used in investing activities ................. (637,466) (1,497,360) (1,546,043) (3,498,711)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of:
Common stock .......................................... 762,500 -- -- 2,914,000
Convertible term note ................................. -- 600,000 600,000 600,000
Debentures ............................................ -- -- -- 1,000,000
Warrants and options .................................. -- -- -- 279,006
Offering costs related to issuance of common stock ........ (5,248) -- -- (118,614)
Payment on debenture ...................................... -- -- -- (230,384)
----------- ----------- ----------- -----------
Net cash provided by financing activities ............. 757,252 600,000 600,000 4,444,008
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS ............... 102,980 (52,478) (57,974) 73,685
CASH AND EQUIVALENTS, beginning of period ..................... 25,434 83,408 83,408 9,723
----------- ----------- ----------- -----------
CASH AND EQUIVALENTS, at end of period ........................ $ 128,414 $ 30,930 $ 25,434 $ 83,408
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest .............................................. $ -- $ 15,572 $ 15,572 $ 39,617
=========== =========== =========== ===========
Income taxes .......................................... $ 202,585 $ -- $ -- $ --
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Increase (decrease) in payables for oil and gas
properties ..................................... $ 294,856 $ 1,041,868 $ 1,201,331 $ 2,466,566
=========== =========== =========== ===========
Conversion of notes/debentures, including principal
and accrued interest, to common stock .......... $ 2,456,264 $ -- $ -- $ --
=========== =========== =========== ===========
Conversion of accounts payable to common stock ............ $ 96,000 $ -- $ -- $ --
=========== =========== =========== ===========
Fair value of warrants issued for debt discount ........... $ -- $ -- $ 425,000 $ 372,272
=========== =========== =========== ===========
Accrued interest transferred to long-term debt ............ $ -- $ 85,624 $ 85,624 $ 1,380
=========== =========== =========== ===========
Common stock issued in lieu of commission .................. $ 71,500 $ -- $ -- $ 107,860
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations - The principal business of Carpatsky Petroleum, Inc.
(Carpatsky) is to participate in the exploration, development, production and
sale of oil, natural gas and natural gas liquids in the Republic of Ukraine
(Ukraine) as a non-operating interest owner through joint ownership and joint
venture arrangements. Carpatsky is organized under laws of the Provence of
Alberta, Canada. All amounts presented within the financial statements are in
U.S. dollars.
Continued Operations - Carpatsky has incurred operating losses and negative cash
flow in operations since inception. As a result of continuing operating losses,
Carpatsky's working capital has been reduced to a deficit of $4,641,371 and
$4,821,000 at December 31, 1998 and September 30, 1999, respectively.
Additionally, due to liquidity problems, Carpatsky has been unable to meet its
financial obligations on a timely basis, including obligations to its Ukranian
joint venture partners which, if not paid, could significantly reduce
Carpatsky's interest in the Ukranian projects (see Notes 2 and 11). Furthermore,
Carpatsky is subject to certain foreign country risks which are discussed below.
If future working capital is not sufficient to meet its obligations, Carpatsky
may have to consider other alternatives, including the sale of existing assets,
cancellation or modification of existing joint interest agreements, and/or
restructuring.
In September 1999, Carpatsky completed a private placement which raised
$1,000,000 in additional equity and holders of debt and payables converted their
outstanding obligations of approximately $2,676,000 into common stock. In
addition, Carpatsky entered into a merger agreement with Pease Oil and Gas
Company (Pease), a public company (see Note 9). In December 1999, Carpatsky also
entered into an agreement for an additional equity infusion of $4,000,000 (see
Note 11). While no assurance can be given, it is hopeful that with the increased
and diversified asset base of the newly combined entity, Carpatsky will be able
to raise additional capital to further develop its Ukranian oil and gas
properties and reduce existing obligations.
The financial statements have been prepared on a going concern basis which
contemplates the realization of assets and liquidation of liabilities in the
ordinary course of business. The financial statements do not include any
adjustments should Carpatsky be unable to continue operations. Continuation of
Carpatsky is dependent upon, among other things, the raising of additional
capital required for the payment of existing obligations, including funding its
share of joint venture obligations, and continued funding of exploration,
development, and overhead costs. Ultimately Carpatsky must achieve profitable
operations and successfully repatriate funds to the United States.
Concentration of Risks - Carpatsky experiences certain risks not associated with
an oil and gas company with operations within the United States. Risks include
operations in a foreign country in transition to capitalism where political,
social, economic and legal systems are not highly developed. Carpatsky's results
may be adversely affected by changes in the political and social conditions in
Ukraine, changes in governmental policies with respect to laws and regulations
and other considerations as discussed below.
F-31
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
As a developer and a producer of natural resources, Carpatsky is subject to
additional regulation and market restrictions. The ultimate transfer of funds to
the U.S. is first subject to various taxes in Ukraine and then repatriation
taxes on the net transfer to the U.S.
Ukraine, as it transitions from a socialistic to a market economy, has suffered
with a highly inflationary economy. While inflation has been decreasing in
recent years, double digit inflation is expected to continue and could increase
as a result of unforeseen political and economic pressures.
In the past, most of Carpatsky's natural gas was sold to a state owned gas
transporter and distributor, which is an affiliate of Carpatsky's joint venture
partner in Ukraine (see Note 2). The affiliate is dependent upon payment by its
customers in order to generate revenues to pay the joint venture. Ukraine is a
"cash poor" country and many of the gas consumers are unable to meet their
financial obligations in hard currency on a timely basis. To date, Carpatsky has
experienced significant losses as a result of uncollected billings to the
affiliate. As additional oil and gas reserves are developed by Carpatsky and
others, management believes gas will become available for export, not
withstanding Ukraine remaining a net importer of gas. Transportation of gas to
export points will subject the joint ventures to additional transportation
charges. It is Carpatsky's belief that as Ukraine develops its economy, internal
gas markets will also develop and Carpatsky expectes to participate in those
markets. No assurances can be made in connection with any of the above
assumptions.
Principles of Consolidation - The accompanying financial statements include the
accounts of Carpatsky and its wholly-owned Delaware subsidiary, Carpatsky
Petroleum Corp., through which it participates in two Ukraine joint ventures
with varying ownership interests (see Note 2). Carpatsky proportionately
consolidated its interest in these oil and gas joint ventures. All material
intercompany transactions and accounts have been eliminated in consolidation.
Change in Year-Ends - In 1999, Carpatsky changed its year-end from June 30 to
December 31. All financial statements have been restated based on December 31
year ends.
Cash and Equivalents - Carpatsky considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. The Ukraine government has placed a lien on the RC Field Joint
Venture (Note 2) cash account until certain taxes (which have been accrued) are
paid. As such there is only an insignificant amount of cash in this account at
the balance sheet dates (see Note 11, Subsequent Events).
Stock Subscription Receivable - Represents funds which were received October 5,
1999 in connection with the sale of Carpatsky's common stock and stock purchase
warrants in a private placement.
Oil and Gas Properties - Carpatsky's oil and gas producing activities are
accounted for using the full cost method of accounting. Carpatsky has one cost
center (full cost pool) since all of its oil and gas producing activities are
conducted in Ukraine. Under the full cost method, all costs incurred in the
acquisition, development and exploration of oil and gas properties are
F-32
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
capitalized. 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 and
categorized as "unevaluated properties" on the balance sheet. These costs are
periodically evaluated for impairment and are transferred to properties being
amortized ("evaluated properties") when either proved reserves are established
or the costs are determined to be impaired. Carpatsky has no unevaluated
properties for any of the periods presented.
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. Carpatsky will accrue the estimated cost of dismantlement and
abandonment over the estimated life of the producing property.
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
value of Carpatsky's oil and gas reserves and the full cost ceiling are both
particularly sensitive in the near term to changes in oil and gas prices or
production rates.
Other Property and Equipment - Other property and equipment is stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, as follows:
Years
-----
Vehicles 7 years
Office equipment 3 to 7 years
Depreciation expense related to other property and equipment amounted to $15,756
and $17,733 for the years ended December 31, 1998 and 1997, respectively.
The costs of normal maintenance and repairs are charged to operating expenses as
incurred. Material expenditures which increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of properties sold, or otherwise disposed of, and the related
accumulated depreciation or amortization are removed from the accounts, and any
gains or losses are reflected in current operations.
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
F-33
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
the financial statements and the reported amounts of revenue and expenses during
the reporting period. The actual results could differ from those estimates.
Carpatsky'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 as well as estimated taxes payable in the Ukraine. 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. Substantially all of Carpatsky's reserves are related to
recent discoveries and as a result, approximately 10% of the proved reserves are
producing. The other 90% of Carpatsky's reserves consist principally of proven
but undeveloped locations.
Ukraine's tax and legal system is relatively new and undergoing rapid
development. As such, there is little official interpretation available in that
there has been an insufficient period of time for the laws to be thoroughly
tested in practice, either at an administrative or judicial level. Carpatsky's
estimate of Ukraine taxes is Carpatsky's best understanding of laws currently in
effect based on the legislation in force, on available official interpretation
and unofficial discussion with Ukranian authorities. Because of the lack of
available official interpretation and the fact that the relevant Ukranian
authorities have little experience with interpretation of such laws, estimates
as to taxes currently payable in the Ukraine could materially change in the near
term.
Taxes - Upon transfer of funds from the foreign joint ventures to the United
States, Carpatsky will be subject to repatriation tax of 15%. The foreign joint
ventures are also subject to (i) a current value added tax (VAT) of 16.67% for
items purchased, which is currently computed on a cash basis and (ii) profits
tax of 30% currently computed on a semi-accrual basis, with no consideration
given to, among other things, uncollected accounts. Under current regulation,
after the year 2000, VAT taxes will also be computed on the "semi-accrual"
basis.
VAT refundable represents VAT taxes paid, generally on capitalized purchases of
oil and gas equipment, which can offset VAT taxes payable on future production.
As amounts will be offset against future production, it has been classified as
long-term, except to the extent there is a current VAT tax payable.
Deferred tax assets and liabilities are recognized for future tax effects
attributable to the 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.
F-34
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
Revenue Recognition - Oil and gas revenues are recognized upon delivery to the
purchaser. Due to uncertainty surrounding the collection of receivables from
sales of gas primarily to a government controlled distributor in Ukraine,
Carpatsky has provided for a substantial allowance against its unpaid receivable
balance.
Barter Transactions - As is customary in undeveloped, cash poor countries,
Carpatsky receives and pays for certain transactions in Ukraine in barter; the
effects of these transactions are summarized as follows:
For the Nine Months Ended For the Years Ended
September 30, December 31,
------------------------- -------------------
1999 1998 1998 1997
---- ---- ---- ----
Gross barter income ......... $ 62,540 $ 82,952 $ 104,302 $ 40,468
Costs of bartered goods ..... (16,005) (46,618) (99,592) (6,642)
--------- --------- --------- ---------
Net barter income ........... $ 46,535 $ 36,334 $ 4,710 $ 33,826
========= ========= ========= =========
The value of barter transactions is based on the value of goods or services
either received or given, whichever is more apparent.
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 income or loss applicable to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
and resulted in the issuance of common stock. Basic and diluted EPS are the same
in 1998 and 1997 as all potential common shares were antidilutive. On the close
of business on September 30, 1999, Carpatsky closed its private placement and
issued common stock for conversion of certain debt. Therefore, the common shares
issued in these transactions had no material effect on net loss per share as of
September 30, 1999.
Stock-Based Compensation - Carpatsky accounts for stock-based compensation for
stock or options issued to employees and directors 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 or directors is
measured as the excess, if any, of the quoted market price of Carpatsky's common
stock at the measurement date (generally, the date of grant) over the amount an
employee must pay to acquire the stock.
F-35
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
In October 1995, the SFAS issued a new statement titled Accounting for
Stock-Based Compensation (No. 123). 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 financial
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.
Foreign Currency - Because the Republic of Ukraine is considered to have a
highly inflationary economy, the functional currency for accounting purposes of
Carpatsky's Ukranian operations is the U.S. dollar. Even though the inflation
rates in the last few years have reduced significantly, the political, social,
and economic instability leaves the future inflation rates unpredictable at this
time. Therefore, for accounting purposes, adjustments resulting from translation
of foreign currency monetary assets (generally current assets and liabilities)
are made as of each balance sheet date and non-monetary assets (consisting
principally of Carpatsky's investment in its oil and gas properties) are
translated at the historical exchange rate. The net effect of these translation
adjustments are reflected as a separate component of the statement of operations
along with exchange gains and losses in foreign currency transactions. During
1998 and 1999, these adjustments have resulted in a substantial gain due to the
significant current liabilities in excess of current assets. If and when the
Ukrainian economy is considered not to be highly inflationary, all assets and
liabilities will be translated at the exchange rate as of the balance sheet
date. Adjustments resulting from translation of foreign currency financial
statements (translated gain and losses) will be accumulated in a separate
component of stockholders' equity (such adjustments, however, would be reflected
as a component of comprehensive income at that time) and would be transferred to
income only on sale, liquidation or substantial complete liquidation of
Carpatsky's interest in the foreign joint ventures.
Unaudited Information - Carpatsky's balance sheet as of September 30, 1999 and
the statement of shareholders' equity for the period then ended as well as the
statement of operations and cash flows for the nine months ended September 30,
1999 and 1998 are prepared by management without audit. However, in the opinion
of management, such information includes all adjustments (consisting of normal
and recurring items) necessary for the fair presentation of Carpatsky's
financial position and results of operations in conformity with generally
accepted accounting principals.
2. JOINT VENTURE ARRANGEMENTS:
Carpatsky's only oil and gas interests consist of two separate joint
ownership/venture arrangements in Ukraine. Common to the oil and gas industry in
many foreign countries, Carpatsky does not own any interest in any real
property. Its rights and obligations are governed by the joint ownership/venture
arrangements. The first arrangement, a joint venture, was formed in 1994 to
develop the Bitkov-Baberensky Oil Field in Western Ukraine (Bitkov Field) with
Ukrnafta, a joint stock company controlled by the Ukranian government. Carpatsky
holds a 45% interest in the joint venture which extends for a period of up to 20
years. Currently, this joint venture (Ukracapatoil, Ltd.) is in the
organizational stage during which certain costs of operations, gathering and
distribution in being paid by Ukrnafta. According to the terms of the joint
venture agreement, all environmental liabilities identified during the
organizational stage will not transfer to the joint venture but will remain the
responsibility of Ukrnafta. In addition, during this stage an environmental
F-36
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
base-line study is to be conducted to determine the extent of potential
environmental liabilities that exist at the field. At the end of the
organizational period, expected within the next two years, Carpatsky may elect
not to proceed with this joint venture due to the potential of unidentified
environmental problems of past operations of the properties or other operational
considerations and economic issues. Carpatsky's investment in this joint venture
is approximately $1,016,000 at September 30, 1999 and revenues and expenses of
its operations have not been significant.
In 1995, Carpatsky executed a joint activity agreement (Agreement) with Ukrnafta
to undertake the joint development of the Rudovsko-Chernozavodsky natural gas
and condensate field (the "RC Field" or "RC Joint Venture") in Eastern Ukraine.
Ukrnafta's initial contribution was certain oil and gas wells for which the
historical cost information was not available. Therefore, an independent party
in Ukraine valued the wells at a current replacement cost of approximately
$4,800,000. Carpatsky's investment, however, has been based on its cost.
Substantially all of Carpatsky's oil and gas reserves are attributable to this
field. Production operations in the field initially commenced in February 1997
with Carpatsky's first well commencing production in August 1998. The Agreement
contemplated each joint venture party owning a 50% working interest in the
project based on equal contributions to the joint account, with Ukrnafta
receiving an additional 10% net revenue interest (e.g., Ukrnafta would have a
55% net revenue interest if both parties have contributed an equal 50% to the
joint account). The contribution, or sharing ratios, are compiled quarterly and
as of January 1, 1999 and October 1, 1999, Carpatsky had an approximate 45% and
35% interest, respectively, interest based on its proportionate share of
contributions to the joint account.
In October 1999, Ukrnafta advised Carpatsky that it had until December 31, 1999
to make an additional contribution to the joint account of approximately $2.9
million. A failure to do so would have diluted Carpatsky's interest in the RC
Field even further and would have precluded them from participating in the next
two wells drilled. In connection with the financing discussed in Note 11,
Ukrnafta notified Carpatsky that its full interest would be preserved assuming
they contribute approximately $1,000,000 in January 2000 and $1,900,000
(representing Carpatsky's proportioned costs incurred through September 1, 1999)
plus an estimated $300,000 (unaudited) for Carpatsky's proportioned costs
expected to be incurred between September 1, 1999 through March 31, 2000 to
regain its 50% interest. Carpatsky intends to use the proceeds from the
financing discussed in Note 11 for these purposes. Currently, Carpatsky is not
named in the underlying license governing the rights and obligations of the RC
field. Ukrnafta has agreed to take such actions as necessary to file the
application with the appropriate governmental agencies to have Carpatsky named
on the license agreement by February 15, 2000. Carpatsky's investment in this
Joint Venture is approximately $4,296,000 at September 30, 1999.
Carpatsky has proportionately consolidated its interest based on relative
ownership interest as of the end of each quarter for both the Bitkov Field and
RC Field joint arrangements.
F-37
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
3. DEBT FINANCING ARRANGEMENTS:
Long-Term Debt - Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Series 1 debenture, interest of 12%, collateralized by all the
outstanding shares of Carpatsky Petroleum Corp. (CPC), a
subsidiary of Carpatsky, which holds all of the contractual
agreements in Ukraine, subject to the subordination to the
promissory note described below .................................... $ 220,000 $ 220,000
Promissory note, interest at 12% (default interest at 18%),
collateralized by a first lien of all the outstanding shares of CPC 328,914 328,914
---------- ----------
Current portion of debt ............................................ 548,914 548,914
Debt converted into common stock in September 1999:
Other Series 1 debentures ................................... -- 780,000
Convertible notes, uncollateralized, interest at 12% ........ -- 1,227,707
---------- ----------
$ 548,914 $2,556,621
========== ==========
</TABLE>
$548,914 has been classified as current as Carpatsky was in non-compliance with
the terms of the debt. All the other debt was also in non-compliance as of
December 31, 1998, however, as explained in Note 6, the defaults were cured
effective September 30, 1999, when $2,007,707 of debt was converted into common
stock and warrants based on understandings as of year-end. Accordingly, this
amount has been classified as long-term as of December 31, 1998. Carpatsky
continues to negotiate with the other creditors for extended time or other
alternatives regarding repayment. Carpatsky has offered these creditors the same
exchange as other creditors, but the offers remain unaccepted and demands for
payment has been made from the holders of the debt.
4. INCOME TAXES:
Income tax expense included in the financial statements does not correspond to
the expected relationship to the loss before income taxes, because such tax
expense represent taxes payable to the Ukranian government. As previously
indicated, taxes in Ukraine are computed on an accrual basis whereby no
consideration is given to the joint ventures losses on uncollected billings.
This results in income reported in Ukraine, which is taxed at 30%. Other
significant permanent differences between financial and tax reporting represent
the gain on the net monetary position for which taxes are not paid. For Canada
tax reporting purposes, Carpatsky has net operating loss carryforwards (NOLs).
Carpatsky had not yet filed its income tax returns for December 31, 1998 but as
F-38
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
of June 30, 1998, the latest date tax returns have been filed, the NOL
carryforward was approximately $1,000,000. The utilization of its loss
carryforwards may be limited based on the potential merger with Pease Oil and
Gas Company, and/or ultimately Carpatsky's intent to reincorporate in the United
States. The deferred tax asset resulting from the NOL carryforward of
approximately $350,000 has been fully offset by a valuation allowance and there
are currently no other significant timing differences between the financial
reporting and tax basis of assets and liabilities.
5. COMMITMENTS AND CONTINGENCIES:
Environmental - Carpatsky and its foreign joint ventures are subject to
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require
Carpatsky and/or its joint ventures 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.
Oil and gas companies operating in Ukraine have little, if any, experience with
estimating the costs of restoring oil and gas properties at the time they are
abandoned. Carpatsky intends to use the best information available to accrue
such costs over the life of its wells.
Carpatsky is aware that there are various environmental problems associated with
the past operation of the properties prior to its involvement in the Bitkov
Field. Upon conclusion of the organizational stage as defined in the license
(expected to occur within the next two years), Ukrnafta is obligated to perform
an environmental study on the field and identify all potential and past
environmental problems which will then become the responsibility of Ukrnafta and
Carpatsky will not be responsible for costs associated with past environmental
damages. However, as Ukrnafta will be performing the study and is itself
obligated for past problems, a potential conflict of interest exists.
Year 2000 Issue - Carpatsky's U.S. accounting systems are currently being
maintained by Pease (see Note 9). Pease has conducted a review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue.
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of Pease's programs
that have time-sensitive software may recognize a date using "00"as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations.
Carpatsky does not believe that the Year 2000 problem will pose a material
operations problem within the U.S. for accounting systems operated by Pease for
Carpatsky. Pease's computer software providers have assured Pease that all of
its software is or will be Year 2000 compliant (i.e., will function properly in
the year 2000 and beyond). Pease's accounting software providers have asserted
they will provide written assurance that its products are or will be Year 2000
compliant. To Pease's knowledge, after investigation, no "imbedded technology"
(such as microchips in an electronic control system) poses a material Year 2000
problem.
F-39
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
Carpatsky has not performed detailed evaluation of the systems used by its joint
ventures in Ukraine. As Carpatsky is substantially dependent on the operator of
each, this may result in a problem for Carpatsky, however, most of these systems
are currently manually performed.
Carpatsky is materially dependent on an affiliate of Ukrnafta for the delivery
and payment of the natural gas produced from the RC Field. This affiliate in
turn may be dependent on various third party vendors for delivery and payment.
Carpatsky has not requested written assurances from this affiliate as most of
their systems are believed to be manual. Carpatsky can give no assurance at this
time that this affiliate or their third party vendors are or will be Year 2000
compliant.
In the event that one or more of Carpatsky's vendors, including Ukrnafta and its
affiliates, were to have a material Year 2000 problem, Carpatsky believes that
the foreseeable consequences would be a temporary delay in revenue collection
caused by an interruption in computerized billing (and not an interruption in
the actual flow of the joint ventures' oil or natural gas), which may have a
substantial impact on Carpatsky's ability to conduct operations. Carpatsky does
not have any contingency plan to address this possibility (see Note 11).
Contingencies - Carpatsky 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. Carpatsky 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. STOCKHOLDERS' EQUITY:
Private Placements and Debt Conversions - In September 1999, Carpatsky completed
a private placement of securities in which it raised $1,000,000 from the sale of
13,333,340 shares of common stock and 5,000,000 warrants. Each warrant entitled
the holder to purchase one share of common stock at $0.20 through December 31,
2000. Officers and directors of Carpatsky subscribed to and paid for $475,000 of
this private placement.
Contingent upon the completion of this private placement, debt holders and other
creditors converted $2,007,706 of debt, $220,000 of payables and $448,558 of
interest into 20,045,344 shares of common stock and 12,307,904 warrants,
including 7,920,000, which were previously outstanding, but were slightly
modified and canceled. The new warrants are on the same terms as the private
placement. Certain of these common shares Carpatsky has agreed to register for
resale at its cost. Other creditors totaling approximately $650,000 (including
accrued interest) have been offered the rights to exchange on the same terms as
above, but have declined the current offer and have made demand for payment.
F-40
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
In connection with issuance of warrants associated with debt, Carpatsky has
recorded approximately $800,000 as the value of the warrants and expensed this
amount as debt discount over the original term of the debt in 1997 and 1998.
Common Shares Issued for Services - Based on the success of the private
offering, Carpatsky issued an individual 953,333 shares of common stock, 357,500
warrants (issued on the same terms as the private placement) valued at $71,500.
This individual subsequently became an officer of Carpatsky and such amounts
were expensed in operations.
Stock Option Plans - Carpatsky's shareholders have approved a stock option plan
that authorizes an unlimited number of shares for stock options, not to exceed
the maximum permitted by the Alberta exchange that may be granted to officers,
directors, employees, and consultants. This amount is currently 10% of the
issued and outstanding shares of common stock. Any grantee may not have options
exercisable into more than 5% of Carpatsky's common stock at any one time.
The plan permits the issuance of incentive and nonstatutory options and provides
for a minimum exercise price equal to 100% of the fair market value of
Carpatsky's common stock on the date of grant. The maximum term of options
granted under the plan is 5 years and options granted to employees expire after
the termination of employment. None of the options may be exercised during the
first six months of the option term.
The following is a summary of activity under this stock option plan for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding, beginning of period ..... 1,822,224 $ .21 850,000 $ .14
Canceled ...................... (400,000) .36 -- --
Granted ....................... 200,000 .20 1,700,000 .22
Exercised ..................... -- -- (727,776) .14
---------- ---- ---------- ----
Outstanding, end of period ........... 1,622,224 $ .18 1,822,224 $ .21
========== ==== ========== ====
</TABLE>
The above amounts exclude 100,000 options exercisable at $.15, being claimed by
a shareholder of Carpatsky for past services from options issued to certain
officers and directors of Carpatsky. No options have been issued subsequent to
December 31, 1998. In December 1999, all the officers and directors surrendered
in the aggregate 1,422,224 options (see Note 11).
F-41
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
For all options granted during 1998 and 1997, the market price of Carpatsky's
common stock on the grant date was approximately equal to the exercise price.
Options remaining outstanding after the surrender in December 1999, and if not
previously exercised, will expire in 2003 (or the earlier of 30 days after a
reorganization of Carpatsky as contemplated in the merger with Pease) and are
exercisable at $.20.
Warrants - Carpatsky has also granted warrants and non-qualified options which
are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period ............... 23,734,300 $ .25 21,303,415 $.25 3,142,500 $ .25
Exercised .................................... -- -- -- -- (773,385) .29
Expired ...................................... (15,814,300) .25 (2,369,115) .28 -- --
Canceled ..................................... (7,920,000) .25 -- -- (773,385) .29
Private placement of debt .................... -- -- 4,800,000 .25 4,000,000 .25
Granted to:
Brokers and underwriter in private
placements ............................. 357,500 .20 -- -- 1,987,685 .25.
Private placement of common stock ............ 00,000 .20 -- -- 13,720,000 .25
Granted for conversion of debt ............... 2,307,904 .20 -- -- -- --
----------- ---- ----------- ---- ----------- ----
Outstanding, end of period ..................... 17,665,404 $ .22 23,734,300 $.22 1,303,415 $ .25
=========== ==== =========== ==== =========== ====
</TABLE>
As of September 30, 1999, all warrants are exercisable at $.20 and will expire
on December 31, 2000.
Pro Forma Stock-Based Compensation Disclosures - Carpatsky applies APB Opinion
25 and related interpretations in accounting for stock options and warrants
which are granted to employees and directors. 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 Carpatsky'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
SFAS No. 123, Carpatsky's net loss and loss per share would have been changed to
the pro forma amounts indicated below.
1998 1997
---- ----
Net loss
As reported $ (346,544) $ (965,734)
Pro forma (346,544) (1,232,934)
Net loss per common share:
As reported (0.01) (0.03)
Pro forma (0.01) (0.04)
F-42
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
The weighted average fair value of options and warrants granted to employees for
the years ended December 31, 1997 was $.21. The fair value of each employee
option and warrant granted was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Expected volatility 170.0%
Risk-free interest rate 6.0%
Expected dividends --
Expected terms (in years) 4.0
7. FINANCIAL INSTRUMENTS:
SFAS No. 107 requires all entities to disclose the fair value of certain
financial instruments in their financial statements. Accordingly, at December
31, 1998, management's best estimate is that the carrying amount of cash,
receivables, notes payable to unaffiliated parties, accounts payable, and
accrued expenses approximates fair value due to the short maturity of these
instruments. However, due to changes in Ukraine's inflation rate or foreign
currency exchange, these accounts may ultimately be settled at different
amounts. Management estimates that fair value is approximately equal to carrying
value of the convertible debentures. Carpatsky continues to negotiate with
parties who did not convert their notes to common stock and as the amounts are
in default and Carpatsky continues to experience current liquidity problems, it
is unknown if and in what amounts such notes will be paid. The joint ventures
have VAT refundable amounts in Ukraine. Such amounts are generally not repaid in
cash in Ukraine, but rather are offset against other taxes. Therefore, these
offsets are dependent upon continued development and operating profits in
Ukraine. Carpatsky expects the recovery or offset of this VAT refundable tax
will be in the short term, however, it could extend over a longer period which
may reduce its ultimate fair value.
8. SIGNIFICANT CONCENTRATIONS:
Substantially all of Carpatsky's accounts receivable at December 31, 1998,
result from crude oil and natural gas sales to entities in Ukraine. This
concentration of customers may negatively impact Carpatsky's overall credit
risk, because these entities may be similarly affected by changes in economic or
other conditions. Carpatsky does not obtain collateral from any of its
customers. Sales generated from production of the RC Field gas accounts for the
majority of Carpatsky's current revenue. Historically, a substantial portion of
these sales were to an affiliate of Ukrnafta in the RC Field. Sales to this
affiliate were 0%, 10%, and 53% for the years ended September 30, 1997, 1998,
and the nine months ended September 30, 1999. As previously discussed, the
ultimate payment of the joint venture's receivables is dependent upon payment of
this affiliate's customers, which in the past has resulted in significant
delinquencies or non-payment. As of December 31, 1998, the net receivable
balance was not significant, as it has been substantially reserved as
uncollectible.
F-43
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
9. AGREEMENT TO MERGE WITH PEASE OIL AND GAS COMPANY:
On September 1, 1999, Carpatsky and Pease Oil and Gas Company (Pease) entered
into a definitive Agreement and Plan of Merger (the "Merger Agreement") to
combine their respective businesses through a reverse merger. The Merger
Agreement was amended on December 30, 1999 in connection with a financing
arrangement entered into between Carpatsky with Bellwether Exploration Company
(Bellwether) (see Note 11). Pursuant to the terms of the amended Merger
Agreement, the newly combined entity will have approximately 55.5 million common
shares and 102.41 million shares of a newly designated preferred stock
outstanding. The effective ownership distribution of Carpatsky immediately after
the merger will be as follows: approximately 87.5% to Carpatsky's former
shareholders (including Bellwether, assuming their preferred shares were
converted into 28,920,984 common shares of Pease); approximately 10.5% to former
Pease Series B Preferred stockholders; and approximately 2.0% to Pease's current
common stockholders. The Merger Agreement is conditioned upon, among other
things, regulatory and shareholder approvals. The Merger Agreement was
unanimously approved by the Boards of Directors of both companies; Bellwether
and the directors and officers of Pease and Carpatsky have agreed to vote their
shares in favor of the transaction. The parties expect to complete the
transaction in early 2000. Pursuant to the Merger Agreement, there is a break-up
fee of $250,000 payable by the defaulting company.
10. OIL AND GAS PRODUCING ACTIVITIES:
Costs Incurred in Oil and Gas Producing Activities - The following is a summary
of costs incurred in oil and gas producing activities for the years ended
December 31, 1998 and 1997:
1998 1997
---- ----
Property acquisition costs $ -- $ --
Development costs 1,540,543 3,449,211
Exploration costs -- --
---------- ----------
Total $ 1,540,543 $ 3,449,211
=========== ==========
Full Cost Amortization Expense - Amortization expense amounted to $176,465 and
$15,617 for the years ended December 31, 1998 and 1997, respectively.
Amortization expense per equivalent units of natural gas produced (mcfe)
amounted to $.134 per mcfe for both of the years ended December 31, 1998 and
1997. Oil is converted to equivalent units of natural gas on the basis of 6 mcf
of gas to one barrel of oil.
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 Carpatsky's
consulting petroleum engineers. Reserve estimates require substantial judgment
F-44
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
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 Republic of Ukraine. The following table presents estimates of Carpatsky's
net proved oil and gas reserves, and changes therein for the years ended
December 31, 1998 and 1997.
The reserve estimates are based on Carpatsky's portionate interest as of year
end in its joint ventures. Subsequent to December 31, 1998, Carpatsky's interest
in the RC Field, which accounts for 96% of total reserves, decreased to 35% from
45% as of October 1, 1999. If Carpatsky makes the required capital contribution
as discussed in Note 2, it will regain its 45% interest.
<TABLE>
<CAPTION>
1998 1997
------------------ -------------------
Oil Gas Oil Gas
(bbls) (mcf) (bbls) (mcf)
------ ----- ------ -----
<S> <C> <C> <C> <C>
Proved reserves, beginning of year ................ 2,756,899 212,347,000 2,769,305 212,389,066
Extensions, discoveries, and other additions 11,389 750,453 -- --
Production ................................. (29,997) (1,136,453) (12,406) (42,066)
------------ ------------ ------------ ------------
Proved reserves, end of year ...................... 2,738,291 211,961,000 2,756,899 212,347,000
============ ============ ============ ============
Proved developed reserves, beginning of year ...... 139,661 744,000 152,067 786,066
============ ============ ============ ============
Proved developed reserves, end of year ............ 387,304 22,228,000 139,661 744,000
============ ============ ============ ============
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows (Unaudited) - SFAS No.
69 prescribes guidelines for computing a standardized measure of future net cash
flows and changes therein relating to estimated proved reserves. Carpatsky has
followed these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are determined
by applying year-end prices and costs to the estimated quantities of oil and gas
to be produced. Estimated future income taxes are computed using current
statutory income tax rates including consideration for estimated future
statutory depletion and tax credits. The resulting future net cash flows are
reduced to present value amounts by applying a 10% annual discount factor.
Future income taxes are based on U.S. Statutory rates assuming offsetting
benefits will be available for income taxes paid in Ukraine. Repatriation taxes
of 15% for funds transferred from Ukraine have not been considered as such
amounts ultimately to be repatriated are not certain.
F-45
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
The reserve information presented below assumes that Carpatsky will be able to
realize proceeds from the sale of its oil and gas, which, as discussed herein,
has been a problem in the past.
The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and, as such, do not necessarily
reflect Carpatsky's expectations for actual revenues to be derived from those
reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process, as discussed previously, are equally applicable to
the standardized measure computations since these estimates are the basis for
the valuation process.
The following summary sets forth Carpatsky's future net cash flows relating to
proved oil and gas reserves as of December 31, 1998 and 1997 based on the
standardized measure prescribed in Statement of Financial Accounting Standards
No. 69.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Future cash inflows ...................................... $ 351,535,000 $ 431,080,000
Future production costs .................................. (214,640,000) (217,334,000)
Future development costs ................................. (25,339,000) (27,103,000)
Future income tax expense ................................ (41,000,000) (69,000,000)
------------- -------------
Future net cash flows ............................. 70,556,000 117,643,000
10% annual discount for estimated timing of cash flow .... (32,527,000) (45,693,000)
------------- -------------
Standardized Measure of Discounted Future Net
Cash Flows ............................................ $ 38,029,000 $ 71,950,000
============= =============
</TABLE>
The above 1998 amounts are based on year-end gas prices of $1.50 per mcf in
1998. Average selling price received in 1999 was $.87 per mcf as Carpatsky began
selling gas on the spot market.
F-46
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
Changes in Standardized Measure (Unaudited) - The following are the principal
sources of change in the standardized measure of discounted future net cash
flows for the years ended December 31, 1998 and 1997:
1998
----
Standardized Measure, beginning of year ................ $ 71,950,000
Sale of oil and gas produced, net of production costs .. (461,000)
Net changes in prices and production costs ............. (42,000,000)
Net changes in estimated development costs ............. 470,000
Revisions of previous quantity estimates and other ..... (14,522,000)
Discoveries, extensions, and other additions ........... 250,000
Accretion of discount .................................. 7,200,000
Changes in income taxes, net ........................... 15,142,000
------------
Standardized Measure, end of year ...................... $ 38,029,000
============
11. SUBSEQUENT EVENTS (UNAUDITED):
In December 1999, all the directors and one former director were issued an
aggregate of 600,000 shares of common stock which will be valued for financial
reporting purposes at $60,000. These shares were granted in connection with the
anticipated changes associated with the financing discussed in the following
paragraph. As a requisite of receiving the shares, each director had to
surrender all their options previously granted and currently outstanding (see
Note 6).
On December 30, 1999, Carpatsky sold 95.45 million of its preferred shares
(Series A) and warrants to acquire 12,500,000 common shares to Bellwether for $4
million. The warrants are exercisable at $.20 per share through December 31,
2000. The preferred shares are convertible (at $.08 per share) into 50 million
Carpatsky common shares, do not carry a preferential dividend and have majority
voting rights over Carpatsky as well as a liquidation preference of $4,000,000.
In connection with this investment, Chairman and CEO of Bellwether became the
Chairman and CEO of Carpatsky and three Carpatsky directors retired and were
replaced by four Bellwether appointees, giving Bellwether five of the now eight
directorships of Carpatsky.
In connection with the financing, the terms of the merger between Carpatsky and
Pease were amended to (1) approve the Bellwether investment and commit Pease to
issue a similar class of preferred stock to Bellwether upon consummation of the
merger, (2) revise the sharing ratio so that Pease shareholders will retain, in
the aggregate, a 12.5% interest in the merged entity after giving affect to the
Bellwether financing, and (3) modify such other terms as necessary.
F-47
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1998 is Unaudited)
The $4 million has been placed in a Carpatsky account. Of that amount, $500,000
was transferred to the joint activity account of the RC Field to pay delinquent
taxes. An additional $500,000 has been earmarked for the purchase of material
and equipment to be paid for by January 15, 2000 and approximately $2.2 million
is to be paid to the joint activity once the joint venture license agreement is
amended. This is anticipated to be completed by February 15, 2000. The payment
terms have been agreed to by Ukrnafta to allow Carpatsky to maintain its 45% net
revenue interest.
If the merger with Pease is successful, the preferred stock will be exchanged
into preferred stock of Pease based upon an exchange rate which will enable
Bellwether to maintain its voting control, however the conversion rights into
common stock will be based on the same exchange ratio as other common
shareholders of Carpatsky.
In connection with the Bellwether financing and with the approval of the
Canadian Venture Exchange (CVE) (successor to the Alberta Stock Exchange),
Carpatsky's chief operating officer was issued 2,000,000 shares of common stock
which issuance was previously contingent upon the completion of Pease merger.
These shares will be valued at $200,000 for financial reporting purposes. The
CVE also approved the authorization of 500,000,000 shares of no par value
preferred stock. Such preferred shares can be issued in such series and
preferences as may be determined by Carpatsky Board of Directors.
Carpatsky and its joint ventures are not aware of any significant problems in
connection with computer malfunctions associated with Y2K on January 1, 2000
which would effect their operations.
F-48
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Article VII of the Registrant's Articles of Incorporation provides that no
director or officer of the Registrant shall be personally liable to the
Registrant or any of its stockholders for damages for breach of fiduciary duty
as a director or officer, except that such provision will not eliminate or limit
the liability of a director or officer for any act or omission which involves
intentional misconduct, fraud or a knowing violation of law or for the payment
of any dividend in violation of Section 78.300 of the Nevada Revised Statutes.
Section 78.751 of the Nevada Revised Statutes permits the Registrant to
indemnify its directors, officers, employees and agents if such person acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, has no reasonable cause to believe his conduct was
unlawful.
To the extent that a director, officer, employee or agent of a corporation has
been successful on the merits or otherwise in defense of any action, the
corporation must provide indemnification against expenses, including attorneys'
fees, actually and reasonably incurred by him in connection with the defense.
Section 43 of the Registrant's Bylaws provides that the Registrant shall provide
indemnification to Registrant's officers, directors and employees to the fullest
extent permitted under the Nevada General Corporation Law.
Item 21. Exhibits and Financial statement schedules.
(a) Exhibits. The following is a complete list of exhibits filed as part of
this registration statement and which are incorporated in this document.
Exhibit No. Document
- ---------- --------
3.1 Articles of Incorporation.(1)
3.2 Bylaws.(2)
3.3 Amended and Restated Articles of Incorporation in the form
proposed to be amended.
4.1 Agreement and Plan of Merger dated August 31, 1999.(3)
4.2 First Amendment to Agreement and Plan of Merger dated December
30, 1999.(4)
5.1 Opinion of Alan W. Peryam, LLC as to legality of Pease common and
preferred stock.(2)
5.3 Opinion of McManus Thomson as to certain matter of Canadian
law(2).
8.1 Opinion of Satterlee Stephens Burke & Burke LLP as to the tax
consequences of the proposed merger under the tax laws of the
United States.(2)
8.2 Opinion of Feleski Flynn as to the tax consequences of the
proposed merger under the tax laws of Canada.(2)
10.1 1990 Stock Option Plan.(1)
10.1 1993 Stock Option Plan.(1)
10.3 1994 Employee Stock Option Plan.(1)
10.4 Employment Agreement effective December 27, 1994 between Pease
Oil and Gas Company and Patrick J. Duncan.(1)
10.5 Agreement between Beta Capital Group, Inc., and Pease Oil and Gas
Company dated March 9, 1996.(1)
10.6 Form of Warrants issued to Beta Capital Group, Inc.(1)
II-1
<PAGE>
10.7 1996 Stock Option Plan.(1)
10.8 1997 Long Term Incentive Option Plan (1)
10.9 Preferred Stock Investment Agreement dated December 31, 1997.(1)
10.10 Letter Agreement dated 1/16/98 between National Energy Group,
Inc. and Pease Oil and Gas Company.(1)
10.11 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 (1)
10.12 Retirement, Severance and Termination of Employment Agreement
from James N. Burkhalter dated 1/1/98 (1)
10.13 Letter Agreement dated May 20, 1998 between National Energy
Group, Inc. and Pease Oil and Gas Company.(1)
10.14 Amended Employment Agreement effective November 1, 1998 between
Willard H. Pease, Jr. and Pease Oil and Gas Company.(1)
10.15 Severance and Termination of Employment Agreement effective
December 7, 1998 between Willard H. Pease, Jr. and Pease Oil and
Gas Company.(1)
10.16 Confirmation of Employment Contract effective January 11, 1998
between Patrick J. Duncan and Pease Oil and Gas Company.(1)
10.17 Engagement Letter of San Jacinto Securities, Inc. dated
September 4, 1998 with Pease Oil and Gas Company.(1)
20.1 Opinion of Houlihan Smith & Company, Inc. (Appendix B to
registration statement.
23.1 Consent of HEIN + ASSOCIATES LLP with respect to Pease.
23.2 Consent of HEIN + ASSOCIATES LLP with respect to Carpatsky.
23.3 Consent of Alan W. Peryam, LLC (included with Exhibits 5.1).(2)
12.4 Consent of Satterlee Stephens Burke & Burke LLP (included with
Exhibits 5.1 and 8.1).(2)
23.5 Consent of McManus Thomson (included with Exhibit 5.3).(2)
23.6 Consent of Feleski Flynn (Canadian counsel).(2)
23.7 Consent of Houlihan Smith & Company, Inc.(2)
27.1 Financial Data Schedule-Pease Oil and Gas Company
27.2 Financial Data Schedule-Carpatsky Petroleum Inc.
- ---------------
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998 filed with the Commission April
2, 1999.
(2) To be filed by amendment.
(3) Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K dated
September 13, 1999.
(4) Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K dated
December 31, 1999.
(b) Financial Statement Schedules. Schedules have been omitted since the
required information is not present, or not present in amounts sufficient to
require submission of the schedule, or because the information is included in
the financial statements or notes thereto.
Item 22. Undertakings.
(a) The undersigned Registrant undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for the
other Items of the applicable form.
II-2
<PAGE>
The Registrant undertakes that every prospectus (i) that is filed under the
immediately preceding paragraph, or (ii) that purports to meet the requirements
of Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant by the indicated provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(b) The undersigned Registrant undertakes to respond to requests for
information that is incorporated by reference into the prospectus under Items 4,
10(b), 11, or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(c) The undersigned Registrant undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and Pease
being acquired involved therein, that was not the subject of and included in the
registration statement when it become effective.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the state of Colorado
on January 21, 2000.
PEASE OIL AND GAS COMPANY
(Registrant)
By: /s/ Patrick J. Duncan
----------------------------------
Patrick J. Duncan, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the capacity
and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Patrick J. Duncan President and director January 21, 2000
- ----------------------- (Principal Executive
Patrick J. Duncan Officer, Principal
Financial and
Accounting Officer
/s/ Steve A. Antry Director January 21, 2000
- ------------------------
Steve A. Antry
/s/ Stephen L. Fischer Director January 21, 2000
- ------------------------
Stephen L. Fischer
/s/ Homer C. Osborne Director January 21, 2000
- ------------------------
Homer C. Osborne
/s/ James C. Ruane Director January 21, 2000
- ------------------------
James C. Ruane
/s/ Clemons F. Walter Director January 21, 2000
- ------------------------
Clemons F. Walker
II-4
<PAGE>
This registration statement constitutes the Management Information Circular
of Carpatsky Petroleum Inc. provided to shareholders of Carpatsky Petroleum Inc.
in connection with the solicitation of proxies for use at the special meeting of
shareholders of Carpatsky Petroleum Inc. described herein. The following
certificate is provided to shareholders of Carpatsky Petroleum Inc. only under
the requirements of the Securities Act (Alberta).
To The Shareholders of Carpatsky Petroleum Inc.
The foregoing contains no untrue statement of a material fact and odes not
omit to state a material fact that is required to state or that is necessary to
make a statement not misleading in light of the circumstances in which it was
made.
J. P. Bryan Robert Bensh
Chief Executive Officer Chief Financial Officer
II-5
<PAGE>
APPENDIX B
CONFIDENTIAL
January 7, 2000
Board of Directors
Pease Oil & Gas Company
751 Horizon Ct. Suite 203
Grand Junction, CO 81506-8718
Ladies and Gentlemen:
We understand that Pease Oil and Gas Company ("Pease" or "the Company") has
entered into a definitive merger agreement (the "Merger") with Carpatsky
Petroleum, Inc. ("Carpatsky") whereby Pease will issue approximately 73.9
million shares to Carpatsky in a reverse triangular merger transaction that is
intended to qualify as a "tax-free" reorganization under the Internal Revenue
Code of 1986, as amended. We also understand that at or before the closing of
the Merger all of the currently outstanding Series B Convertible Preferred Stock
of Pease will be exchanged for approximately 8.9 million common shares of Pease.
You have requested our opinion as to whether the Merger, pursuant to the
definitive merger agreement, dated August 31, 1999 and amended December 30, 1999
is fair, from a financial point of view, to Pease and its stockholders as of the
date hereof (the "Opinion"). For the purposes of the Opinion set forth herein,
we have, among other things:
a. Reviewed the financial terms of the transaction as provided in the
definitive Merger Agreement. This included a review of the First
Amendment to Merger Agreement, including exhibits.
b. Reviewed the Pease and Carpatsky disclosure schedules to the Merger
Agreement.
c. Reviewed the financial terms of the Securities Purchase by Bellwether
Exploration Company of Convertible Preferred Shares and Warrants of
Carpatsky as provided in the Securities Purchase Agreement by and
between Carpatsky Petroleum, Inc. and Bellwether Exploration Company
including exhibits.
<PAGE>
d. Reviewed the public Securities and Exchange Commission filings of
Pease including the most recent 10-QSB, 10-KSB, and the 8-K announcing
the planned merger.
e. Reviewed financial statements of Pease and Carpatsky audited by Hein +
Associates.
f. Reviewed internal financial and capitalization schedules describing
the operations of Pease prepared by Pease management.
g. Reviewed reserve reports as of January 1, 1999 of Pease oil and
natural gas reserves as prepared by Netherland, Sewell & Associates,
Inc. and dated March 16, 1999. Additionally, Houlihan was provided
with a pricing sensitivity analysis prepared by the same dated March
18, 1999.
h. Reviewed reserve reports dated June 30, 1999 of certain leasehold
interests of Carpatsky as prepared by Ryder Scott Company and dated
June 21 and 23, 1999. These reports represent the full contractual
interest reserves as well as the paid-in interest reserves. Houlihan
also reviewed various reserve sensitivity analyses prepared by Ryder
Scott.
i. Reviewed a report of Wise & Treece Petroleum Management, Inc. dated
August 23, 1999 which reviews the Ryder Scott reserve report, and
calculates an estimated engineered value of the reserves in the
Carpatsky interest in the RC field based upon the Ryder Scott data and
other assumptions provided by Wise & Treece and Pease management.
j. Reviewed other due diligence documents and letters including documents
reviews, due diligence memos and opinions from Pease management and
Ostrander-Krug & Sobel, LLC.
k. Reviewed several other proposals for mergers, acquisitions, or
proposed financings as well various memos from advisors to Pease
evaluating several of these various offers.
l. Reviewed the Agreement Not to Sell or Convert Securities and the
Exchange Agreement and Irrevocable Proxy pertaining to the outstanding
Series B Convertible preferred stockholders' agreement not to convert
outstanding preferred stock to common stock during the merger
negotiations and the final agreement by holders of the preferred stock
to exchange all outstanding Series B Preferred for a set number of
shares of common stock at or before the Effective Time of the merger.
m. Reviewed the Resolutions of the Pease board of directors and the
Amended and Restated Articles of Incorporation proposed to facilitate
the merger.
n. Analyzed the historical trading prices and volumes of Pease and
Carpatsky stock as quoted on the NASDAQ Small Cap Market and OTC
Bulletin Board in the case of Pease and the Alberta Stock Exchange in
the case of Carpatsky.
o. Analyzed the risk adjusted valuation of Pease assets and the various
assets of Carpatsky and the share exchange ratio calculation that
determined the number of shares of Pease common stock to be issued in
the merger.
<PAGE>
p. Compared Pease and Carpatsky from a financial point of view with
certain other companies in the oil and gas exploration and production
industry that we deemed to be relevant. Houlihan focused on general
financial ratios as well as equity and asset valuation ratios.
q. Conducted such other studies, analyses, inquiries and investigations
as Houlihan deemed appropriate.
In arriving at our Opinion we have considered such factors as we have deemed
relevant including, but not limited to: (1) the reserve and engineering values
as calculated by Pease advisors, (2) the allocation between preferred and common
stockholders of Pease as negotiated by Pease and documented in the Exchange
Agreement and Irrevocable Proxy; (3) the historical cash flows of Pease and
Carpatsky, (4) the conditions of closing of the Merger, (5) the risks associated
with the Merger, (5) the upside potential of the Merger, as described in the due
diligence conducted by Pease management, and (6) other due diligence findings of
Pease related to the Merger.
During our review, we relied upon and assumed, without independent verification,
the accuracy, completeness and fairness of the financial and other information
provided, and have further relied upon the assurances of Pease management that
they are unaware of any facts that would make the information provided to us to
be incomplete or misleading for the purposes of this Opinion. We have not
assumed responsibility for any independent verification of this information or
undertaken any obligation to verify this information. The management of Pease
and Carpatsky informed us that the forecasts and reserve reports provided
represent their best current judgment, at the date of the opinion, as to the
future financial performance of Pease and Carpatsky, each on a stand-alone
basis. We assumed reserve reports had been reasonably prepared based on the
current judgment of Pease's and Carpatsky's management. We assumed no
responsibility for and express no view as to the forecasts and reserves or the
assumptions on which they were based. We did not perform an independent
evaluation or appraisal of the assets of either Pease or Carpatsky. Furthermore,
we have requested and received a representation letter from Pease indicating
that they have read this Opinion letter and that they believe that it is
accurate and does not omit any material facts or assumptions.
Our Opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. We disclaim any obligation to advise the Board of Pease
or any person of any change in any fact or matter affecting our Opinion, which
may come or be brought to our attention after the date of this Opinion.
Our Opinion does not constitute a recommendation to any stockholder of Pease or
Carpatsky as to how such stockholder should vote, or as to any other actions,
which such stockholder should take in conjunction with the Merger. This Opinion
relates solely to the question of fairness to Pease stockholders, from a
financial point of view, of the Merger as currently proposed. Further we express
no opinion herein as to the structure, terms or effect of any other aspect of
the Merger, including, without limitation, any effects resulting from
environmental issue(s), the application of any bankruptcy proceeding, fraudulent
conveyance, or other international, federal or state insolvency law, or of any
pending or threatened litigation affecting Pease or Carpatsky.
<PAGE>
We are expressing no opinion as to the price at which Pease common stock will
actually trade at any time. We are also expressing no opinion as to the income
tax consequences of the Merger. Our Opinion does not address the relative merits
of the Merger, nor does it address the Board's decision to proceed with the
Merger.
Richard Houlihan, a director and shareholder of Houlihan Smith & Company, Inc.
("Houlihan") served a term as a Director of Pease from August 10, 1996 to
October 2, 1997. Mr. Houlihan also holds an outstanding convertible debenture of
Pease with a principal balance of $17,500 maturing in April 2001 paying 10%
interest quarterly and warrants to purchase 10,000 shares of Pease at $7.50 per
share. Andrew D. Smith, president and shareholder of Houlihan beneficially owns
an outstanding convertible debenture o Pease with a principal balance of $17,500
maturing in April 2001 paying 10% interest quarterly. A Due Diligence Study of
Pease dated May 31, 1996 was prepared by the Los Angeles Office of Houlihan
Valuation Advisors ("HVA"). HVA received a fee for $35,000 plus out-of-pocket
expenses for this engagement. Houlihan has no direct ownership of HVA; however,
Richard Houlihan, receives a royalty in conjunction with certain HVA offices in
the United States. Additionally, Mr. Houlihan is a part owner of the Los Angeles
HVA office. HS&Co. and HVA share office space in downtown Chicago, Illinois;
however, HVA has no other economic interest or ownership in HS&Co. Neither
Richard Houlihan nor any principals of HVA participated in the preparation or
analysis for this Opinion.
It is understood that this Opinion will be included in its entirety in an S-4
Registration Statement filed with the U.S. Securities and Exchange Commission.
For purposes of this filing, no summary of or excerpt from this Opinion may be
used, and no published reference to this Opinion letter other than the S-4 may
be made without our prior express written approval, which shall not be
unreasonably withheld. Notwithstanding this restriction, however, this report
may be shared with professional advisors and / or consultants on a need -to-know
basis.
Houlihan, a National Association of Securities Dealers member, as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Houlihan will receive a
<PAGE>
non-contingent from Pease relating to its services in providing this Opinion. In
an engagement letter dated July 27, 1999, Pease has agreed to indemnify Houlihan
with respect to Houlihan's services as follows:
If Houlihan or any person or entity associated with Houlihan becomes
involved in any way in any legal or administrative proceeding related
to the services performed hereunder or the report, Pease will
indemnify, defend and hold Houlihan and any such person and / or entity
harmless from all damage and expenses (including reasonable attorney's
fees and expenses and court costs) incurred in connection therewith,
except to the extent that a court having jurisdiction shall have
determined in a final judgement that such loss, claim, damage or
liability resulted primarily from the negligence, bad faith, willful
misfeasance, or reckless disregard of the obligations or duties of
Houlihan hereunder.
Based on the foregoing and such other factors as we deem relevant, we are of the
opinion that the Merger as defined and described above is fair, from a financial
point of view to the stockholders of Pease as of the date hereof.
Very truly yours,
Houlihan Smith & Company, Inc.
/s/ D. Grey Merryman, CFA
D. Grey Merryman, CFA
Vice President
<PAGE>
APPENDIX D
Section 184 of the Business Corporations Act (Alberta).
184(1) Subject to sections 185 and 234, a holder of shares of any class of
a corporation may dissent if the corporation resolves to
(a) amend its articles under section 167 or 168 to add, change or
remove any provisions restricting or constraining the issue or transfer of
shares of that class,
(b) amend its articles under section 167 to add, change or remove any
restrictions on the business or businesses that the corporation may carry on,
(c) amalgamate with another corporation, otherwise than under section
178 or 180.1,
(d) be continued under the laws of another jurisdiction under section
182, or
(e) sell, lease or exchange all or substantially all its property
under section 183.
(2) A holder of shares of any class or series of shares entitled to vote
under section 170, other than section 170(1)(a), may dissent if the corporation
resolves to amend its articles in a manner described in that section.
(3) In addition to any other right he may have, but subject to subsection
(20), a shareholder entitled to dissent under this section and who complies with
this section is entitled to be paid by the corporation the fair value of the
shares held by him in respect of which he dissents, determined as of the close
of business on the last business day before the day on which the resolution from
which he dissents was adopted.
(4) A dissenting shareholder may only claim under this section with respect
to all the shares of a class held by him or on behalf of any one beneficial
owner and registered in the name of the dissenting shareholder.
(5) A dissenting shareholder shall send to the corporation a written
objection to a resolution referred to in subsection (1) or (2)
(a) at or before any meeting of shareholders at which the resolution
is to be voted on, or
(b) if the corporation did not send notice to the shareholder of the
purpose of the meeting or of his right to dissent, within a reasonable time
after he learns that the resolution was adopted and of his right to dissent.
(6) An application may be made to the Court by originating notice after the
adoption of a resolution referred to in subsection (1) or (2),
(a) by the corporation, or
(b) by a shareholder if he has sent an objection to the corporation
under subsection (5),
to fix the fair value in accordance with subsection (3) of the shares of a
shareholder who dissents under this section.
(7) If an application is made under subsection (6), the corporation shall,
unless the Court otherwise orders, send to each dissenting shareholder a written
offer to pay him an amount considered by the directors to be the fair value of
the shares.
D-1
<PAGE>
(8) Unless the Court otherwise orders, an offer referred to in subsection
(7) shall be sent to each dissenting shareholder
(a) at least 10 days before the date on which the application is
returnable, if the corporation is the applicant, or
(b) within 10 days after the corporation is served with a copy of the
originating notice, if a shareholder is the applicant.
(9) Every offer made under subsection (7) shall
(a) be made on the same terms, and
(b) contain or be accompanied by a statement showing how the fair
value was determined.
(10) A dissenting shareholder may make an agreement with the corporation
for the purchase of his shares by the corporation, in the amount of the
corporation's offer under subsection (7) or otherwise, at any time before the
Court pronounces an order fixing the fair value of the shares.
(11) A dissenting shareholder
(a) is not required to give security for costs in respect of an
application under subsection (6), and
(b) except in special circumstances shall not be required to pay the
costs of the application or appraisal.
(12) In connection with an application under subsection (6), the Court may
give directions for
(a) joining as parties all dissenting shareholders whose shares have
not been purchased by the corporation and for the representation of dissenting
shareholders who, in the opinion of the Court, are in need of representation,
(b) the trial of issues and interlocutory matters, including pleadings
and examinations for discovery,
(c) the payment to the shareholder of all or part of the sum offered
by the corporation for the shares,
(d) the deposit of the share certificates with the Court or with the
corporation or its transfer agent,
(e) the appointment and payment of independent appraisers, and the
procedures to be followed by them,
(f) the service of documents, and
(g) the burden of proof on the parties.
(13) On an application under subsection (6), the Court shall make an order
(a) fixing the fair value of the shares in accordance with subsection
(3) of all dissenting shareholders who are parties to the application,
(b) giving judgment in that amount against the corporation and in
favour of each of those dissenting shareholders, and
D-2
<PAGE>
(c) fixing the time within which the corporation must pay that amount
to a shareholder.
(14) On
(a) the action approved by the resolution from which the shareholder
dissents becoming effective,
(b) the making of an agreement under subsection (10) between the
corporation and the dissenting shareholder as to the payment to be made by the
corporation for his shares, whether by the acceptance of the corporation's offer
under subsection (7) or otherwise, or
(c) the pronouncement of an order under subsection (13),
whichever first occurs, the shareholder ceases to have any rights
as a shareholder other than the right to be paid the fair value of his
shares in the amount agreed to between the corporation and the
shareholder or in the amount of the judgment, as the case may be.
(15) Subsection (14)(a) does not apply to a shareholder referred to in
subsection (5)(b).
(16) Until one of the events mentioned in subsection (14) occurs,
(a) the shareholder may withdraw his dissent, or
(b) the corporation may rescind the resolution,
and in either event proceedings under this section shall be discontinued.
(17) The Court may in its discretion allow a reasonable rate of interest on
the amount payable to each dissenting shareholder, from the date on which the
shareholder ceases to have any rights as a shareholder by reason of subsection
(14) until the date of payment.
(18) If subsection (20) applies, the corporation shall, within 10 days
after
(a) the pronouncement of an order under subsection (13), or
(b) the making of an agreement between the shareholder and the
corporation as to the payment to be made for his shares,
notify each dissenting shareholder that it is unable lawfully to pay dissenting
shareholders for their shares.
(19) Notwithstanding that a judgment has been given in favour of a
dissenting shareholder under subsection (13)(b), if subsection (20) applies, the
dissenting shareholder, by written notice delivered to the corporation within 30
days after receiving the notice under subsection (18), may withdraw his notice
of objection, in which case the corporation is deemed to consent to the
withdrawal and the shareholder is reinstated to his full rights as a
shareholder, failing which he retains a status as a claimant against the
corporation, to be paid as soon as the corporation is lawfully able to do so or,
in a liquidation, to be ranked subordinate to the rights of creditors of the
corporation but in priority to its shareholders.
(20) A corporation shall not make a payment to a dissenting shareholder
under this section if there are reasonable grounds for believing that
(a) the corporation is or would after the payment be unable to pay its
liabilities as they become due, or
D-3
<PAGE>
(b) the realizable value of the corporation's assets would thereby be
less than the aggregate of its liabilities.
D-4
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT'S CONSENT
We consent to the use in the Registration Statement of Pease Oil and Gas Company
(Pease) on Form S-4 of our report dated March 5, 1999 on our audits of the
consolidated financial statements of Pease as of December 31, 1998, and for the
years ended December 31, 1997 and 1998 and our report dated November 2, 1999 on
our audits of the consolidated financial statements of Carpatsky Petroleum, Inc.
(Carpatsky) of the consolidated financial statements of Carpatsky as of December
31, 1998 and for the years ended December 31, 1997 and 1998, both of which are
contained in such Form S-4 and to the use of our name and the statements with
respect to us, as appearing under the heading "Experts" in the Prospectus.
Our report on Pease included an explanatory paragraph regarding the uncertainty
of Pease's ability to continue operations as a going concern. Our report on
Carpatsky, included explanatory paragraphs regarding the uncertainties of
conducting business in Ukraine and Carpatsky's ability to continue operations as
a going concern.
/s/ Hein + Associates llp
Hein + Associates llp
Denver, Colorado
January 19, 2000
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 5
<CIK> 0000076878
<NAME> PEASE OIL AND GAS CO
<S> <C>
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<PERIOD-END> SEP-30-1999
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