As filed with the Securities and Exchange Commission on August 14, 2000
SEC File No. 333-95213
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
PEASE OIL AND GAS COMPANY
(Exact 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.)
CARPATSKY PETROLEUM INC.
----------------------------------------------------
(a corporation to be formed)
(Exact name of registrant as specified in its charter)
Delaware 1311 To be applied for
------------------------------ --------------------------- -----------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
Patrick J. Duncan
751 Horizon Court, Suite 203 751 Horizon Court, Suite 203
P.O. Box 60219 P.O. Box 60219
Grand Junction, Colorado 81506-8758 Grand Junction, Colorado 81506-8758
(970) 245-5917 Phone: (970) 245-5917
---------------------------------- ---------------------------------------
(Address, including ZIP Code, (Name, address, including ZIP Code, and and
telephone number, including telephone number, including area code, area code,
of registrant's of agent for service) principal executive offices)
Copies to:
Alan W. Peryam, Esq. George G. Young III, Esq.
Alan W. Peryam, LLC Haynes and Boone, L.L.P.
1120 Lincoln Street, Suite 1000 1000 Louisiana, Suite 4300
Denver, Colorado 80203-2138 Houston, Texas 77002
Phone: (713) 547-2081
Fax: (713) 236-5699
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
<PAGE>
<TABLE>
<CAPTION>
Calculation of Registration Fee
Proposed Proposed
maximum maximum Amount of
Title of each class of Amount to offering aggregate registration
securities to be registered be registered price per unit offering price fee
--------------------------- ------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value(1) .... 44,959,582(2) $0.359375(4) $16,157,350(2) $4,265.54(6)
Preferred Stock, $0.001 par value .... 102,410,000(3) $0.359375(5) $10,393,484(3)(5) $2,743.88(6)
----------- ---------- ---------- --------
Total ....................... -- -- $26,550,825 $7,009.42(6)
</TABLE>
(1) Includes subscription interests in Carpatsky Petroleum Inc., a company to
be incorporated in the state of Delaware, pursuant to the continuance
described herein.
(2) Represents: the maximum number of shares of Pease common stock issuable in
connection with the merger in exchange for Carpatsky common shares.
(3) Includes 28,921,000 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.
(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 to be issued in the
merger.
(5) 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.
(6) A registration fee of $7,850.55 has been previously paid.
--------------------------------------------------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the 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 Commission, acting pursuant to said Section 8(a),
may determine.
--------------------------------------------------------------------------------
<PAGE>
Subject to completion, dated August 14, 2000
The information in this proxy statement and prospectus is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Carpatsky Petroleum Inc. Pease Oil and Gas Company
[logo] [logo]
SPECIAL MEETINGS OF SHAREHOLDERS
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 and related transactions which, if
completed, will result in Carpatsky becoming a wholly-owned subsidiary of Pease.
The combined company will be named Radiant Energy, Inc.
If the merger is completed, each Carpatsky common share will be converted
into .57842 shares of Radiant Energy common stock and each Carpatsky preferred
share will be converted into 1.07292 shares of Radiant Energy preferred stock.
Holders of common stock of Pease will continue to own their common stock after
the merger. Based on the stock outstanding on July 31, 2000, Radiant Energy will
issue approximately 45.0 million shares of common stock and 102.4 million shares
of preferred stock to former Carpatsky shareholders, representing 87.5% of our
fully- diluted common stock and all of our preferred stock following the merger.
We are asking the holders of common shares and preferred shares of
Carpatsky to vote to approve the merger and related transactions and the holders
of common stock of Pease to vote to approve amendments to our articles of
incorporation and to elect directors. Whether or not you plan to attend your
meeting, please take the time to vote on the proposals submitted to shareholders
at your meeting by completing and mailing the appropriate enclosed proxy card.
The dates, times and places of the special meetings are as follows:
For shareholders of For shareholders of
Carpatsky Petroleum Inc.: Pease Oil and Gas Company:
____________, 2000, 10:00 _________________, 2000, 9:00
a.m., local time a.m., local time
1210 606-4th St. S.W. __________________________
Calgary, AlbertaT2P 1T1 Houston, Texas 770 [ ]
Carpatsky Petroleum Inc. Pease Oil and Gas Company
Douglas G, Manner Patrick J. Duncan
Chief Executive Officer President and Chief Financial Officer
--------------------
For a description of risk factors and other significant considerations in
connection with the merger and related matters described in
this document, see "Risk Factors" beginning on page 8.
--------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued under this
proxy statement and prospectus or passed upon the adequacy or accuracy of this
proxy statement and prospectus. Any representation to the contrary is a criminal
offense. No securities commission or similar authority in Canada has in any way
passed on the merits of the securities offered under this proxy statement and
prospectus and any representation to the contrary is an offense.
This proxy statement and prospectus is dated ____________, 2000, and is
first being mailed to shareholders on or about ______________, 2000.
<PAGE>
CARPATSKY PETROLEUM INC.
1331 Lamar, Suite 1450
Houston, Texas 77010
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _______, 2000
To the Shareholders of Carpatsky Petroleum Inc.:
A special meeting of shareholders of Carpatsky Petroleum Inc. will be held
on , ---------------------------------------------- 2000, at 10:00, a.m., local
time, at 1210 606-4th St. S.W., Calgary, Alberta, Canada T2P 1T1, to consider
and vote upon ------------------------- the following matters:
1. A proposal to adopt a special resolution in the form set forth on page
15, 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
become a Delaware corporation and each outstanding Carpatsky common
and preferred share, other than shares for which appraisal rights are
perfected under Alberta law, will become one share of common or
preferred stock of the Delaware corporation.
2. A proposal to approve the Amended and Restated Agreement and Plan of
Merger, dated August 11, 2000, among Carpatsky, Pease and a
wholly-owned subsidiary of Pease, and the related merger described in
this proxy statement and prospectus.
3. To conduct any other business which may properly come before the
special meeting or any adjournment or postponement of the special
meeting.
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. A list of shareholders entitled to vote on the merger agreement will be
kept at [ ] for ten days before the meeting.
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.
<PAGE>
PEASE OIL AND GAS COMPANY
751 Horizon Court, Suite 203
Grand Junction, Colorado 81506-8758
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _______, 2000
To the Shareholders of Pease Oil and Gas Company:
A special meeting of shareholders of Pease Oil and Gas Company 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 and adopt amended and restated articles of
incorporation, pursuant to which:
o our name will be changed to "Radiant Energy, Inc.," and
o the number of shares of our authorized common stock will be
increased to 150,000,000 and the number of shares of our
authorized preferred stock will be increased to 200,000,000.
2. The election of a board of directors composed of the following five
persons:
Class I: B. Dee Davis
Class II: Dr. Jack Birks and Patrick J. Duncan
Class III: J. P. Bryan and Douglas G. Manner
3. To conduct any other business which may properly come before the
special meeting or any adjournment or postponement of the special
meeting.
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.
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 shareholder attending the special meeting may vote
in person even if that shareholder has returned a proxy.
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Available Information
Pease files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document filed with
the SEC by Pease at the SEC's public reference room located at 450 Fifth Street,
N.W., Washington, D.C. 20549 or at the SEC's regional offices located in New
York, New York and Chicago, Illinois. You may obtain further information on the
operation of the SEC's Public Reference Room by calling 1-800- SEC-0330. Pease's
filings are also available to you without charge from the SEC's web site at
http://www.sec.gov.
The SEC allows Pease to incorporate by reference information from the
documents it files with them. This means that Pease can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this proxy statement and
prospectus, and information that Pease later files with the SEC will
automatically update and supersede this information. Specifically, Pease
incorporates by reference the documents listed below and any future filings
Pease makes with the SEC prior to the date of the meetings, including any
filings Pease makes prior to the effectiveness of the registration statement,
under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934:
o Annual Report on Form 10-KSB for the year ended December 31, 1999;
o Quarterly Report on Form 10-QSB for the quarter ended March 31, 2000;
and
o Current Report on Form 8-K filed on January 12, 2000.
Carpatsky files annual audited and quarterly unaudited financial
statements, information circulars relating to shareholder meetings and other
information and reports with the Alberta Securities Commission. You may read and
copy documents maintained by the Alberta Securities Commission in its public
files located at Fourth Floor, 300-5th Avenue S.W., Calgary, Alberta T2P 3C4.
Information filed electronically with the Alberta Securities Commission may also
be obtained at http://www.sedar.com.
This proxy statement and prospectus is part of a registration statement on
Form S-4 filed by Pease and Carpatsky with the SEC under the Securities Act of
1933 with respect to this offering of common and preferred stock. This proxy
statement and prospectus does not contain all of the information filed with the
SEC. This proxy statement and prospectus incorporates important business and
financial information about us that is not included in or delivered with this
document. You may request a copy of this information at no cost by writing or
telephoning us at the following addresses:
Pease Oil and Gas Company Carpatsky Petroleum Inc.
751 Horizon Court, Suite 203 1331 Lamar, Suite 1455
Grand Junction, Colorado 81506 Houston, Texas 77010
Phone: (970) 245-5917 Phone: (713) 650-1025
The meetings to approve the merger and related transactions will be held on
__________, 2000 and you must make your decision of whether or not to approve
the transactions by that date. To obtain timely delivery of the requested
information, you must request this information by ________, 2000, or the date
that is no later than five business days before the date of your meeting.
You should rely only on the information contained or incorporated by
reference in this proxy statement and prospectus or any supplement to vote on
the merger and related transactions. We have not authorized anyone else to
provide you with different information. You should not assume that the
information included in this proxy statement and prospectus or any documents
incorporated by reference herein is accurate as of any date other than the date
on the front of such documents.
i
<PAGE>
TABLE OF CONTENTS
Page
Where You Can Find More Information.......................................... i
Questions and Answers About the Pease and Carpatsky Merger................... 1
Summary...................................................................... 2
Summary Historical and Pro Forma Financial Data..................... 6
Risk Factors................................................................. 8
Forward-Looking Statements................................................... 14
The Special Meetings......................................................... 15
The Continuance And Merger................................................... 20
Federal Income Tax Considerations in the United States.............. 26
Tax Consequences of Ownership and Disposition of Our
Stock by Canadian Holders ....................................... 28
Income Tax Considerations in Canada................................. 29
The Merger Agreement......................................................... 32
Selected Financial Data of Pease............................................. 35
Pease Management's Discussion and Analysis of Financial
Conditions and Results of Operations................................ 36
Selected Financial Data of Carpatsky......................................... 44
Carpatsky Management's Discussion and Analysis of Financial
Conditions and Results of Operations................................ 45
Comparative Per Share Data................................................... 49
Comparative Per Share Market Price and Related Shareholder Matters........... 50
Pro Forma Combined Financial Information..................................... 51
Business of Pease............................................................ 56
Business of Carpatsky........................................................ 63
Republic of Ukraine.......................................................... 69
Material Contracts Between Pease and Carpatsky............................... 74
Security Ownership of Management and Certain Beneficial Owners of Pease...... 75
Security Ownership of Management and Certain Beneficial Owners of Carpatsky.. 77
Directors and Executive Officers............................................. 78
Certain Relationships and Related Transactions of Pease...................... 80
Certain Relationships and Related Transactions of Carpatsky.................. 81
Description of Capital Stock................................................. 83
Comparison of Rights of Holders of Carpatsky, Pease and
Radiant Energy Common Stock......................................... 85
Legal Opinions............................................................... 88
Experts...................................................................... 88
Glossary of Oil and Gas Term................................................. 89
Index to Consolidated Financial Statements...................................F-1
Appendix A - Amended Agreement and Plan of Merger [see Exhibit 2.3]
Appendix B - Opinion of Houlihan Smith & Company, Inc.
Appendix C - Sections of the Corporation Law of Alberta relating to
dissenters' rights for Carpatsky shareholders Appendix D - Sections
of the General Corporation Law of Delaware relating to dissenters'
rights for Carpatsky shareholders
ii
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE PEASE AND CARPATSKY MERGER
Q: What is being proposed at the meetings?
A: The boards of directors of Carpatsky and Pease have unanimously approved a
series of transactions which, when completed, will result in the following:
o Carpatsky will become a wholly owned subsidiary of Pease;
o Carpatsky shareholders will become Pease shareholders;
o Carpatsky's nominees will be elected to four of five seats on our
board of directors;
o Our combined company will be renamed Radiant Energy, Inc.
Q: Will this change the business of Pease?
A: Yes. Currently, Pease's operations focus on the exploration and development
of oil and gas properties located in the Gulf Coast area. After the merger,
we will focus our business activities primarily on operations in the
Republic of Ukraine.
Q: What do I need to do now?
A: Carefully read and consider the information contained in this document, and
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.
Q: If my broker holds my shares in nominee or "street name," will my broker
vote my shares for me?
A: Your broker will vote your shares only if you provide instructions on how
to vote. You should therefore provide your broker with instructions on how
to vote your shares.
Q: May I change my vote after I have mailed my signed proxy card?
A: Yes, you may change your vote up to the time it is cast at the special
meeting. We have provided instructions for changing your vote under the
caption "The Special Meetings--Procedures for Revocation of Proxies."
Q: Should I send in my stock certificates now?
A: No. If the merger is completed, we will send written instructions to
Carpatsky shareholders for exchanging their certificates. Pease
shareholders will keep their existing certificates. However, Pease
shareholders may elect to surrender their stock certificates in exchange
for certificates reflecting the name Radiant Energy.
Q: When will Carpatsky shareholders be permitted to sell the shares they
receive in the merger?
A: Immediately following the merger, Carpatsky shareholders will be entitled
to sell the Radiant Energy common stock or preferred stock received in the
merger, unless they are an "affiliate" of Carpatsky immediately before the
merger or of Radiant Energy following the merger.
<PAGE>
Q: When do you expect the merger to be completed?
A: We expect to complete the merger shortly after receiving shareholder
approval at the meetings.
Q. Who can help answer my questions about the merger?
A. If you have more questions about the merger:
Pease shareholders should contact:
Pease Oil and Gas Company
751 Horizon Court, Suite 203
Grand Junction, CO 81506
Attention: Patrick J. Duncan
Telephone: (970) 245-5917
Carpatsky shareholders should contact:
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.
Calgary, Alberta
T2P 1T1
2
<PAGE>
SUMMARY
This summary highlights selected information from this proxy statement and
prospectus and may not contain all of the information that is important to you.
To understand the merger and related transactions fully and for a more complete
description of the legal terms of the transactions, you should read carefully
this entire proxy statement and prospectus and the documents to which we have
referred you. We have provided definitions of terms used to describe oil and gas
reserves and our ownership in those reserves under "Glossary of Oil and Gas
Terms." References to "we," "us" or "our" refer to Pease before the merger and
Radiant Energy thereafter.
The Companies
Carpatsky. Carpatsky holds interests in two producing oil and gas fields in
Ukraine. As of December 31, 1999, Carpatsky had estimated net proved reserves of
86 MBbls of oil and 229 MMcf of natural gas in the Bitkov field, located in
Eastern Ukraine, and had estimated net proved reserves of 113 MBbls of
condensate and 15.6 Bcf of natural gas in the RC field, located in Western
Ukraine. Carpatsky's address and phone number is:
Carpatsky Petroleum Inc.
1331 Lamar, Suite 1450
Houston, Texas 77010
(713) 756-7029
Pease. Pease owns working interests in two producing oil and gas fields in
southern Louisiana and a 12.5% working interest in a proprietary 3-D seismic
data project covering approximately 130,000 acres in Texas. Pease had estimated
net proved reserves of approximately 334 MBbls of oil and 1.4 Bcf of natural gas
at December 31, 1999. Pease's address and phone number is:
Pease Oil and Gas Company,
751 Horizon Court, Suite 203,
Grand Junction, Colorado 81506,
(970) 245-5917
Business After the Merger
Following the merger, we intend to devote substantially all of our business
activities to developing our projects in Ukraine. We 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. Our ability to achieve these benefits depends upon our ability to
integrate our businesses and other risks described under "Risk Factors."
The Continuance
(Page 32)
A continuance is a transaction permitted by Delaware and Alberta law
pursuant to which Carpatsky will change its state of incorporation from the
province of Alberta to Delaware. Under Delaware law, following the continuance,
Carpatsky will be deemed to have been a Delaware corporation since the date of
its incorporation in Alberta, and shareholders of the continued Carpatsky will
be deemed to have been shareholders of the continued Carpatsky from the date
they initially acquired their Carpatsky shares.
The Merger
(Page 20)
What Shareholders of Carpatsky Will Receive in the Merger (Page 32). Except
for shares as to which appraisal rights are perfected, each Carpatsky common
share will be converted into .57842 shares of our common stock and each
Carpatsky preferred share will be converted into 1.07292 shares of our preferred
stock. Carpatsky shareholders will receive cash in lieu of any fractional shares
of our stock.
3
<PAGE>
Exchange of Our Preferred Stock. In connection with the merger, several
holders of our preferred stock will exchange approximately 27,000 shares of
their preferred stock for approximately 2.3 million shares of common stock,
representing 57%, of our currently outstanding common stock. This exchange will
occur on the day before the record date for the merger. The holders of our
preferred stock have agreed to exchange all the remaining shares of their
preferred stock for approximately 6.6 million shares of common stock immediately
following the closing of the merger.
The holders of our preferred stock have agreed to accept less common stock
in the exchange than they would have received if they converted their preferred
stock pursuant to its conversion terms. In total, holders of our preferred stock
will receive 8,865,665 shares of our common stock in exchange for their
preferred stock, representing 10.5% of our common stock immediately following
the merger. The conversion terms of our preferred stock provide that each share
of our outstanding preferred stock is convertible into a number of shares of
common stock having a market value of $66.67 immediately prior to the
conversion. Based on the closing price of our common stock on July 31, 2000 of
$.32, our preferred stock is currently convertible into 22 million shares of
common stock, which would represent 93% of our common stock immediately
following the conversion.
Ownership Following the Merger. Following the merger, our common stock will
be owned by the following persons, assuming all of our preferred stock is
exchanged for common stock:
Former Carpatsky shareholders................................... 87.5%
Former Pease preferred shareholders............................. 10.5%
Pease common shareholders....................................... 2%
Amendments to Articles of Incorporation
Our articles of incorporation do not currently provide for enough common
and preferred stock to cover the shares we would be obligated to issue in the
merger and in exchange for our outstanding preferred stock. We are therefore
proposing to amend our articles of incorporation to authorize the issuance of
4
<PAGE>
150,000,000 shares of common stock and 200,000,000 shares of preferred stock. We
are also proposing to change our name to Radiant Energy, Inc.
Election of Directors
(Page 78)
In connection with the merger, we will elect a new board of directors.
These directors and their principal employment is described below:
J.P. Bryan.--Senior Managing Director of Torch
Energy Advisors Incorporated
Douglas G. Manner--President and CEO of
Bellwether Exploration Company and Carpatsky
Dr. Jack Birks--Retired
Patrick J. Duncan--President, Chief Financial Officer
and Treasurer of Pease.
B. Dee Davis--Director of International Business
Development of Torch Energy Advisors Incorporated
If the continuance and merger do not occur, our existing board of
directors will continue in office.
Recommendation to Shareholders
(Page 23)
To Pease Shareholders. Pease's board of directors has unanimously approved
the merger agreement, the merger and the amendments to our articles of
incorporation, and recommends that each Pease shareholder vote to adopt our
restated articles of incorporation.
To Carpatsky Shareholders. Carpatsky's board of directors has unanimously
approved continuing the corporation in Delaware, the merger agreement and the
merger, and recommends that Carpatsky shareholders vote to adopt and approve the
continuation, the merger agreement and the merger.
Opinions of Pease's Financial Advisors
(Page 23)
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 shareholders. The full text of this opinion is attached as Appendix B,
which you should read carefully. The opinion of Houlihan Smith & Company is
directed to the Pease board of directors and does not constitute a
recommendation to any shareholder with respect to matters relating to the Pease
proposals.
Carpatsky has not requested a fairness opinion regarding the continuance
and the merger, relying instead on the business judgment of its board of
directors.
Comparative Market Price Information
(Page 50)
Pease common stock trades in the OTC Bulletin Board market. 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 July
31, 2000, ranged from a high bid of $1.00 to a low bid of $0.16.
Carpatsky common shares are listed on the Canadian Venture Exchange in
Canada. The quoted bid price range for Carpatsky common shares during 1999, and
through January 21, 2000, ranged from a high bid of U.S.$0.16 to a low bid of
U.S.$0.03. Trading in Carpatsky common shares on the Canadian Venture Exchange
was suspended on January 22, for failure to file required financial statements.
The bid prices have been converted from Canadian dollars based upon the exchange
rate in effect on the applicable date.
5
<PAGE>
On May 26, 1999, the last full trading day prior to the public announcement
of the merger, the closing bid price for our stock was:
Carpatsky . . . . . . $.14
Pease. . . . . . . . . $.625
Following the merger, our common stock will be listed on the Canadian
Venture Exchange and traded on the OTC Bulletin Board.
Approval by Pease Shareholders
(Page 16)
The affirmative vote of holders of a majority of the outstanding shares of
our common stock and our preferred stock, voting separately, is required to
adopt our amended and restated articles of incorporation. The election of our
directors is by a plurality vote of our common stock. The holders of our
preferred stock, who will exchange a portion of their preferred stock for 57% of
our common stock prior to the record date, have advised us that they will vote
their common stock and preferred stock in favor of the amendments to our
articles of incorporation and the election of the director nominees. In
addition, the officers and directors of Pease, who together beneficially will
own approximately 1.8% of our outstanding common stock after the exchange by our
preferred shareholders, have advised us that they intend to vote in favor of the
amendments to our articles of incorporation. Adoption of the amended and
restated articles of incorporation and the election of the director nominees is
therefore assured.
Approval by Carpatsky Shareholders
(Page 16)
The continuance must be approved by holders of two-thirds of the Carpatsky
common and preferred shares, voting together as a class, represented at the
meeting and voting on the special resolution. If the continuance is approved,
the holders of a majority of the outstanding Carpatsky common and preferred
shares, voting together as a class, must vote to approve the merger. The
officers and directors of Carpatsky who together beneficially own common and
preferred shares representing approximately 64% of the votes entitled to be cast
have advised us that they intend to vote all shares which they beneficially own
in favor of the matters to be presented to Carpatsky's shareholders. Shares
beneficially owned by our officers and directors include shares owned by
Bellwether Exploration Company, which owns all of the Carpatsky preferred shares
and has agreed to vote in favor of the continuance and adoption of the merger
agreement if the conditions to closing the merger are satisfied. Common and
preferred shares held by Bellwether represent approximately 58% of the votes
entitled to be cast at the special meeting.
6
<PAGE>
Dissenters' Rights
(Page 18)
Carpatsky If you are a holder of record of Carpatsky common shares you will
have the right to dissent to both the continuance and the merger. A detailed
description of dissenters' rights is set forth under the caption "The Special
Meetings--Carpatsky Dissenters' Rights."
Pease Holders of Pease common stock and preferred stock will not have the
right to dissent to the merger or related transactions.
Termination Fees and Expenses
(Page 34)
The merger agreement provides for payment of a termination fee of $250,000
by a party that supports or enters into a competing transaction.
Accounting Treatment
(Page 31)
The merger will be accounted for as a purchase transaction, with Carpatsky
as the acquiror, in accordance with generally accepted accounting principles.
Material United States Federal
Income Tax Considerations
(Page 26)
The continuance and the merger will constitute a tax-free reorganization
for United States income tax purposes. However, Carpatsky shareholders who are
U.S. citizens or residents will be required to either elect to receive a deemed
dividend or recognize gain as a result of the continuance. Shareholders of
Carpatsky who are U.S. citizens or residents will not recognize a gain with
respect to the shares of our common or preferred stock received by them in
exchange for their Carpatsky common or preferred shares as a result of the
merger. Pease shareholders will not recognize gain in connection with the
merger.
Material Canadian Income Tax Considerations
(Page 29)
Holders of Carpatsky common shares residing in, or subject to the income
tax authority of, Canada, will not recognize taxable income or loss for Canadian
federal income tax purposes in connection with continuance of Carpatsky as a
Delaware corporation and the merger.
Conditions of the Continuance and Merger
(Page 33)
The completion of the merger depends upon meeting a number of conditions,
described in this proxy statement and prospectus, including:
o approval by the shareholders of both Pease and Carpatsky;
o the absence of any law or injunction that effectively prohibits the merger;
o the absence of material adverse changes to the businesses or assets of
Pease or Carpatsky;
o the continued effectiveness of the registration statement filed with the
SEC with respect to the shares of common and preferred stock to be issued
to the Carpatsky shareholders in the merger;
7
<PAGE>
o receipt of all necessary third party consents and all approvals from
governmental authorities; and
o the absence of demands for appraisal by holders of more than .625% of
Carpatsky common shares.
Regulatory Approvals
(Page 31)
The continuance of Carpatsky must be consented to by the Registrar of
Corporations for Alberta, Canada. Both the continuance and the merger must be
approved by the Canadian Venture Exchange.
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 U.S.$.20 per share. The purchase price for the
preferred shares and warrants was U.S.$4.0 million. The preferred shares are
convertible into 50 million common shares.
The preferred shares vote as a class with the common shares on all matters
submitted to Carpatsky 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 controls all
matters voted on by Carpatsky shareholders which require a majority vote and can
veto any other matters voted on by Carpatsky shareholders. In connection with
this investment, Bellwether appointed a majority of Carpatsky's directors and
executive officers.
In the continuance and merger, Bellwether's preferred shares will be
converted into 102.41 million shares of our 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 on all matters submitted to Radiant Energy
shareholders, including the election of directors. Bellwether will therefore
control all matters voted on by our shareholders after the merger.
Bellwether is an independent oil and gas company based in Houston, Texas.
Bellwether's common stock is traded on the Nasdaq stock market under the symbol
"BELW."
Fees and Expenses
(Page 34)
We anticipate approximately $350,000 of expenses will be incurred in
connection with the merger.
8
<PAGE>
In accordance with the terms of his employment agreement, Patrick J.
Duncan, President of Pease, will receive a termination payment equal to
approximately $220,000 upon completion of the merger.
Summary of Risk Factors
(Pages 8 to 14)
Risks Relating to the Merger
o Pease and Carpatsky have generated operating losses for each of the last
two years. Both companies' auditors issued a qualified audit report.
o The transaction may not close.
o The value of the consideration to be received by
shareholders in the merger could decrease.
Risks Related to Our Business
o We will require additional financing to effect our business plan, which may
be unavailable on acceptable terms.
o We will conduct most of our operations in Ukraine. There are risks in
operating in Ukraine, including distributing and being paid for gas
produced in Ukraine.
o We do not have any direct rights in the licence for the RC field. o Bellwether
will control us. o We are subject to the risk of volatile oil and natural gas
prices. o We will not control operations on our oil and gas properties and will
be
dependent upon the operators of our properties.
o We will experience drilling and operating risks.
o We must continue to comply with significant amounts of governmental
regulation.
o We must comply with environmental regulations.
o Our estimates of proved oil and gas reserves may be inaccurate and we may
not ultimately realize the future net revenues stated in our reserve
estimates.
o We will face substantial competition. o Our corporate charter includes
anti-takeover provisions. o Our corporate charter limits director's liability. o
There will be no dividends on our common stock. o The market price for our
common stock following the merger is likely to be
volatile. o Our common stock is a "penny stock."
9
<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
is 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 is presented for illustrative purposes only and is 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 pro forma combined
condensed financial statements, including the notes to those pro forma financial
statements, are included in this proxy statement and prospectus.
Pease Oil and Gas Company Summary Financial Data
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
-------------------- -----------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ........................................$ 799,000 $ 412,000 $ 2,144,000 $ 2,888,000 $ 4,567,000
Gross profit ................................... 636,000 328,000 1,739,000 1,268,000 2,040,000
Income (loss) from operations .................. 211,000 (153,000) (151,000) (10,400,000) (15,467,000)
Net income (loss) .............................. 130,000 (232,000) (465,000) (10,627,000) (15,895,000)
Net income (loss) available to
common shareholders .......................... 64,000 (298,000) (731,000) (12,685,000) (15,985,000)
Net income (loss) per common
share ........................................ 0.04 (0.18 (0. 3) (7.99) (12.21)
Weighted average number of
common shares outstanding .................... 1,731,000 1,626,000 1,684,000 1,588,000 1,309,000
Balance Sheet Data:
Current assets .................................$ 1,519,000 $ 1,428,000 $ 1,203,000 $ 1,741,000 $ 7,349,000
Current liabilities ............................ 317,000 558,000 281,000 639,000 2,054,000
Working capital ................................ 1,202,000 870,000 922,000 1,102,000 5,295,000
Total assets ................................... 7,362,000 7,557,000 7,141,000 7,913,000 21,294,000
Total liabilities .............................. 2,878,000 2,905,000 2,787,000 2,932,000 5,203,000
Shareholders' Equity ........................... 4,484,000 4,652,000 4,354,000 4,981,000 16,091,000
Carpatsky Petroleum Inc. Summary Financial Data
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
-------------------- -----------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Revenue ....................................$ 575,000 $ 111,000 $ 800,000 $ 226,000 $ 86,000
Gross profit (loss) ............................ 239,000 (59,000) (217,000) (83,000) 3,000
Income (loss) from operations .................. (1,040,000) (348,000) (6,018,000) (972,000) (831,000)
Net income (loss) .............................. (1,066,000) (174,000) (5,754,000) (599,000) (976,000)
Net income (loss) per share .................... (0.01) -- (0.12) (0.01) (0.03)
Weighted average number of
common shares outstanding .................... 77,728,000 40,796,000 49,471,000 40,796,000 31,691,000
Other Financial Data:
Ratio of combined fixed charges
and preference dividends to
earnings(1) .................................. -- -- -- -- --
Balance Sheet Data:
Current assets .................................$ 2,654,000 $ 226,000 $ 4,024,000 $ 208,000 $ 343,000
Current liabilities ............................ 3,142,000 5,033,000 3,645,000 4,850,000 3,170,000
Working capital (deficit) ...................... (488,000) (4,807,000) 379,000 (4,642,000) (2,827,000)
Total assets ................................... 6,938,000 9,497,000 8,507,000 9,489,000 7,080,000
Total liabilities .............................. 3,142,000 7,040,000 3,645,000 6,858,000 3,893,000
Shareholders' Equity ........................... 3,796,000 2,457,000 4,862,000 2,631,000 3,187,000
</TABLE>
------------
(1) Earnings were not sufficient to cover fixed charges and preference
dividends by the amount of the net loss for each period.
10
<PAGE>
<TABLE>
<CAPTION>
Pease Oil and Gas Company
and
Carpatsky Petroleum Inc.
Summary Pro Forma Combined Condensed Financial Data
Year Ended December 31, 1999
-------------------------------------------------------
Pro Forma
Carpatsky Pease Adjustments Combined
--------- ----- ----------- ---------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue .................................$ 800,000 $ 2,144,000 $ 2,944,000
Operating income (loss) ..................... (6,018,000) (151,000) 417,000 (5,752,000)
Net income (loss) ........................... (5,754,000) (465,000) 775,000 (5,444,000)
Income (loss) per share ..................... (0.12) (0.43) (0.10)
Other Financial Data:
Ratio of combined fixed charges and
preference dividends to earnings
<CAPTION>
Three Months Ended March 31, 2000
-------------------------------------------------------
Pro Forma
Carpatsky Pease Adjustments Combined
--------- ----- ----------- ---------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue ................................. 575,000 799,000 1,374,000
Operating income (loss) ..................... (1,040,000) 211,000 94,000 (735,000)
Net income (loss) ........................... (1,066,000) 130,000 183,000 (753,000)
Income (loss) per share ..................... (0.01) 0.04 (0.01)
Other Financial Data:
Ratio of combined fixed charges and
preference dividends to earnings
Balance Sheet Data as
of March 31, 2000:
Working capital (deficit) ................... (488,000) 1,202,000 (386,000) 228,000
Current assets .............................. 2,654,000 1,519,000 (386,000) 3,787,000
Current liabilities ......................... 3,142,000 317,000 -- 3,459,000
Total assets ................................ 6,938,000 7,362,000 (2,721,000) 11,579,000
Total liabilities ........................... 3,142,000 2,878,000 238,000 6,258,000
Shareholders' equity ........................ 3,796,000 4,484,000 (2,959,000) 5,321,000
</TABLE>
Combined Proved Oil and Natural Gas Reserves at December 31, 1999
Net Proved Reserves
------------------------
MBbls Bcf Bcfe
----- ---- ----
Pease....................... 334 1.4 3.4
Carpatsky................... 199 15.8 17.0
----- ----- ------
Total....................... 533 17.2 20.4
===== ===== ======
11
<PAGE>
RISK FACTORS
In evaluating the merger, you should carefully consider the following risk
factors, as well as the other information we have included or referenced in this
proxy statement and prospectus.
Pease and Carpatsky have each generated operating losses for each of the
last two years and have retained deficits. Both companies' auditors issued a
qualified audit report.
Pease has incurred the following losses from operations:
o $10,400,000 for the year ended December 31, 1998; and
o $151,000 for the year ended December 31, 1999.
Carpatsky has incurred the following losses from operations:
o $972,000 for the year ended December 31, 1998;
o $6,018,000 for the year ended December 31, 1999; and
o $1,040,000 for the three months ended March 31, 2000.
Our auditors' reports for the financial statements of both Pease and
Carpatsky for our last fiscal years ending December 31, 1999 included an
explanatory paragraph that there was substantial doubt as to whether each
company has sufficient operating capital to enable us to continue as a going
concern.
The transaction may not close.
The proposed merger transaction is subject to a number of conditions,
including obtaining approval of our shareholders. 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
fourth quarter of 2000.
The value of the consideration to be received by Carpatsky shareholders in
the merger could decrease, depending on the trading price of Pease common stock.
Carpatsky shareholders will not receive consideration in the merger with a
set market value or a minimum market value. The number of shares of Radiant
Energy common stock that Carpatsky shareholders will receive in the merger is
fixed. The value of these shares will depend on the trading price of Radiant
Energy common stock. No adjustment will be made to the number of shares of
Radiant Energy common stock to be received by Carpatsky shareholders in the
event of any increase or decrease in the market price of Carpatsky common shares
or Radiant Energy common stock. For historical and current market prices of
Radiant Energy common stock and Carpatsky common shares, see "Comparative Per
Share Market Price and Related Shareholder Matters."
We will require additional financing. The terms may be unfavorable to
present shareholders. Failure to receive financing will jeopardize the chances
for future success.
We will be required to make substantial capital expenditures to develop our
existing reserves, and to discover new oil and gas reserves. Historically, we
have financed these expenditures primarily with cash from operations and
proceeds from the sale of debt and equity securities. See "Pease Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity, Capital Expenditures and Capital Resources" and
"Carpatsky Management's Discussion and Analysis of Financial Conditions and
Results of Operations--Liquidity, Capital Expenditures and Capital Resources"
for a discussion of our capital budget. We cannot assure you that we will be
able to raise capital in the future.
12
<PAGE>
If we cannot obtain sufficient additional capital resources, our operations
and financial condition will adversely affected. If we are unable to secure
additional financing following the merger, we may sell assets and curtail
drilling and exploration activities.
We will conduct most of our operations in Ukraine.
We expect that, following the merger, our primary focus will be on
operations in Ukraine. 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 and exercise of
foreign government sovereignty over the exploration area. No assurance can be
given that our operations in Ukraine will be successful. See "Republic of
Ukraine," and Note 1 of the Notes to Carpatsky's Consolidated Financial
Statements.
Ukraine is subject to political and economic instability.
The form of government and economic institutions in 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 projects. These arrangements 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."
Ukraine's market economy is undeveloped.
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 us
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."
Doing business in Ukraine subjects us to significant foreign currency
risks.
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, we can give
no assurance that such convertibility will continue.
There are risks in producing and monetizing oil and gas produced in
Ukraine.
13
<PAGE>
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;
o competitors in Ukraine;
o the limited access to pipelines and other transport needed to export
natural gas;
o the possibility that oil and natural gas prices in Ukraine will be
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.
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."
Business disputes must be resolved in a foreign jurisdiction.
If a dispute in connection with Ukraine operations occurs, we may be
subject to the jurisdiction of foreign courts or may not be successful in
subjecting foreign persons to the jurisdiction of the courts of the United
States or enforcing U.S. judgments in such other jurisdictions. We may also be
hindered or prevented from enforcing our rights with respect to a governmental
instrumentality because of the doctrine of sovereign immunity.
We do not have any direct rights in the license to extract gas and gas
condensate from the RC field.
Carpatsky has no direct rights in the license to extract gas and gas
condensate from the RC field. Ukrnafta, the Ukrainian national oil company, is
the sole licensee for the RC field. Carpatsky participates in the exploration
and development of reserves in the RC field pursuant to a joint activity
agreement between Carpatsky and Ukrnafta. Pursuant to the joint activity
agreement, Carpatsky and Ukrnafta must annually agree on the budget and
contributions from the parties. Carpatsky's recourse for disagreements regarding
an inability to agree on the budget is to dissolve the joint activity. Since
Ukrnafta is the sole licenseholder for the RC field, its mineral rights will not
be diminished in any way by dissolution of the joint activity, but Carpatsky
would lose all contractual rights and claims to the RC field if the joint
activity is dissolved. This gives Ukrnafta substantial leverage in negotiating
the annual budget and contributions from the parties. Carpatsky intends to
convert the joint activity into a modern corporate entity with the cooperation
of Ukrnafta. This process is expected to take place in the next six months
pending initiation of direct negotiations. There can be no assurance that
Carpatsky will be successful in converting to a modern corporate entity.
14
<PAGE>
No assurances can be made that we will be able to acquire a development
license covering the RC field. We may not be successful in converting our
ownership of the RC field from a traditional license arrangement to a production
sharing agreement.
The joint activity agreement with Ukrnafta allows Carpatsky to participate
in the exploration and development of reserves under an exploration license held
by Ukrnafta covering the RC field. The exploration license expires in March
2003. In order for Carpatsky to continue developing and producing reserves upon
expiration of the exploration license, Ukrnafta must acquire a development
license. A development license is granted at the discretion of the Ukranian
government, and neither Carpatsky nor Ukrnafta has a right to receive the
development license. No assurances can be made that a development license to
continue producing reserves in the RC field will be granted.
Ukraine has recently passed legislation which would allow Carpatsky to own
its reserves under a production sharing agreement. The production sharing
agreement is a more favorable method of conducting operations in Ukraine than
the current licensing arrangement, primarily because:
o the production sharing agreement may be transferred, which would allow
Ukrnafta to transfer a direct interest in the mineral rights in the RC
field to Carpatsky and would make obtaining financing from commercial
lenders easier;
o the production sharing agreement has Ukrainian tax advantages over the
existing licensing arrangements; and
o the production sharing agreement does not require the acquisition of a
development license to produce reserves.
Carpatsky and Ukrnafta have verbally agreed to seek a production sharing
agreement to cover operations in the RC field. Carpatsky can make no assurances,
however, that it will be successful in attaining one. Carpatsky does not plan to
invest additional funds in the RC field (other than the proceeds of the sale of
oil and gas from the field) until Carpatsky receives a production sharing
agreement.
Bellwether will control us.
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 our shareholders.
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 Douglas G. Manner and B. Dee Davis, who are
proposed to be elected to our board of directors. Mr. Manner, 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 continuance and merger, Carpatsky shareholders will
become shareholders in Radiant Energy, a Nevada corporation, and, accordingly,
your rights as shareholders will be governed by Nevada law. See "Comparison of
Rights of Holders of Carpatsky, Pease and Radiant Energy Common Stock."
We will be subject to the risk of volatile oil and natural gas prices.
15
<PAGE>
Our success is highly dependent on prices for oil and gas, which are
extremely volatile. Beginning in 1997 and continuing through late last year, the
prices we received for our production generally declined, especially for oil.
Oil prices have recently recovered, but remain volatile. Any additional
substantial or extended decline in the price of oil or gas would have a material
adverse effect on us. Oil and gas markets are both seasonal and cyclical. Prices
of oil and gas affect the following aspects of our business:
o our revenues, cash flows and earnings;
o our ability to attract capital to finance our operations and the cost
of the capital;
o the amount we are allowed to borrow under our bank credit facility;
o the value of our oil and gas properties; and
o the profit or loss we incur in exploring for and developing our
reserves.
Various factors beyond our control will affect 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.
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 Ukraine to explore and develop those properties.
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 ability to contribute capital to
the budgets of both Ukrainian ventures will determine our level of authority on
the management committees.
We will experience drilling and operating risks.
Oil and natural gas drilling activities are subject to many risks,
including the risk that no commercially productive reservoirs will be
encountered. We can make no assurance that wells in which we will have an
interest will be productive or that we will recover all or any portion of our
drilling or other exploratory costs. Drilling for oil or natural gas may involve
unprofitable efforts, not only from dry wells but from wells that are productive
but do not produce sufficient net revenue to return a profit after drilling,
operating and other costs. The costs of drilling, completing and operating wells
is often uncertain. Our drilling operations may be curtailed, delayed or
canceled as a result of numerous factors, many of which are beyond our control,
including by way of illustration the following:
16
<PAGE>
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 effect 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 pressures;
o blowouts; o cratering;
o pipeline ruptures; o spills; and
o power shortages; 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 effect on our business, financial
condition and results of operations.
We must continue to comply with significant amounts of governmental
regulation.
Domestic oil and natural gas operations are subject to extensive federal,
state and local laws and regulations relating to the exploration for, and
development, production and transportation of, oil and natural gas, including
safety matters, which may change from time to time in response to economic
conditions. Matters subject to regulation by domestic federal, state and local
authorities include:
o permits for drilling operations; o road and pipeline construction;
o reports concerning operations; o the spacing of wells;
o unitization and pooling of properties; o taxation;
17
<PAGE>
o environmental protection; o production rates; and
o customs regulations; o worker safety regulations.
o construction of processing facilities;
We can give no assurance that delays will not be encountered in complying
with such requirements or that such regulations will not require us to alter our
drilling and development plans. Any delays in obtaining approvals or material
alterations to our drilling and development plans could have a material adverse
effect on our operations. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and natural gas below actual production capacity in order to conserve
supplies of oil and natural gas. We believe that we are and will continue to be
in substantial compliance with all applicable laws and regulations. We are
unable to predict the ultimate cost of compliance with changes in these
requirements or their effect on our operations. Significant expenditures may be
required to comply with governmental laws and regulations and may have a
material adverse effect on our financial condition and future results of
operations.
We must comply with environmental regulations.
We must operate exploratory and other oil and natural gas wells in
compliance with complex and changing environmental laws and regulations adopted
by government authorities. The implementation of new, or the modification of
existing, laws and regulations could have a material adverse effect 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.
We must develop additional reserves to replace reserves depleted by
production.
Our future success will depend upon our ability to develop our 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. We must continue exploratory
drilling or otherwise acquire proved reserves to continue to increase 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
that produce revenues exceeding 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 our crude oil and natural gas properties described in this proxy statement
and prospectus are based on the assumptions that such properties will be
developed in accordance with their proposed development programs and that future
crude oil prices will remain the same as crude oil prices at December 31, 1999,
with respect to production attributable to our interests in our respective
properties.
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We will face substantial competition.
We 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. We will continue to face
intense competition from both major and independent oil and natural gas
companies when we seek to acquire desirable properties and to market our
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 us.
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 Ukraine. To acquire producing properties or
undeveloped exploratory acreage will require an assessment of a number of
factors including:
o the value of the oil or gas properties and the likelihood of future
production;
o recoverable reserves;
o operating costs;
o potential environmental and other liabilities; and
o drilling and production difficulties.
Such assessments will necessarily be inexact and uncertain. Our review of
assets to be acquired may not reveal all existing or potential problems. Any
unsuccessful acquisition could have a material adverse effect on us.
Our corporate charter includes anti-takeover provisions.
Following the merger, our amended and restated articles of incorporation
will authorize 200 million shares of preferred stock, of which 102.41 million
will be issued to Bellwether. Our board of directors may issue the balance of
the unissued preferred stock without shareholder approval and may set the
rights, preferences and other designations, including voting rights, of those
shares as the board of directors may determine. In addition, our articles of
incorporation provide for a classified board of directors. Directors serve
staggered three-year terms and may only be removed for cause. These provisions
may discourage transactions involving actual or potential changes of control,
including transactions that otherwise could involve payment of a premium over
prevailing market prices to holders of our common stock. We have no plans,
arrangements, commitments or understandings relating to potential future
issuances of preferred stock. We 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--Anti-Takeover Statutes" and
"Comparison of Rights of Holders of Carpatsky, Pease and Radiant Energy Common
Stock."
Our corporate charter limits director liability.
Our amended and restated articles of incorporation will provide, as
permitted by Nevada law, that our directors shall not be personally liable to
the corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, with certain exceptions. These provisions may discourage
shareholders from bringing suit against a director for breach of fiduciary duty
and may reduce the likelihood of derivative litigation brought by shareholders
on behalf of Radiant Energy against directors. In addition, the amended and
restated articles of incorporation and our bylaws will provide for mandatory
indemnification of directors and officers to the fullest extent permitted by
Nevada law.
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Absence of dividends on common stock.
Neither Pease nor Capatsky have ever declared or paid cash dividends on
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 our common stock following the merger is likely to be
volatile and the market for our common stock may not be liquid.
If our operating results should be below the expectations of investors or
analysts in one or more future periods, it is likely that the price of the
common stock would be materially adversely affected. In addition, the stock
market has experienced significant price and volume fluctuations that have
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 our common stock. Finally, upon
consummation of the merger, the stock owned by Carpatsky shareholders will cease
trading on the Canadian Venture Exchange. After the merger, our common stock
will be traded on the OTC Bulletin Board and the Canadian Venture Exchange.
Accordingly, our shareholders may experience different levels of spreads between
bid and asked quotations as a result of deficiencies between such markets.
The market price of our common stock could be adversely affected by sales
of substantial amounts of common stock in the public market or the perception
that such sales could occur.
Upon completion of the merger we will have 55,556,620 shares of common
stock outstanding. Trading in our common stock is sporadic and relatively
infrequent. The sale of a material number of our shares of common stock in the
public market or the perception that such sales could occur could have a
material adverse effect on the trading price of our common stock.
Because our common stock is a "penny stock," you may be unable to resell it
in the secondary market.
A "penny stock" is an equity security with a market price of less than $5
per share which is not listed on the Nasdaq or a national securities exchange.
Due to the extra risks involved in an investment in penny stocks, federal
securities laws and regulations require broker-dealers to deliver a standardized
risk disclosure document that provides information about penny stocks and the
nature and level of risks in the penny stock market prior to effecting
transactions in penny stocks for a customer. The broker-dealer must also provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and associated persons received in the penny
stock transactions and monthly account statements showing the market value of
each penny stock held in the customer's account. The bid and offer quotations
and the broker-dealer and associated person compensation information must be
given to the customer orally or in writing prior to completing the transaction
and must be given to the customer in writing before or with the customer's
confirmation. In addition, the penny stock rules require that prior to a
transaction, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These additional penny stock
disclosure requirements limit the ability of broker-dealers to sell penny stocks
and may reduce the trading activity in the market for our common stock. Because
of these extra requirements, many broker-dealers are unwilling to sell penny
stocks at all. As a result, you may be unable to resell our stock and could lose
your entire investment.
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FORWARD-LOOKING STATEMENTS
This proxy statement and prospectus contains forward-looking statements. We
cannot assure you that the plans, intentions or expectations upon which our
forward-looking statements are based will occur. Our forward- looking statements
are subject to known and unknown risks, uncertainties and assumptions, including
those discussed elsewhere in this proxy statement and prospectus and the
documents that are incorporated by reference into this proxy statement and
prospectus. These forward-looking statements include statements regarding:
o the availability of capital resources;
o our plans to develop our oil and gas properties in Ukraine; and
o our plans to convert our ownership in the RC field from a joint
activity agreement into a production sharing agreement.
When used in this prospectus, 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.
Some of the risks that could affect our future results and could cause
results to be materially different from those expressed or implied by these
forward-looking statements include:
o the contemplated merger not being consummated;
o the volatility of oil and gas prices;
o our ability to generate additional capital;
o our ability to maintain and develop our oil and gas properties in
Ukraine and to successfully market the oil and gas that is produced;
o our success in exploring for oil and natural gas in other areas;
o delays in planned drilling and exploration activities;
o risks inherent in oil and gas acquisitions, exploration, drilling,
development and production;
o competition;
o shortages of labor, equipment, services and supplies;
o U.S. and foreign government regulation;
o environmental matters;
o political and geographical risks associated with operations in
Ukraine; and
o the financial condition of other companies participating in the
exploration, development and production of oil and gas.
Many of these risks are beyond our control. All of the prospects in the
Gulf Coast and in Ukraine are currently operated by other parties; therefore, we
may not be in a position to control costs, safety and timeliness of work as well
as other critical factors affecting a producing well or exploration and
development activities.
The information contained in this proxy statement and prospectus, including
the information set forth under "Risk Factors," identifies additional factors
that could affect our operating results and performance. We urge you to
carefully consider those factors. When you consider our forward-looking
statements, you should keep in mind these risk factors and the other cautionary
statements in this prospectus. Our forward-looking statements speak only as of
the date made, and we do not have any obligation to update these forward-looking
statements.
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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 Carpatsky common and preferred shares by
Carpatsky's board of directors for use at the special meeting of Carpatsky
shareholders.
This proxy statement and prospectus is being furnished to holders of Pease
common and preferred stock in connection with the solicitation of proxies by
Pease's board of directors for use at the special meeting of Pease shareholders.
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 Voted on at the Pease Special Meeting
The Pease special meeting will be held to consider and vote upon the
following proposals:
o A proposal to adopt amended and restated articles of incorporation,
pursuant to which our corporate name will be changed to "Radiant
Energy, Inc."
o A proposal to adopt amended and restated articles of incorporation
pursuant to which our authorized common stock will be increased to
150,000,000 shares and our authorized preferred stock will be
increased to 200,000,000 shares.
o The election of a board of five directors as follows: Term ending:
-----------
o Class I: B. Dee Davis 2001
o Class II: Dr. Jack Birks and Patrick J. Duncan 2002
o Class III: J.P. Bryan and Douglas G. Manner 2003
o To transact any other business which may properly come before the
special meeting or any adjournments or postponements of the special
meeting.
Matters to Be Voted on 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 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 domesticated into the State of Delaware,
United States of America, and to be governed by the Delaware
General Corporation Law, by filing with the Secretary of
State of Delaware, a certificate of domestication and
certificate of incorporation of Carpatsky Petroleum Inc., a
Delaware Corporation pursuant to which each outstanding
common share of Carpatsky Petroleum Inc., an Alberta
corporation, will be converted into one share of common
stock representing Carpatsky Petroleum Inc., a Delaware
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corporation (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., an Alberta corporation, will be converted
into one share of preferred stock representing Carpatsky
Petroleum Inc., a Delaware corporation (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 Carpatsky Petroleum Inc.
may in its discretion abandon the application for
domestication under the Delaware General Corporation Law
without further approval of the shareholders; and
4. any director or officer of 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 Carpatsky Petroleum Inc.
being conclusive evidence of such authorization.
o To consider and vote upon a proposal under Delaware law to
approve and adopt the merger and the merger agreement.
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
Pease. The proposal to adopt amended and restated articles of incorporation
must be approved by the holders of a majority of the outstanding shares of our
common stock and our preferred stock, voting separately. Directors are elected
by a plurality of the votes cast by the holders of our common stock. Holders of
Pease preferred stock have advised us that they will, prior to the record date,
exchange a portion of their preferred stock for approximately 2.3 million shares
of common stock, representing 57% of our current outstanding common stock. These
shareholders have also advised us of their intent to vote for the amendments to
the articles of incorporation and election of the director nominees. In
addition, our officers and directors, who together will own approximately 1.8%
of our outstanding common stock after the exchange by our preferred
shareholders, have advised us that they intend to vote in favor of the amendment
to our articles of incorporation and the election of the director nominees.
Approval of these matters is therefore assured.
Carpatsky. The special resolution approving the continuance of Carpatsky as
a Delaware corporation must be approved by holders of two-thirds of the
Carpatsky common shares and preferred shares, 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 Carpatsky common and preferred shares, voting together as a single
class. Directors and executive officers of Carpatsky, who beneficially own
common and preferred stock representing 64% of the votes entitled to be cast at
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the special meeting, have agreed to vote in favor of the continuance and merger.
Shares beneficially owned by our officers and directors include shares owned by
Bellwether Exploration Company, which owns all of the Carpatsky preferred shares
and has agreed to vote in favor of the continuance and adoption of the merger
agreement if the conditions to closing the merger are satisfied. Bellwether's
common and preferred shares represent approximately 58% 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 shareholders
entitled to notice of and to vote at the special meetings of Pease and
Carpatsky. Accordingly, only holders of record of Pease common and preferred
stock or Carpatsky common and preferred shares 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 3,867,894 shares of Pease common stock outstanding, held
by approximately 1,100 holders of record, and 80,325 shares of Pease series B
preferred stock held by 8 persons. At Pease's special meeting, each record
holder of common stock will be entitled to one vote per share and each record
holder of preferred stock will be entitled to one vote per share. Carpatsky had
77,728,263 outstanding common shares held by approximately 150 holders of record
and 95.45 million preferred shares held by Bellwether, on the record date. Each
holder of record of Carpatsky common and preferred shares will be entitled to
one vote per share on each proposal at Carpatsky's special meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding common and preferred shares is necessary to
constitute a quorum at each of the special meetings.
Treatment of Abstentions and Broker Non-Votes
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.
Under Nevada law, abstentions and broker non-votes are not counted as
voting for or against the proposal. Abstentions and broker non-votes are not
treated as voting under Alberta law. Under Delaware law, abstentions are treated
as shares entitled to vote, but broker non-votes are not. Abstentions and broker
non-votes will have the following effects at the special meetings: Carpatsky.
The special resolution approving the continuance of Carpatsky as a Delaware
corporation must be approved by holders of two-thirds of the Carpatsky common
shares and preferred shares, 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 Carpatsky
common and preferred shares, voting together as a single class. Directors and
executive officers of Carpatsky, who own common stock representing 9.8% of the
votes entitled to be cast at the special meeting, have agreed to vote in favor
of the continuance and merger. Bellwether Exploration
o Abstentions and broker non-votes will have the same practical
effect as no votes with respect to the proposal to adopt amended
and restated articles of incorporation.
o Abstentions and broker non-votes will have no effect on the
election of directors.
o For purposes of the continuance of Carpatsky into Delaware,
abstentions and broker non-votes will have no effect.
o At the Carpatsky special meeting, abstentions and broker non-votes
will have the same practical effect as no votes with respect to
the proposal to approve and adopt the merger and merger agreement.
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Adjournment
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 shareholders. If we propose to adjourn the Pease
meeting by a vote of the shareholders, 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.
If shareholders of Carpatsky approve the continuance, the Carpatsky special
meeting will be adjourned until 3:00 p.m., Calgary time, on ________, 2000 so
that a certificate of continuance may be filed in Alberta and Delaware. If the
Pease shareholders approve all proposals at the Pease special meeting, it is
anticipated that the Carpatsky special meeting will be reconvened and all other
proposals will be voted on at that time. The special meeting may be adjourned to
a later date if Carpatsky is unable to file the certificates required for
continuance in Alberta and Delaware prior to reconvening, the Pease special
meeting is adjourned or material conditions to the merger other than the filing
of the required certificates in Alberta and Delaware and approval by Carpatsky
shareholders have not been satisfied.
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,
Computershare Trust Company, Inc. or otherwise mail it to Pease. Pease
shareholders, 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 entitled to
vote and represented at the special meeting by a properly executed proxy
received prior to or at the special meeting will be voted at the special meeting
in accordance with the instructions indicated on the proxy. If no instructions
are indicated, the proxy will be voted for adoption of the amended and restated
articles of incorporation and for election of the five nominated directors.
Pease's board of directors is not presently aware of other proposals that
may be brought before the special meeting. In the event that other proposals are
brought before the special meeting, the persons named in the Pease proxy will
vote in accordance with what they consider to be in the best interests of Pease
and its shareholders.
Proxies - Carpatsky
The Carpatsky proxy accompanying this proxy statement and prospectus is
solicited by the management of Carpatsky for use at the special meeting. Please
complete, date and sign the accompanying proxy and promptly return it in the
accompanying envelope to Carpatsky's transfer agent, CIBC Mellon Trust Company.
The address of CIBC Mellon Trust Company is 600 The Dome Tower, 333-7th Avenue
S.W., Calgary AB T2P 2Z1. Messrs. J. P. Bryan and Robert Bensh are the persons
named in the form of proxy enclosed with this proxy statement and prospectus,
Mr. Bryan is the Chairman of the board of directors of Carpatsky and Mr. Bensh
is the Chief Operating Officer of Carpatsky. If appointed proxy, Messrs. Bryan
and Bensh will vote the shares or withhold from voting the shares as specified
in the Carpatsky proxy. Carpatsky shares represented by a properly executed
proxy will be voted in favor of approval of each matter for which no
specification has been given. The form of proxy enclosed with this proxy
statement and prospectus confers discretionary authority upon the persons
appointed proxy to vote on amendments or variations to matters identified in
this proxy statement and prospectus, 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.
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Under Alberta law, Carpatsky shareholders have the right to appoint some
other person, who does not need to 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 this proxy statement and prospectus or submit
another form of proxy appointing the desired representative. Proxies will not be
valid unless received by CIBC Mellon Trust Company before 4:00 p.m. (Calgary
time) on _____________.
The Carpatsky proxy must be in writing and must be signed by the Carpatsky
shareholder or his attorney that has been authorized in writing. If the
Carpatsky shareholder is a corporation, the proxy must be signed under its
corporate seal by a duly authorized officer or by an attorney of the corporation
that has been authorized in writing.
Procedures for Revocation of Proxies
Carpatsky and Pease shareholders may revoke proxies by:
o delivering a written notice to the corporate secretary stating that
the proxy is revoked;
o submitting a proxy with a later date;
o attending the special meeting and voting in person.
In addition, prior to the vote on the continuance, Carpatsky shareholders
may revoke a proxy by delivering a notice of revocation signed in the same
manner as required for proxies to Carpatsky's registered office or CIBC Mellon
Trust Company on or before the last business day preceding the date of the
special meeting or any adjournment. Such revocation may be delivered to the
chairman of the meeting on the day of the meeting.
If you attend the meeting and do not vote, you will not automatically
revoke a proxy given previously. Any revocation during the meeting will not
affect votes previously taken. Shareholders who hold their common or preferred
stock in the name of a bank, broker or other nominee should follow the
instructions provided by their bank, broker or nominee to revoke a proxy.
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
Carpatsky shareholders have the right to dissent to the continuance under
Alberta, Canada law and the right to dissent to the merger under Delaware law.
The Continuance
A holder of Carpatsky common and preferred shares is entitled to dissent
and be paid the fair value of such shares if the continuance of Carpatsky as a
Delaware corporation is completed and such shareholder provides Carpatsky with
written objection to the continuance at or before the special meeting, does not
vote in favor of the continuance and otherwise complies with the procedure set
out in section 184 of the Business Corporations Act (Alberta). A written
objection must be in addition to and separate from any proxy or vote against the
merger. Section 184 requires adherence to procedures and failure to do so may
result in the loss of all rights to dissent. Accordingly, each holder of
Carpatsky common and preferred shares 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 C.
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The Merger
Shareholders of Carpatsky objecting to the merger have appraisal rights.
Each shareholder electing to demand appraisal of his shares is required to
deliver to Carpatsky, before the taking of the vote on the merger, a written
demand for appraisal. A demand for appraisal must identify the shareholder and
state that the shareholder intends to demand appraisal. A demand must be in
addition to and separate from any proxy or vote against the merger.
Within ten days after the effective date of the merger, Carpatsky will
notify each shareholder who has demanded appraisal and has not voted for or
consented to the merger of the date that the merger has become effective. Within
120 days after the effective date of the merger, Carpatsky or any shareholder
who is entitled to appraisal rights may file a petition in the Court of Chancery
demanding a determination of the value of the shares of all shareholders with
appraisal rights. If a petition is not filed with the Court of Chancery within
120 days after the effective date of the merger, the right to an appraisal
terminates. At any time within 60 days after the effective date of the merger,
any shareholder 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 Delaware
law which discuss the rights of shareholders to dissent from the transaction are
attached as Appendix D.
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.
Expenses of Solicitation
Pease and Carpatsky will share the cost of solicitation of proxies from our
shareholders, estimated to be $350,000. In addition to solicitation by mail, our
directors, officers, and employees may solicit proxies from shareholders 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 them, and we will
reimburse those holders for their reasonable expenses.
Shareholders' Proposals For Pease's 2001 Annual Meeting
Proposals of our shareholders that are intended to be presented at the 2001
annual meeting of shareholders must be received by our secretary no later than ,
2001. If the date of the 2001 annual meeting is changed by more than 30 days
from the date of the meeting described by this proxy statement and prospectus,
the deadline for submitting proposals is a reasonable time before we begin to
print and mail proxy materials for our 2001 annual meeting.
The persons named in our form of proxy for our 2001 annual meeting will
have discretionary authority to vote any proxies they hold at such meeting on
any matter for which we do not receive notice by , 2001. If the date of our 2001
annual meeting is changed by more than 30days from the date of the meeting
described by this proxy statement and prospectus, such persons will be able to
exercise discretionary authority if notice of the matter has not been received
in a reasonable time before we mail our proxy materials for the 2001 annual
meeting.
If the date of the 2001 annual meeting of shareholders is advanced or
delayed by more than 30 calender days from the date of the meeting described by
this proxy statement and prospectus, we will, in a timely manner, inform
shareholders of such change by including a notice under Item 5, in our earliest
possible quarterly report on Form 10-Q. The notice will include the new deadline
for submitting proposals to be included in our proxy statement and the new date
for determining whether we may exercise discretionary voting authority because
we have not received timely notice of a matter.
In order to avoid controversy as to the date on which any such proposal is
received by us, it is suggested that shareholders submit their proposals by
certified mail, return receipt requested, or other means that permit them to
prove the date of delivery.
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THE CONTINUANCE AND MERGER
Background of the Merger
On March 18, 1998 one of Pease's 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
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
shareholder 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 the 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 and determined
that it may be in the interest of the shareholders to merge with another company
to give Pease shareholders a greater opportunity for increased value. That
decision was based upon assessment of Pease's limited base of oil and gas
reserves and lack of access to the 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 in evaluating those candidates to
determine which would offer Pease the greatest potential for increasing its
reserve base and growth opportunities.
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. 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 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.
An Executive Committee meeting was held on August 31, 1998 to discuss
merger possibilities, details of the engagement of San Jacinto Securities to
initiate a merger and pursuing a third party "white knight" to assist Pease in
financing and restructuring its capital, particularly the outstanding nonvoting
series B preferred stock.
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<PAGE>
The board of directors met again 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 been submitted to a number of
inquiring candidates. Many recipients had objected to the proposed amount of
liquidated damages for breach and the nondisclosure terms requested in the
confidentiality agreements. The board approved modifying the agreement. The
board also elected Patrick J. Duncan as interim President of Pease. Willard H.
Pease, Jr., Pease's former president, 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. 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 Mr.
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 shareholders.
The board of directors 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 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 Company, 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
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 series B 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.
29
<PAGE>
Texas, both then directors of Carpatsky, with this information. They agreed that
Pease appeared to satisfy Carpatsky's 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 gas reserve reports, cash flow projections
and a description of Pease's 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 an oil and gas volumetric
evaluation for Carpatsky 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 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, Patrick J. Duncan explained that he had met with several potential merger
candidates during the first week of 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. Mr.
Duncan faxed a counterproposal to Texoil, Inc. that 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 counsel and Mr. Etheredge. Subsequent to the
meeting, representatives of Pease requested 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, L.P.,
independent petroleum consultants, to undertake a study of Carpatsky's oil and
gas reserves in Ukraine and the discounted present value of those reserves.
Ryder Scott was also engaged to estimate the capital required to develop the
fields and product pricing. On May 12, a committee of the Pease board of
directors consisting of Messrs. Osborne, Walker, 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., Virgin Oil Company, Inc. and
Pecos Operating Co. described proposals to acquire Pease. The board agreed to
review and further discuss these proposals.
30
<PAGE>
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
series B 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, the Chairman of
Pease, and Mr. Hofheinz, the 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
Mr. Duncan and several consultants, and to review a draft of the merger
agreement.
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 and James Doran of Hein + Associates LLP, a Denver, Colorado based
accounting firm, to review Carpatsky's 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 estimate 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 and gas fields in which Carpatsky has interests and met
with local management. The group also 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.
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 Pease's 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 1998, 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 regarding Bellwether
acquiring either a significant equity interest or the entire equity interest in
Carpatsky. At that time, Bellwether declined to pursue the transaction because
of uncertainties regarding the investment environment in Ukraine.
In September 1999, at the request of Carpatsky in connection with the Pease
merger, Torch transferred the $500,000 note to Bellwether and both Torch and
Bellwether converted their loans into an aggregate of 11,130,944 common shares
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.
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<PAGE>
In November 1999, Mr. Texas, the President of Carpatsky at the time,
informed Mr. Davis of Torch that Carpatsky required additional financing to
satisfy its obligations under the joint activity agreement for the RC field and
to continue development of the field. Mr. Davis was advised that without an
additional infusion of cash, Carpatsky could forfeit a portion of its interest
under the joint activity account covering the RC field in 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 Ukraine and negotiations with Carpatsky's management, Bellwether
agreed to acquire 95.45 million Carpatsky preferred shares and warrants to
purchase 12.5 million common shares. The preferred shares are convertible into
50 million common shares of Carpatsky. For a description of the terms of the
preferred shares, see "Description of Capital Stock--Class A Preferred Stock."
The Carpatsky preferred shares will be converted into our preferred stock in the
merger. Following the merger, Bellwether will control us. 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 common shares
of Carpatsky which previously had been contingent upon the completion of the
Pease merger. These shares were valued at $200,000 for financial reporting
purposes.
Reasons for the Merger
Carpatsky's Reasons for the Merger
Carpatsky's board of directors considered a number of factors in
unanimously approving the continuance and merger, including the following:
Additional Cash Flow and Proceeds of Asset Sales. Carpatsky will require
additional capital to finance its drilling programs in Ukraine. The oil and gas
properties owned by Pease provide additional cash flow to finance these
operations. In addition, the Pease properties are located in active producing
areas in the United States, and Carpatsky believes that there will be a ready
market for the sale of these properties, should we decide to sell these
properties to finance our operations in the Ukraine following the merger.
Cost Savings. The combined entity will be able to reduce its general and
administrative overhead expenses by an estimated $1.0 million per year.
U.S. Domicile. Carpatsky's principal executive offices have been located in
the United States since [ ]. The board of directors believes that changing the
domicile of incorporation of Carpatsky to the United States will provide better
access to the larger U.S. capital markets. In addition, under Alberta law, at
least half of Carpatsky's directors must be Canadian residents, while Nevada law
places no restriction on the residency of directors. This residency requirement
does not reflect the current majority ownership of Carpatsky's stockholders.
Recommendation to Shareholders. Carpatsky's board of directors has
unanimously approved continuing the corporation in Delaware, the merger
agreement and the merger, and recommends that Carpatsky shareholders vote to
adopt and approve the continuation, the merger agreement and the merger.
Pease's Reasons for the Merger
As described above, our directors considered a number of alternatives in
the search for a merger candidate. The directors recognized that we only have
three principal producing properties, we do not control the operations of any of
these properties and there is only a limited opportunity to significantly
increase shareholder value from the existing asset base. In addition, our
limited liquid resources and ability to raise additional capital made it
unlikely that we would be able to acquire new properties or participate in new
opportunities. As a result of the merger, our shareholders will have an
32
<PAGE>
opportunity to participate in Carpatsky's rights to explore and develop oil and
gas reserves in Ukraine, an area where there is the potential for the
development of significant natural gas reserves. Further, the increased size of
the combined entity is expected to simplify future financings of our various
properties, both within the United States and in Ukraine, while reducing
overhead expenses as a result of combining our offices with those of Carpatsky
in Houston that are nearer to our producing properties.
Recommendation to Shareholders. Pease's board of directors has unanimously
approved the merger agreement, the merger and the amendments to our articles of
incorporation, and recommends that each Pease shareholder vote to adopt our
restated articles of incorporation.
Opinion of Financial Advisor
Pease retained Houlihan Smith & Company, Inc. as a financial advisor and to
render an independent opinion to the board of directors of Pease in connection
with the merger. The merger consideration resulted from the negotiations between
Pease and Carpatsky and was not initially determined by Houlihan. On January 7,
2000, Houlihan gave its written opinion to the Pease board of directors that the
merger is fair, from a financial point of view, to the shareholders of Pease.
Houlihan updated its January 7, 2000 opinion in its written opinion to Pease's
board on June 27, 2000.
The full text of Houlihan's opinion, dated June 27, 2000, is attached as
Appendix B. The opinion contains a description of the matters considered by
Houlihan and the limits of its review. Pease shareholders 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's shareholders. 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 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 was among many factors taken into consideration
by Pease's board in making its determination to approve the merger and recommend
the stock issuance and merger as contemplated in the merger agreement. This
summary of Houlihan's opinion is qualified in its entirety by references to the
full text of the opinion that is included in this document with Houlihan's
consent.
In connection with rendering its opinion, Houlihan, among other things:
o Reviewed the financial terms of the transaction as provided in the
merger agreement, as amended.
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.
o Reviewed the SEC filings of Pease, including the most recent annual
and quarterly reports, and the current reports announcing the planned
merger.
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.
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o Reviewed reserve reports prepared by Netherland, Sewell & Associates,
Inc. for Pease's oil and gas reserves as of January 1, 2000 and 1999.
Additionally, Houlihan was provided with a pricing sensitivity
analysis prepared by Netherland, Sewell & Associates, Inc. dated March
18, 1999.
o Reviewed reserve reports prepared by Ryder Scott Company, L.P. for
certain leasehold interests of Carpatsky as of December 31, 1999, 1998
and 1997 and June 30, 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 document
summaries, 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 offers.
o Reviewed the exchange agreement with Pease's series B preferred
shareholders agreeing to convert all of the preferred stock to common
stock.
o Reviewed the resolutions of Pease's 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 common
stock quoted on the NASDAQ Small Cap Market and OTC Bulletin Board and
Carpatsky common shares quoted on the Canadian Venture Exchange.
o Analyzed the risk adjusted valuation of Pease's 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 were deemed to be relevant. Houlihan focused on general
financial ratios as well as equity and asset valuation ratios.
o Conducted such other studies, analyses, inquiries and investigations
as Houlihan deemed appropriate.
In arriving at its opinion, Houlihan considered such factors as it deemed
relevant including, but not limited to:
o the reserve and engineering values as calculated by Pease's advisors;
o revised reserves booked for accounting purposes in response to SEC
comments;
o the allocation between preferred and common shareholders of Pease as
negotiated by Pease and documented in the exchange agreement with
Pease's series B preferred shareholders;
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o the historical cash flows of Pease and Carpatsky;
o the conditions of closing of the merger;
o the risks associated with the merger;
o the upside potential of the merger, as described in the due diligence
conducted by Pease's management; and
o 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
provided to Houlihan. Houlihan 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 the economic, market, financial
and other conditions existing on, and 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.
The following is a summary of the principal financial analyses performed by
Houlihan in connection with providing its written opinion on January 7, 2000 as
updated by its opinion on June 27, 2000.
Relative Reserve Value Analysis
Houlihan prepared an analysis of the relative enterprise and equity value
of both Pease and Carpatsky by adjusting the discounted present value of future
net cash flows, or PV10 value, of the estimated proved reserves of each company
to an estimate of what a buyer may pay in a typical acquisition transaction. For
Carpatsky, Houlihan considered the paid in interest case, which assumes that
Carpatsky's net revenue interest in the RC field is 20%, and the full
contractual interest case, which assumes that Carpatsky's net revenue interest
in the RC field is 45%. Houlihan utilized the PV10 value calculated using the
SEC's rules for Pease, but not for Carpatsky, because of the likelihood that
Carpatsky's reserves will continue to be economically viable for Carpatsky for
longer than the current concession that terminates in March 2003. The PV10 value
of each company was then multiplied by an adjustment factor estimated using
Houlihan's business judgment and a consultation of the 1999 Survey of Economic
Parameters Used in Property Evaluation prepared by the Society of Petroleum
Evaluation Engineers. This developed an acquisition value for both Pease and
Carpatsky. An acquiror would likely use a discount rate higher than 10%. This
analysis is only intended to determine relative values, not an estimate of fair
market value.
The debt of each company was then subtracted from the respective enterprise
values to determine a relative equity value. These equity values were then used
to calculate a total equity value post merger, and the respective percentage of
the total equity value allocated to the shareholders of Pease and Carpatsky. The
percentage of equity value was compared to the ownership percentage implied by
the merger. The following tables illustrate this analysis.
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<PAGE>
<TABLE>
<CAPTION>
Pease Carpatsky
------------------------------ -------------------------------------------------------------
Full Contractual
Paid In Interest Case Interest Case
($ in 000s) ($ in 000s) ($ in 000s)
------------------------------ ------------------------------------ ---------------------
PV10 Adjustment Discounted PV10 Adjustment Discounted PV10 Adjustment Discounted
---- ---------- ---------- ---- ---------- ---------- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved
Producing ................. $ 2,194 100% $ 2,194 $ 7,105 100% $ 7,105 11,831 100% $ 11,831
Behind Pipe ............... 2,844 75% 2,133 1,305 75% 979 1,798 75% 1,349
Undeveloped ............... 1,231 55% 677 20,350 55% 11,193 43,294 55% 23,812
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Proved .............. 6,270 5,005 28,761 19,277 56,923 36,992
Probable
Producing ................. 3,644 23% 820 457 25% 114 1,043 25% 261
Behind Pipe ............... 0 0% 0 2,589 25% 647 3,253 25% 813
Undeveloped ............... 0 0% 0 25,885 20% 5,177 57,702 20% 11,540
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Probable ............ 3,644 820 28,474 5,824 60,955 12,354
Total Reserves ............... 9,914 5,824 57,236 25,101 117,879 49,345
======= ======= ======= ======= ======= =======
Less Debt .................... 2,566 663 663
------- ------- -------
Equity Value ................. 3,258 24,438 48,682
======= ======= =======
</TABLE>
Relative Value Analysis Based on Adjusted PV10 Values
Full Contractual
Paid In Interest Case Interest Case
--------------------- ----------------
Carpatsky Equity Value ........... 24,438 48,682
Pease Equity Value ............... 3,258 3,258
Total Equity Value ............... 27,697 51,941
Pease Equity Percentage .......... 11.8% 6.3%
Carpatsky Equity Percentage ...... 88.2% 93.7%
Relative Publicly Traded Stock Valuation Analysis
Houlihan calculated the market value of the publicly traded stock
outstanding, assuming that all preferred stock was converted to common stock.
The last closing share price of Carpatsky was from January 21, 2000 of $.17 per
share. Because of the long time period Carpatsky shares have not been trading,
Houlihan performed a second calculation using a weighted average share price
from the trading period under review of $.126 per share. The price for Pease was
the closing price as of June 27, 2000 of $.1875 per share. The market value of
each company was then added to calculate the pro forma market value post merger.
The relative percentages of market value for both Pease and Carpatsky were
calculated and compared to the ownership percentage implied by the Merger.
<TABLE>
<CAPTION>
Shares Price Per
Outstanding Share Value Percentage
----------- --------- ----- ----------
<S> <C> <C> <C> <C>
Carpatsky common shareholders.................. 77,728,263 $0.1260 $ 9,793,761
Carpatsky preferred shareholders............... 50,000,000 $0.1260 6,300,000
-----------
Total Equity Value........................ $ 16,093,761 89.0%
Pease common shareholders...................... 1,731,398 $0.1875 $ 324,637
Pease preferred shareholders................... 8,865,665 $0.1875 1,662,312
-----------
Total Equity Value........................ $ 1,986,949 11.0%
Total Combined Equity Value........... $ 18,080,710 100.0%
</TABLE>
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Each of the analyses conducted by Houlihan was carried out to provide a
different perspective on the merger, and to enhance the total mix of
information. Houlihan did not form a conclusion as to whether any individual
analysis, considered in isolation, supported or failed to support an opinion as
to the fairness, from a financial point of view, of the merger to the Pease
shareholders. Houlihan did not place any specific reliance or weight on any
individual analysis but instead concluded that its analyses, taken as a whole,
supported its determination. Accordingly, Houlihan believes that its analyses
must be considered as a whole and that selecting portions of its analyses or the
factors it considered, without considering all analyses and factors
collectively, could create an incomplete view of the process underlying the
analyses performed by Houlihan in connection with the preparation of its
opinion.
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,
private placements and valuations for corporate and other purposes. Houlihan was
selected by Pease on the basis of this experience. Houlihan received a non-
contingent fee of $32,500 plus reimbursement for all reasonable out-of-pocket
expenses from Pease relating to its services in providing the opinion. In
addition, Pease has 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 Continuance and Merger to Carpatsky Shareholders
The following discussion summarizes the material United States federal
income tax considerations relevant to the exchange of Carpatsky common and
preferred shares for common and preferred stock of the Delaware corporation
created in the continuance and the subsequent exchange of that common and
preferred stock for Pease common and preferred stock in the merger. This
discussion is based on currently existing provisions of the Internal Revenue
Code of 1986, existing and proposed Treasury Regulations under the IRC, and
current administrative rulings and court decisions, all of which are subject to
change. Any change in the IRC and Treasury Regulations, which may or may not be
retroactive, could alter the tax consequences to Pease, Carpatsky, or
Carpatsky's shareholders 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 shareholders who own 10% or more of the voting power of all classes of
Carpatsky stock, who are not U.S. citizens, residents or domestic entities, who
are dealers in securities, who are subject to the alternative minimum tax
provisions of the IRC,, 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 continuance or 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 Radiant Energy common or
preferred stock are disposed after the merger. Accordingly, Carpatsky
shareholders are urged to consult their own tax advisors as to the specific tax
consequences to them of the continuance and the merger, including the applicable
federal, state, local, and foreign tax consequences.
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With some exceptions, transactions that constitute reorganizations do not
require any of the participating corporations or their shareholders to pay any
federal income taxes. Reorganizations involving foreign corporations, such as
Carpatsky, sometimes fall within these exceptions and require certain
shareholders to include an amount in income or recognize gain on the
transaction. Both the continuance and the merger are intended to constitute
reorganizations. If the continuance 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:
o No amount will be included in income, and no gain or loss will be
recognized by, any Carpatsky shareholder who owns less than 10% of the
voting power of all classes of shares of Carpatsky and whose shares of
Carpatsky have a fair market value of less than $50,000 on the date of
the continuance. The aggregate tax basis of such shareholder's
Carpatsky shares will be unchanged, and the holding period applicable
to such shareholder's Carpatsky shares will include the period for
which such shares were held prior to the continuance.
o Each Carpatsky shareholder who owns less than 10% of the voting power
of all classes of shares of Carpatsky but whose shares of Carpatsky
have a fair market value of $50,000 or more on the date of the
continuance will recognize gain to the extent the fair market value of
such shares exceeds the aggregate tax basis of such shares, but will
not recognize any loss. Rather than recognize gain, the Carpatsky
shareholder may elect to include in income all the earnings and
profits attributable to such shareholder's shares in Carpatsky. The
amount of earnings and profits attributable to a shareholder's shares
is generally equal to the positive amount, if any, of Carpatsky's
undistributed net profits, whenever earned, after excluding any income
previously taxed in the United States. The aggregate tax basis of the
shareholder's Carpatsky shares will be increased by the amount of the
recognized gain or deemed dividend, and the holding period applicable
to such shareholder's Carpatsky shares will include the period for
which such shares were held prior to the continuance.
o No gain or loss will be recognized by Carpatsky shareholders solely
upon their receipt of Radiant Energy common and preferred stock in
exchange for Carpatsky common and preferred shares in the merger
except to the extent of cash received instead of a fractional share of
Radiant Energy common or preferred stock.
o The aggregate tax basis of the Radiant Energy 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 shares exchanged for Carpatsky common and preferred
stock in the continuance.
o The holding period applicable to the Radiant Energy common and
preferred stock received by each Carpatsky shareholder in the merger
will include the period for which the Carpatsky common and preferred
shares were considered to be held, provided that the Carpatsky common
and preferred shares are held as a capital asset at the time of the
merger.
o Cash payments received by Carpatsky's shareholders instead of a
fractional share will be treated as if the fractional share of Radiant
Energy common or preferred stock had been issued in the merger and
then redeemed by Radiant Energy. 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.
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o Neither Pease, CPI Acquisition Corp. nor Carpatsky will recognize
material amounts of gain solely as a result of the continuance and
merger.
The parties are not requesting and will not request a ruling from the
Internal Revenue Service in connection with the continuance or the merger. The
consummation of the merger is conditioned on the receipt by Pease and Carpatsky
of a legal opinion to the effect that the merger will qualify as a should be
aware that the tax opinion does not bind the Internal Revenue Service and the
IRS is therefore not precluded from successfully asserting a contrary opinion.
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 Carpatsky common or preferred share surrendered equal to the difference
between the shareholder's basis in his/her shares and the fair market value, as
of the effective date of the merger, of the Radiant Energy common or preferred
stock received in exchange for the Carpatsky common or preferred shares. In an
event like this, a shareholder's aggregate basis in the Radiant Energy common
and preferred stock received in the merger would equal its fair market value,
and the shareholder's holding period applicable to the stock would begin the day
after the merger.
Tax Consequences of Ownership and Disposition of Our Stock by Canadian Holders
Dividends with respect to Our Stock
In general, the gross amount of dividends paid to a Canadian shareholder
after the merger with respect to our stock 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 shareholder that are effectively
connected with a U.S. trade or business conducted by the Canadian shareholder
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. citizens, residents or domestic entities.
In addition to the graduated tax described above, dividends received by a
corporate Canadian shareholder that are effectively connected with a U.S. trade
or business of the corporate Canadian shareholder may also be subject to a
branch profits tax at a rate of 30% or such lower rate as may be specified by an
applicable tax treaty. Under the U.S.--Canada income tax treaty, the amount of
such tax is limited to 5%.
A Canadian shareholder of our stock 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 Our Stock
A Canadian shareholder generally will not be subject to U.S. Federal income
tax on any gain realized upon the sale or other disposition of our stock unless:
o the gain is effectively connected with a U.S. trade or business of the
Canadian shareholder, which gain, in the case of a corporate Canadian
shareholder, must also be taken into account for branch profits tax
purposes;
o the Canadian shareholder is an individual who holds his or her shares
as a capital asset, which is 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
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o we are or have been a "U.S. real property holding corporation" for
U.S. Federal income tax purposes at any time within the shorter of the
five-year period preceding the disposition or the holder's holding
period for our stock. We are not currently, have not been within the
last five years, and do not believe that we will become a "U.S. real
property holding corporation" for U.S. Federal income tax purposes.
Backup Withholding and Information Reporting
Generally, we 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.
Dividends paid to a Canadian shareholder at an address within the U.S. may
be subject to backup withholding at a rate of 31% if the Canadian shareholder
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 shareholders
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. citizen, resident or domestic
entity. Under recently finalized Treasury Regulations regarding withholding and
information reporting, payment of dividends to Canadian shareholders at an
address outside the U.S. after December 31, 2000 may be subject to backup
withholding at a rate of 31% unless such Canadian shareholder satisfies various
certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition by a Canadian shareholder of our stock 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 shareholder 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 shareholder of our
stock 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:
o a U.S. person;
o a "controlled foreign corporation" for U.S. Federal income tax
purposes; or
o 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
shareholder's non-U.S. status and certain other conditions are met, or
the Canadian shareholder otherwise establishes an exemption.
Neither backup withholding nor information reporting applies to a payment of the
proceeds of a disposition by a Canadian shareholder of our stock 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 our
stock. Canadian shareholders should consult their tax advisors regarding the
effect, if any, of those final Treasury Regulations on the ownership and
disposition of our stock.
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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 shareholder who receives our stock pursuant to the merger is
urged to consult his or her advisor to determine the impact of such Canadian
shareholder's personal tax situation on the anticipated tax consequences under
state, local, foreign or other tax laws, of the receipt, ownership and
disposition of our stock.
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's
common shares in connection with the continuance of Carpatsky in the state of
Delaware and the concurrent merger of Carpatsky with CPI Acquisition Corp., a
wholly-owned subsidiary of Pease.
This discussion is based on the provisions of the Income Tax Act (Canada)
(ITA) and the regulations thereunder, the Canada-United States Income Tax
Convention, 1980, and counsel's understanding of the current administrative
practices and policies of the Canada Customs and Revenue Agency. This discussion
takes into account all proposed amendments to the ITA and the regulations
thereunder that have been publicly announced by or on behalf of the Minister of
Finance (Canada) prior to the date of this proxy statement and prospectus 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 common shareholder of Carpatsky 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's common shares 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 Canada Customs and Revenue Agency in connection with any of the
transactions contemplated herein. Carpatsky's common shareholders should be
aware that this summary does not bind the Canada Customs and Revenue Agency and
it is therefore not precluded from asserting a contrary position.
This discussion is of a general nature only. Carpatsky's common
shareholders should consult their own tax advisors with respect to their own
particular circumstances.
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Consequences of the Continuance
The domestication, 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 the
domesticated Carpatsky common stock in replacement will continue to hold their
Carpatsky common stock at the same adjusted cost base as their Carpatsky common
shares immediately before the continuance.
Consequences of the Merger
The merger of 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
Carpatsky common shares, 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 Carpatsky common shares 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 Radiant Energy common stock at a cost to
the holder of an equal amount.
Disposition of Our Common Stock
Shareholders Resident in Canada. A disposition or deemed disposition by
a holder of our 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. Three-quarters of any
capital gain must be included in the holder's income for the year of
disposition. Three-quarters of any 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 distribution. 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 our common stock which such holder receives in the merger. 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 our common stock which such holder receives in the merger, as
such shares will be deemed to continue to be taxable Canadian property to the
holder thereof for the purposes of the ITA.
Dividends on Our Common Stock
Shareholders Resident in Canada. Dividends on our 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.
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Shareholders Not Resident in Canada. Dividends on shares of our 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 our 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. The information required to be
disclosed includes 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 our 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
shareholder of Carpatsky resident in Canada of a cash payment from Carpatsky
before the continuance will generally be treated as a dividend by such
shareholder to the extent that the payment exceeds the paid-up capital of the
shares. This deemed dividend will be taxed in the manner described above. 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. Dividend treatment will not arise if the cash payment is made after the
domestication and merger has occurred. The receipt by a dissenting shareholder
of Carpatsky of a cash payment after the continuance 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.
Shareholders Not Resident in Canada. A cash payment received from
Carpatsky before the continuance by a dissenting shareholder of Carpatsky not
resident in Canada 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. Under the Canada-United States Income Tax Convention, 1980, 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 common shareholder of Carpatsky of a cash
payment after the continuance 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 common shares of Carpatsky in respect of which the dissent is exercised
are not taxable Canadian property to the holder as described above.
Eligibility for Investment of Our Common Stock
Provided that our 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, our
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.
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Interests of Persons in the Merger
One member of the Pease board of directors has an interest in the
merger that is in addition to his interest as a shareholder. Our board of
directors was aware of this interest and considered it in approving the merger
agreement and the transactions contemplated in the merger agreement. If and when
the merger is consummated, Patrick J. Duncan, our current President and CFO,
will receive $220,000 under the provisions in his existing employment agreement
with us. This amount consists of a termination payment of $195,000 and the
repurchase by us of 1,564 shares of our common stock from Mr. Duncan for
$25,000.
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 "Pro Forma Combined Financial
Information."
Regulatory Approval
The continuance of Carpatsky must be consented to by the Registrar of
Corporations for British Columbia and Alberta, Canada. Both the continuance and
the merger must be approved by the Canadian Venture Exchange.
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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 included in this proxy
statement and prospectus as Appendix A which we intend to sign before this proxy
statement and prospectus is mailed.
General
Pease, CPI Acquisition Corp., which is a wholly-owned subsidiary of Pease,
and Carpatsky have entered into a merger agreement which provides that:
o Carpatsky will continue into the State of Delaware and thereby become
a Delaware corporation.
o Following the continuance, the wholly-owned subsidiary of Pease will
be merged with and into Carpatsky.
o Carpatsky common shareholders will receive an estimated 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 shareholders seek appraisal rights.
o Each outstanding Carpatsky common share, except for shares held by
shareholders who dissent, will be exchanged for .57842 shares of our
common stock and each outstanding Carpatsky preferred share will be
converted into 1.07292 shares of our preferred stock.
o Warrants and options entitling holders to purchase Carpatsky shares
shall be adjusted to permit holders to acquire 17,563,947 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 Continuance
The Business Corporations Act (Alberta) which governs Carpatsky does not
contain provisions allowing the direct merger of Carpatsky with a U.S.
corporation such as Pease's subsidiary. Carpatsky may, however, "continue" into
the U.S. In accordance with Delaware law, following the continuance, Carpatsky
will become subject to the law of Delaware and its existence as a corporation
will be deemed to have commenced on the date of its original incorporation under
the laws of Alberta, Canada. In addition, under Delaware law, Carpatsky
shareholders will be deemed to have been shareholders of the Delaware
corporation since the date they initially acquired their shares of Carpatsky.
The continuance will not affect any obligations or liabilities of Carpatsky
issued prior to the continuance, nor will it affect the ownership interests of
any of Carpatsky's shareholders. The sole effect on Carpatsky will be that the
corporation will become subject to Delaware law commencing on the effective date
of the continuance as if it had been incorporated in such state on such date.
Effective Time of the Merger
The closing will occur, and the merger will become effective, upon:
o the approval by Carpatsky shareholders of the continuance of Carpatsky
into Delaware and the merger;
o the adoption of amended and restated articles of incorporation by our
shareholders;
o the election of our new board of directors by our shareholders; and
o the satisfaction or waiver of the other conditions set forth in the
merger agreement.
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It is anticipated that the merger will become effective soon after
Carpatsky's and Pease's special meetings upon satisfaction or waiver of all
conditions to the merger.
Exchange of Certificates
Computershare Trust Company, 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 certificates for surrender
and exchange for certificates representing our common stock. Carpatsky
shareholders should not send any stock certificate with their proxy cards. You
should 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's names.
Each holder of Carpatsky common shares will be entitled, upon surrender to
the exchange agent, to receive in exchange for his shares of Carpatsky a common
stock certificate representing the number of our whole shares of common stock
into which his Carpatsky common shares were converted in the merger, together
with any cash payable in lieu of fractional shares. Until a holder of Carpatsky
common shares surrenders his Carpatsky common share certificate to the exchange
agent, the certificate representing Carpatsky common shares will be deemed to
represent the number of whole shares of our common stock into which the
Carpatsky common shares were converted.
Fractional Shares
Certificates representing fractional shares of our 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 shareholder. Instead of the issuance of any fractional
share, each holder of Carpatsky common shares who otherwise would be entitled to
receive a fractional share of our common stock in the merger will receive, upon
surrender for exchange, an amount in cash determined by multiplying the last
sales price of our common stock on the OTC Bulletin Board before the effective
date of the merger, by the fraction of a share to which that holder would
otherwise be entitled.
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 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 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:
46
<PAGE>
o declare or pay any dividend;
o repurchase or issue any capital stock or securities convertible into
capital stock;
o effect any reorganization, liquidation, recapitalization, stock split
or reclassification;
o acquire, or purchase the assets of, any other business;
o sell or encumber any assets, except in the ordinary course of
business;
o take any actions that could reasonably be expected to result in a
competing transaction;
o amend its articles of incorporation;
o change its method of accounting or any tax election or settle any
material claim;
o incur any indebtedness in excess of $10,000; or
o enter into any agreements or transactions with affiliates.
Conditions to Consummation of the Merger
The obligations of Pease and Carpatsky to complete the merger are subject
to the following conditions:
o Carpatsky shareholders must approve the continuance and merger.
o Pease shareholders must adopt the amended and restated articles of
incorporation.
o All of the issued and outstanding shares of our preferred stock shall
have been exchanged for shares of our common stock.
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.
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 the parties 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.
o Pease and Carpatsky shall have each furnished to the other an opinion
of its counsel regarding due incorporation, authority to do business,
issuances of stock and other routine matters.
o Holders of no more than .625% of the issued and outstanding common
shares of Carpatsky have exercised their dissenters' rights.
o We shall not have determined to withhold any amounts in respect of the
shares of our common stock or preferred stock issuable in the merger.
Termination
The merger agreement may be terminated at any time prior to effectiveness
of the merger, whether before or after shareholder approval of the merger, by
the mutual consent of Pease and Carpatsky or by either Pease or Carpatsky if:
o the other party material breaches any representation, warranty or
covenant;
o any representation or warranty of the other party becoming incapable
of being satisfied.
o there is a judgement, injunction or other order preventing the
consummation of the continuance, exchange of Pease preferred stock or
merger, unless the party seeking to terminate has not fulfilled its
obligations under the agreement to obtain or vacate such order;
o the merger is not consummated by October 31, 2000;
47
<PAGE>
o either party fails to obtain the required shareholder approval;
o the other party's board of directors withdraws or changes its
recommendation of the merger agreement and the transactions
contemplated thereby or has recommended a competing transaction;
o a tender or exchange offer is commenced for 20% or more of the other
party's outstanding stock and its board of directors fails to
recommend to its shareholders not tender or exchange their shares in
such offer; or
o 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.
If the merger agreement is terminated, neither party nor their affiliates,
directors, officers, or shareholders will be subject to any continuing
obligations with respect to the merger agreement, except with respect to
confidentiality obligations or liquidated damages provisions. The other party
shall be entitled to receive a $250,000 payment, which amount shall be inclusive
of all of such party's expenses, if the merger agreement is terminated as a
result of:
o a willful breach of any representation, warranty, covenant or
agreement by a party that had entered into negotiations prior to
termination regarding a competing transaction that is completed within
one year of termination;
o a party failing to secure the requisite vote of its shareholders or
its board of directors withdrawing its recommendation to shareholders
and at the time there exists a competing transaction;
o a party's board of directors recommends a competing transaction; or
o a party's board of directors failing to recommend that its
shareholders not tender or exchange their shares in connection with a
tender or exchange offer for 20% or more of its outstanding capital
stock.
Expenses and Fees
Except as set forth above, if the merger is not consummated, all expenses
other than costs associated with this proxy statement and prospects incurred in
connection with the merger agreement and the transactions contemplated by the
merger agreement will be paid by the party incurring such costs and expenses.
The printing, 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. If
the merger is completed, all such expenses will be borne by us. Costs and
expenses incurred in connection with the merger agreement are expected to
consist primarily of legal and accounting fees, petroleum engineering fees and
filing fees under federal and state regulatory laws and are estimated to be
$350,000.
48
<PAGE>
SELECTED FINANCIAL DATA OF PEASE
The selected balance sheet data as of December 31, 1999, 1998 and 1997 and
the selected statement of operations data for the years ended December 31, 1999,
1998 and 1997 have been derived from our audited financial statements. The
selected unaudited financial data for the three months ended March 31, 2000 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 three months
ended March 31, 2000 are not necessarily indicative of results for the full
fiscal year. This 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.
Pease Selected Financial Data Table
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
--------------------- ------------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ............................ $ 799,000 $ 412,000 $ 2,144,000 $ 2,888,000 $ 4,567,000
Cost of operations ................. (163,000) (84,000) (405,000) (1,620,000) (2,527,000)
----------- ------------ ------------ ------------ ------------
Gross profit .................... 636,000 328,000 1,739,000 1,268,000 2,040,000
----------- ------------ ------------ ------------ ------------
Other costs and expenses:
Consulting arrangement-
related party ................ -- 38,000 38,000 247,000 437,000
General and administrative ...... 173,000 180,000 845,000 1,587,000 1,487,000
Depreciation, depletion and
amortization ................. 252,000 263,000 1,007,000 2,241,000 2,670,000
Impairment expense .............. -- -- -- 7,593,000 12,913,000
----------- ------------ ------------ ------------ ------------
Total other costs and expenses 425,000 481,000 1,890,000 11,668,000 17,507,000
----------- ------------ ------------ ------------ ------------
Income(loss) from operations ....... 211,000 (153,000) (151,000) (10,400,000) (15,467,000)
Other income and (expense):
Interest and other income ....... 9,000 11,000 46,000 172,000 273,000
Interest expense ................ (90,000) (90,000) (360,000) (399,000) (701,000)
----------- ------------ ------------ ------------ ------------
Net income (loss) .................. $ 130,000 $ (232,000) $ (465,000) $(10,627,000) $ (15,895,000)
=========== ============ ============ ============ ============
Net income (loss) available to
common shareholders ............. $ 64,000 $ (298,000) $ (731,000) $(12,695,000) $ (15,985,000)
=========== ============ ============ ============ ============
Net income (loss) per common stock:
Basic ........................... $ 0.04 $ (0.18) $ (0.43) $ (7.99) (12.21)
Diluted ......................... $ 0.01 $ (0.18) $ (0.43) $ (7.99) (12.21)
Weighted Avg Shares Outstanding
Basic ........................... 1,731,000 1,626,000 1,684,000 1,588,000 1,309,000
Diluted ......................... 18,326,000 1,626,000 1,684,000 1,588,000 1,309,000
Balance Sheet Data:
Current assets ..................... $ 1,519,000 $ 1,428,000 $ 1,203,000 $ 1,741,000 $ 7,349,000
Current liabilities ................ 317,000 558,000 281,000 639,000 2,054,000
Working capital .................... 1,202,000 870,000 922,000 1,102,000 5,295,000
Total assets ....................... 7,362,000 7,557,000 7,141,000 7,913,000 21,294,000
Total liabilities .................. 2,878,000 2,905,000 2,787,000 2,932,000 5,202,000
Stockholders' Equity ............... 4,484,000 4,652,000 4,354,000 4,981,000 16,092,000
</TABLE>
49
<PAGE>
PEASE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Liquidity, Capital Expenditures and Capital Resources
At March 31, 2000, our cash balance was $909,000 with a positive working
capital position of $1,202,000, compared with $724,000 in cash and working
capital of $922,000 at December 31, 1999 and a cash balance of $1,050,000 and
positive working capital position of $1,102,000 at December 31, 1998. The
changes in our cash balance on those dates are summarized as follows:
Cash balance at December 31, 1998 ............................... $ 1,050,000
Sources of Cash:
Cash provided by operating activities ................ 739,000
Proceeds from the sale of property and equipment ..... 101,000
Proceeds from the redemption of certificate of deposit 70,000
-----------
Total Sources of Cash .......................... 910,000
Uses of Cash:
Capital expenditures for oil and gas activities ...... (932,000)
Series B preferred stock dividends ................... (245,000)
Purchase and retirement of series B preferred stock .. (51,000)
Repayment of long term debt .......................... (6,000)
Capital expenditure for office equipment ............. (2,000)
-----------
Total uses of cash ............................. (1,236,000)
-----------
Cash balance at December 31, 1999 ............................... 724,000
Sources of Cash:
Cash provided by operating activities ................ 322,000
Proceeds from the redemption of certificate of deposit 15,000
-----------
Total Sources of Cash .......................... 337,000
Uses of Cash:
Capital expenditures for oil and gas activities ...... (150,000)
Repayment of long term debt .......................... (1,000)
-----------
Total uses of cash ............................. (152,000)
-----------
Cash balance at March 31, 2000 .................................. $ 909,000
===========
As a result of higher commodity prices and maintaining low overhead
expenses, we were able to generate positive cash flows from operations in 1999
and through the first quarter of 2000. As far as our uses of cash, the following
table illustrates the costs incurred for our exploration activities during 1999.
The difference between the total incurred, as illustrated in the following
table, and the total amount of cash used in 1999, relates to the changes in
accounts payable at December 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
Program Operator
-----------------------------------------------
NEGX Beta AHC Other Total %
---- ---- --- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Category:
Exploratory Dry Holes ............ $ -- $164,000 $ -- $ -- $164,000 18%
Land, G&G Costs on
Seismic Programs ................. 2,000 130,000 -- -- 132,000 15%
Successful efforts .................... -- 59,000 251,000 1,000 311,000 34%
Capitalized Interest .................. -- 278,000 -- -- 278,000 30%
Other Exploration Costs ............... -- -- -- 24,000 24,000 3%
-------- -------- -------- -------- -------- --------
Total Exploration Costs ........ $ 2,000 $631,000 $251,000 $ 25,000 $909,000 100%
======== ======== ======== ======== ======== ========
Percent ........................ -- 69% 28% 3% 100%
</TABLE>
50
<PAGE>
The following table illustrates the costs incurred for our exploration
activities during the first quarter of 2000. The difference between the total
cash paid for exploration activities in the above table and the amount
illustrated below, relates to the net increase in accounts payable for those
activities between December 31, 1999 and March 31, 2000.
<TABLE>
<CAPTION>
Program Operator
-----------------------------------------------
Internal
NEGX Beta AHC Costs Total %
---- ---- --- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Category:
Productive Efforts ............... $ -- $ 1,000 $ 61,000 $ -- $ 62,000 32%
Exploratory Dry Holes ............ -- 32,000 -- -- 32,000 17%
Land, G&G Costs on
Seismic Programs ............... 6,000 20,000 -- -- 26,000 13%
Capitalized Interest ................. -- 69,000 -- -- 69,000 36%
Other Exploration Costs .............. -- -- -- 5,000 5,000 2%
-------- -------- -------- -------- -------- --------
Total Exploration Costs ........ $ 6,000 $122,000 $ 61,000 $ 5,000 $194,000 100%
======== ======== ======== ======== ======== ========
Percent ........................ 3% 63% 31% 3% 100%
</TABLE>
Our current oil and gas assets consist of the following:
o the East Bayou Sorrel Area in Iberville Parish, Louisiana, operated by
National Energy Group, Inc.;
o the Maurice Prospect in Fayetteville Parish, Louisiana, operated by
Amerada Hess Corporation; and
o the Formosa, Texana and Ganado 3-D prospects encompassing 130,000
acres in and around Jackson County, Texas, operated by Beta Oil and
Gas, Inc.
In December 1998, National Energy Group filed an involuntary Chapter 11
bankruptcy petition 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 our current production, the bankruptcy petition might
adversely effect future development or operation of the field; however, we do
not expect that our interest in the field or production from currently existing
wells will be affected.
We have an unsecured claim in the bankruptcy proceeding for various amounts
which we believe were overpaid to National Energy Group as operator in
connection with the drilling and operating of certain wells. Collection of these
amounts may be delayed or may not occur, pending disposition of National Energy
Group's reorganization proceeding. The total claim is approximately $60,000.
However, no amount has been recorded in the financial statements as of December
31, 1999 or March 31, 2000.
51
<PAGE>
Since we are a non-operator in all of the areas in which we hold an oil and
gas interest, we do not necessarily control the timing of any development or
exploration activities and therefore have little control over the corresponding
required cash outlays. However, we currently expect the expenditures that will
be proposed by the respective operators of our core areas to be within the
following ranges through the first quarter of 2001:
Estimated Investment
-----------------------
Area Minimum Maximum
---- ------- -------
East Bayou Sorrel Area ......................... $ 50,000 $ 400,000
Formosa, Texana, and Ganado Prospects .......... 250,000 1,100,000
Maurice Prospect ............................... 350,000 500,000
---------- ----------
Total .................................... $ 650,000 $2,000,000
========== ==========
In addition to the potential capital necessary for our exploration
activities, in April 2001 our convertible debentures with a current outstanding
balance of $2,782,500 will become due and payable. Accordingly, given the range
of potential capital requirements through the first quarter of 2001, our current
and anticipated cash position may not be sufficient to cover future working
capital and exploration obligations. We have vigorously explored various
alternatives for additional sources of capital. However, with the hyper-dilutive
potential of the outstanding series B preferred stock should the holders elect
to convert into common stock, we have been unable to attract additional equity
capital. For example, using our recent common stock price on July 31, 2000 of
$0.32, should all the holders of the series B preferred stock elect to convert
into common stock, we would be required to issue approximately 22 million shares
in the conversion. This would represent approximately 93% of the then
outstanding common stock. Presently, we have only 4.0 million shares of common
stock authorized and are obligated under the terms of our agreements with our
preferred shareholders to seek approval of additional authorized shares at our
next meeting of shareholders to allow for conversion should the preferred
shareholders choose to do so. However, it cannot be determined at this time
whether or not additional common stock will be authorized by the common
shareholders and if not, what the consequences may be.
In September 1998, we engaged San Jacinto Securities, Inc., an investment
banking firm located in Dallas, Texas, to assist us in pursuing various
strategic alternatives. Their efforts have focused primarily on seeking a
potential merger candidate for us. In exchange for their services, San Jacinto
Securities was paid a $150,000 non- refundable cash fee in 1999 that was
expensed for financial statement reporting purposes and will receive an
additional 3% of the merger value in excess of $5.0 million should it close. On
September 1, 1999, we entered into a merger agreement with Carpatsky.
Carpatsky's primary oil and gas assets are located in the Republic of Ukraine.
We entered into the merger agreement with Carpatsky in order to, among other
things, increase and diversify our asset base and improve the chances of
financing future opportunities.
If the contemplated merger with Carpatsky cannot be consummated within a
reasonable period of time, or is otherwise abandoned, then we may have to seek
additional financing. However, our common stock was delisted from the Nasdaq
SmallCap electronic market system on January 14, 1999 for failure to maintain an
average bid price of at least $1.00 per share. The stock is now listed on the
over-the-counter market on the NASD Bulletin Board. It is believed that this
delisting will have a material negative impact on our ability to raise
additional equity capital. Therefore, it is unclear at this time what
alternatives for future working capital will be available, or the extent of any
dilution that existing shareholders may experience as a result of obtaining such
working capital. If additional sources of financing are not ultimately
available, we may have to consider other alternatives, including the sale of
existing assets, cancellation of existing exploration agreements, farmouts,
joint ventures, restructuring under the protection of Federal bankruptcy laws or
liquidation.
52
<PAGE>
Results of Operations
Overview
Our largest source of operating revenue is from the sale of produced oil,
natural gas, and natural gas liquids. The level of our revenues and earnings are
affected by prices at which oil, gas and natural gas liquids are sold.
Therefore, our operating results for any prior period are not necessarily
indicative of future operating results because of the fluctuations in oil, gas
and natural gas liquid prices and the lack of predictability of those
fluctuations as well as changes in production levels.
During 1998, we completed the sale of all our Rocky Mountain assets, which
consisted of operated oil and gas properties, a gas plant and a service and
supply business. The disposition of these assets has had a material negative
impact on our total revenue subsequent to that date.
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.
53
<PAGE>
Oil and Gas
Operating statistics for oil and gas production for the periods presented
are as follows:
<TABLE>
<CAPTION>
For the Three Months For the Year Ended
Ended march 31, December 31,
------------------------- -------------------------
2000 1999 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Production:
Oil (Bbls)
Rocky Mtns ......................... -- -- -- 51,000
Gulf Coast ......................... 23,000 18,000 74,000 58,000
Gas (Mcf)
Rocky Mtns ......................... -- -- -- 230,000
Gulf Coast ......................... 52,000 107,000 337,000 320,000
BOE (6:1)
Rocky Mtns ......................... -- -- -- 89,000
Gulf Coast ......................... 32,000 36,000 130,000 112,000
Average Collected Price:
Oil (Bbls)
Rocky Mtns ......................... $ -- $ -- $ -- $ 12.11
Gulf Coast ......................... 27.93 10.87 17.80 12.19
Gas (Mcf)
Rocky Mtns ......................... -- -- -- 1.39
Gulf Coast ......................... 2.95 2.00 2.46 2.22
BOE (6:1)
Rocky Mtns ......................... -- -- -- 10.50
Gulf Coast ......................... 25.12 11.47 16.48 12.73
Operating Margins:
Rocky Mtns:
Revenue -
Rocky Mtns. - Oil ............... $ -- $ -- $ -- $ 612,000
Rocky Mtns. - Gas ............... -- -- -- 321,000
----------- ----------- ----------- -----------
933,000
Costs .............................. -- -- -- (806,000)
----------- ----------- ----------- -----------
Operating Margin ................... $ -- $ -- $ -- $ 127,000
=========== =========== =========== ===========
Operating Margin Percent ........... -- -- -- 14%
Gulf Coast:
Revenue -
Gulf Coast - Oil ................ $ 644,000 $ 198,000 $ 1,316,000 $ 716,000
Gulf Coast - Gas ................ 155,000 214,000 828,000 710,000
----------- ----------- ----------- -----------
799,000 412,000 2,144,000 1,426,000
Costs .............................. (163,000) (85,000) (405,000) (243,000)
----------- ----------- ----------- -----------
Operating Margin ................... $ 636,000 $ 327,000 $ 1,739,000 $ 1,183,000
=========== =========== =========== ===========
Operating Margin Percent ........... 80% 79% 81% 83%
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
For the Three Months For the Year Ended
Ended March 31, December 31,
----------------------- -----------------
2000 1999 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Production Costs per BOE before
Depreciation, Depletion and Amortization:
Rocky Mtn Region ...................... $ -- $ -- $ -- $ 9.04
Gulf Coast Region ..................... 5.13 2.34 3.11 2.17
Change in Revenue Attributable to
Total Revenue:
Production ............................ $ (56,000) $(832,000)
Price ................................. 443,000 614,000
-------- --------
Total Increase (Decrease) in Revenue $ 387,000 $(218,000)
======== ========
Change in Revenue for Gulf Coast Only:
Production ............................ $ (56,000) $ 224,000
Price ................................. 443,000 494,000
-------- --------
Total Increase in Gulf Coast Revenue $ 387,000 $ 718,000
======== ========
</TABLE>
The decrease in gas production between the periods presented for March 31,
2000 and 1999 is primarily attributed to the Maurice Field operations where we
have experienced the natural decline of production inherent in oil and gas
operations. In addition to this natural decline of production, we lost a well in
this field in September 1999 due to down-hole mechanical problems. Absent any
unforeseen negative circumstances or additional discoveries, we expect gas
production for the remainder of 2000 to be approximately 50% of what it was in
1999.
Production costs per BOE have increased during the periods presented
because a substantial portion of the production taxes are based on revenue
instead of volume produced and water production increases at the East Bayou
Sorrel facility have significantly increased the lifting costs for the three
wells currently producing there. We expect the production costs to remain at
approximately $5.00 per BOE for the remainder of 2000.
Substantially all of our current oil and gas production is now generated
from four of the ten wells in which we hold a working interest. Of the four main
producing wells, three are operated by National Energy Group and the other one
is operated by Amerada Hess. All these wells are deep, high pressure, water
driven reservoirs that are inherently laden with geologic, geophysical and
mechanical risks and uncertainties. The unexpected loss of any one of these
wells would have a material negative impact on our estimated reserves, future
production and future cash flows.
Gas Plant, Service and Supply
As previously discussed, we sold these assets in 1998. However, the
historical operating results for 1998, excluding depreciation and amortization,
are as follows:
Amount
------
Revenue ......................... $ 272,000
Costs ........................... (296,000)
---------
Net Operating Loss ........... $ (24,000)
=========
55
<PAGE>
Consulting Arrangement - Related Party
In March 1996, we entered into a three-year consulting agreement with Beta
Capital Group, Inc. located in Newport Beach, California. Beta Capital's
chairman, Steve Antry, has been a director of Pease since August 1996. The
consulting agreement, which ended in February 1999, provided for minimum monthly
cash payments of $17,500 plus reimbursement for out-of-pocket expenses. Stephen
Fischer, an independent contractor for Beta Capital, is also a member of our
board of directors. Mr. Antry is the president, and Mr. Fischer is the Vice
President of Capital Markets, of Beta Oil and Gas, Inc., a publicly held oil and
gas company which is the operator of our Formosa, Texana and Ganado prospects.
General and Administrative
General and administrative expenses decreased $741,000 in 1999 when
compared to 1998 as summarized below:
$ 397,000 Reduction of payroll as a result of eliminating executive and
administrative positions
150,000 Fee paid in 1998 to San Jacinto Securities
144,000 Legal and accounting
110,000 Consulting
44,000 Travel
31,000 All other, net
(135,000) Costs associated with pursuing the merger with Carpatsky
---------
$ 741,000 Net decrease between the periods presented
=========
General and administrative expenses decreased only $6,000 during the first
quarter of 2000 when compared to the same period in 1999. However, the costs in
2000 include $47,000 incurred in connection with the merger.
Pease capitalized $24,000 and $237,000 of costs associated with Gulf Coast
exploration activities in 1999 and 1998, respectively, and an additional $5,000
during the first quarter of 2000 that would have been expensed as general and
administrative costs under the successful efforts method of accounting for oil
and gas activities.
Since 1998, we have taken steps to significantly reduce future general and
administrative costs, and we expect "core" general and administrative costs in
2000 to be between $40,000 to $50,000 per month. However, we expect to incur
between $50,000 and $75,000 in connection with the efforts to consummate the
merger transaction with Carpatsky.
Depreciation, depletion and amortization
Depreciation, depletion and amortization for the periods presented by cost
center consisted of the following:
<TABLE>
<CAPTION>
For the Three Months For the Year Ended
Ended March 31, December 31,
-------------------- --------------------
2000 1999 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Oil and Gas Properties - Gulf Coast ................ $ 247,000 $ 257,000 $ 985,000 $1,639,000
Oil and Gas Properties - Rocky Mountains ........... -- -- -- 275,000
Gas Plant, Service and Supply Operations ........... -- -- -- 273,000
Furniture and Fixtures ............................. 5,000 6,000 22,000 54,000
---------- ---------- ---------- ----------
Total ...................................... $ 252,000 $ 263,000 $1,007,000 $ 2,241,000
========== ========== ========== ==========
Depreciation, Depletion and Amortization
per BOE for oil and gas properties ............. $ 7.76 $ 7.13 $ 7.57 $ 9.52
========== ========== ========== ==========
</TABLE>
56
<PAGE>
Depreciation, depletion and amortization 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 depreciation,
depletion and amortization for the Rocky Mountains and the Gulf Coast are
illustrated here for analysis purposes only. Total depreciation, depletion and
amortization for the oil and gas properties decreased in 1999 when compared to
1998 principally as a result of the impairment charges recognized in 1998 that
significantly reduced the net value of the 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 Three Months For the Year Ended
Ended March 31, December 31,
-------------------- -------------------
2000 1999 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest paid or accrued .................... $ 70,000 $ 69,000 $ 281,000 $ 370,000
Amortization of debt discount ............... 55,000 55,000 138,000 342,000
Amortization of debt issuance costs ......... 34,000 35,000 219,000 540,000
---------- ---------- --------- ----------
Total interest incurred ..................... 159,000 159,000 638,000 1,252,000
Interest capitalized ........................ (69,000) (69,000) (278,000) (853,000)
---------- ---------- --------- ----------
Interest expense ............................ $ 90,000 $ 90,000 $ 360,000 $ 399,000
========== ========== ========= ==========
</TABLE>
The lower interest incurred in 1999 is substantially attributable 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 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 $397,000, representing 30% of the unamortized debt
discount and debt issuance costs associated with that debt.
Impairment - Oil and Gas Properties
We use the full cost method of accounting for our oil and gas activities.
The full cost method regards all costs of acquisition, exploration and
development activities as being necessary for the ultimate production of
reserves. All of those costs are incurred with the knowledge that many of them
relate to activities that do not result directly in finding and developing
reserves. However, the benefits obtained from the prospects that do prove
successful, together with benefits from past discoveries, may ultimately recover
the costs of all activities, both successful and unsuccessful. Thus, all costs
incurred in those activities are regarded as integral to the acquisition,
discovery and development of reserves that ultimately result from the efforts as
a whole and are thereby associated with our 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 SEC
rules.
57
<PAGE>
As prescribed by the accounting standards for the full cost method, all the
accumulated costs in excess of the ceiling are to be expensed periodically by a
charge to impairment. No impairment charge was incurred in 1999 or through the
first quarter of 2000 since our ceiling was in excess of the costs accumulated
in our full cost pool. In 1998 we incurred an impairment charge of $7,279,000
which can be attributed to:
o $3,292,000 in dry holes;
o $2,972,000 related to the expiration of leases in the acreage
associated with Parallel Petroleum's 3-D program in South Texas; and
o $1,015,000 to the continuing decline of oil prices. A declining
commodity price has the effect of lowering the "ceiling" of the full
cost pool.
Dividends and Net Loss Per Common Share
We have adopted SFAS No. 128 titled "Earnings Per Share." Accordingly,
basic earnings (loss) per share is computed by dividing income (loss) available
to common shareholders by the weighted-average number of shares of common stock
outstanding during the periods presented.
The net income (loss) available to common shareholders is determined by
including any dividends accruing to the benefit of the preferred shareholders to
the net income (loss). The dividends included for this calculation include paid
dividends, accrued but unpaid dividends and any dividends in arrears.
Accordingly, the net loss available to common shareholders includes the
following charges associated with the series B preferred stock.
<TABLE>
<CAPTION>
For the Three Months For the Year Ended
Ended March 31, December 31,
----------------------- -----------------------
2000 1999 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Dividends declared and paid .............. $ -- $ 66,000 $ 178,000 $ 278,000
Dividends in arrears ..................... 66,000 -- 88,000 --
Non-cash imputed dividend charge ......... -- -- -- 1,789,000
---------- ---------- ---------- ----------
Total .................................... $ 66,000 $ 66,000 $ 266,000 $2,067,000
========== ========== ========== ==========
</TABLE>
In connection with an agreement signed by our preferred shareholders and
associated with the contemplated merger with Carpatsky, we have not accrued or
paid any dividends to the series B preferred stockholders subsequent to
September 1, 1999. However, should the merger be abandoned the amount that we
would be obligated to pay for the periods presented has been included in the
calculation of net income per share as "dividends in arrears."
Computing the diluted earnings per share for the three months ended March
31, 2000 is similar to the basic earnings per share except that income (loss)
available to common shareholders is adjusted to add back the $66,000 of
convertible preferred stock dividends in arrears and the weighted-average number
of shares of common stock outstanding is increased to include the number of
additional shares of common stock that would have been outstanding assuming the
preferred stock had been converted into 16,594,493 shares of common stock on
January 1, 2000. This assumption presumes the preferred stock would have been
converted into common stock in accordance with its original terms of a 25%
discount to the reported closing market price. The market price used for
58
<PAGE>
purposes of this calculation was as of March 31, 2000. Our articles of
incorporation only authorize the issuance of up to four million shares, of which
1,731,398 are currently issued and outstanding. Accordingly, the diluted
earnings per share is only a hypothetical computation since we would be required
to obtain shareholder approval for any shares to be issued beyond four million.
Pursuant to the terms of our proposed merger with Carpatsky, our preferred
shareholders have agreed to exchange all the outstanding preferred stock for
8,865,665 shares of common stock when and if the merger is ultimately
consummated.
Diluted earnings per share for the three months ended March 31, 1999 and
for the years ending December 31, 1999 and 1998, is identical to the basic
earnings per share for the same period since the effects of including any
potential issuances of common stock would have been antidilutive.
SELECTED FINANCIAL DATA OF CARPATSKY
The following table sets forth Carpatsky's selected financial data for the
three years ended December 31, 1999, and for the three-month periods ended March
31, 2000 and 1999. The financial data for each of the years in the three-year
period ended December 31, 1999 has been derived from the audited financial
statements of Carpatsky that were prepared on a consolidated basis. Financial
information for the years ended December 3, 1996 and 1995 is not presented
because oil and gas operations did not commenced until 1997 when the first gas
well in the RC field was completed. Prior to 1997 Carpatsky was in the
development stage, and its activities were principally raising capital.
Furthermore, Carpatsky's financial records prior to 1997 were maintained under
Canadian accounting standards. Conversion of such information to U.S. accounting
standards would require significant costs and effort and the information is not
believed to be material to a shareholder's evaluation of the continuance and
merger. The selected unaudited financial data for each of the three-month
periods ended March 31, 2000 and 1999 have been prepared on a basis consistent
59
<PAGE>
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 three months
ended March 31, 2000 are not necessarily indicative of results for the full
fiscal year. This 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.
Carpatsky Selected Financial Data Table
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
-------------------- ------------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ............................................ $ 638,000 $ 434,000 $ 2,430,000 $ 769,000 $ 99,000
Less allowance for doubtful accounts ............... (63,000) (323,000) (1,630,000) (543,000) (13,000)
------------ ------------ ------------ ------------ ------------
Net revenue ..................................... 575,000 111,000 800,000 226,000 86,000
Cost of operations ................................. (336,000) (170,000) (1,017,000) (309,000) (83,000)
------------ ------------ ------------ ------------ ------------
Gross profit (loss) ............................. 239,000 (59,000) (217,000) (83,000) 3,000
Other costs and expenses:
General and administrative ...................... 333,000 104,000 1,385,000 552,000 805,000
Depreciation, depletion and
amortization .................................. 446,000 185,000 1,366,000 337,000 29,000
Impairment ...................................... 500,000 -- 3,050,000 -- --
------------ ------------ ------------ ------------ ------------
Total other costs and expenses ................ 1,279,000 289,000 2,751,000 889,000 834,000
------------ ------------ ------------ ------------ ------------
Income (loss) from operations ................... (1,040,000) (348,000) (6,018,000) (972,000) (831,000)
Other income and (expense):
Interest and other income ..................... 16,000 16,000 35,000 4,000 40,000
Gain on net monetary position ................. 63,000 297,000 936,000 1,477,000 44,000
Amortization of debt discount ................. -- -- -- (658,000) (139,000)
Interest expense .............................. (23,000) (84,000) (260,000) (318,000) (90,000)
------------ ------------ ------------ ------------ ------------
Loss before taxes ............................... (984,000) (119,000) (5,307,000) (467,000) (976,000)
Provision for income taxes ...................... (82,000) (55,000) (447,000) (132,000) --
------------ ------------ ------------ ------------ ------------
Net loss ........................................ (1,066,000) (174,000) (5,754,000) (599,000) (976,000)
Imputed preferred stock dividend ................ -- -- (336,000) -- --
------------ ------------ ------------ ------------ ------------
Net loss available to common shares ............. $ (1,066,000) $ (174,000) $ (6,090,000) $ (599,000) $ (976,000)
============ ============ ============ ============ ============
Net loss per share .............................. $ (0.01) $ -- $ (0.12) $ (0.01) $ (0.03)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding ..................... 77,728,263 40,796,246 49,471,164 40,796,246 31,691,266
============ ============ ============ ============ ============
Statement of Cash Flows Data:
Net cash provided by (used in)
operating activities ............................ $ (791,000) $ (7,000) $ (676,000) $ (469,000) $ (916,000)
Net cash provided by (used in)
investing activities ............................ $ (1,024,000) $ (539,000) $ (1,553,000) $ (1,666,000) $ (3,499,000)
Net cash provided by (used in)
financing activities ............................ $ -- $ 250,000 $ (4,994,000) $ 600,000 $ 4,444,000
Other Financial Data:
Ratio of combined fixed charges and
preference dividends to earnings(1) ............. -- -- -- -- --
Balance Sheet Data:
Current assets ..................................... $ 2,654,000 $ 226,000 $ 4,024,000 $ 208,000 $ 343,000
Current liabilities ................................ 3,142,000 5,033,000 3,645,000 4,850,000 3,170,000
Working capital (deficit) .......................... (488,000) (4,807,000) 379,000 (4,642,000) (2,827,000)
Total assets ....................................... 6,938,000 9,497,000 8,507,000 9,489,000 7,080,000
Total liabilities .................................. 3,142,000 7,040,000 3,645,000 6,858,000 3,893,000
Stockholders' Equity ............................... 3,796,000 2,457,000 4,862,000 2,631,000 3,187,000
</TABLE>
------------
(1) Earnings were not sufficient to cover fixed charges and preference
dividends by the amount of the net loss for each period.
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<PAGE>
CARPATSKY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Liquidity, Capital Expenditures and Capital Resources
In October 1999, Carpatsky completed a private placement of common shares
which raised $1.0 million. The proceeds of this private placement of common
shares were used to satisfy general overhead obligations and to further fund its
operational activities in Ukraine. Effective September 30, 1999 Carpatsky also
converted $2.676 million of debt and payables into common shares and warrants.
The conversions were negotiated by Carpatsky in order to improve its overall
financial condition and to free up working capital to further its Ukrainian
operations.
In December 1999, Bellwether Exploration Company purchased 95.45 million
shares of a newly issued class of Carpatsky preferred shares that are
convertible into 50 million common shares and warrants to purchase 12.5 million
Carpatsky common shares for one year at an exercise price of U.S.$0.20 per
share. The purchase price for the preferred shares and warrants was U.S.$4.0
million. A portion of the proceeds from this offering were used for general
corporate obligations but most of the proceeds were used to fund or otherwise
satisfy obligations associated with the Ukrainian ventures.
Until recently, our cash flow from operations has not been sufficient to
fund any meaningful development in our Ukrainian assets nor cover our corporate
overhead. Therefore, our primary sources of capital have historically been from
the sale of debt and equity securities. Although we are starting to realize cash
flows from our Ukranian assets, we expect all of these funds to be reinvested in
the Ukranian ventures, at least for the foreseeable future.
Carpatsky's oil and gas assets consist of interests in the
Rudovsko-Chervonozavodskoye natural gas and gas condensate field (RC field) and
the Bitkov-Babchensky oil field (Bitkov field) located in Ukraine. Carpatsky
holds its interests in the RC field pursuant to a joint activity agreement with
Ukrnafta and in the Bitkov field pursuant to a joint venture with Ukrnafta. Most
of Carpatsky's current oil and gas reserve value is attributable to the RC
field. Carpatsky expects drilling to be completed, or at least started, on two
to seven additional development wells in this field during 2000.
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 the first quarter 2001:
Etimated Investment Requirements
Venture Minimum Maximum
The RC venture ............................ $ 2,800,000 $ 7,840,000
The Bitkov venture ........................ 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 activity agreement in
the RC field is 45%, its maximum potential interest. Carpatsky's share of net
revenues is based on capital contributions to the joint activity's account and
is computed on a quarterly basis. Based on a recent review of the payments to
and withdrawals from the joint activity's account, Carpatsky notified Ukrnafta
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<PAGE>
that Carpatsky disagreed with certain of the charges to and withdrawals from the
account. Ukrnafta and Carpatsky are currently negotiating an agreement to adjust
the relative ownership interest of Carpatsky in the joint activity's account.
Carpatsky has proposed to Ukrnafta that the relative net revenue interest of
Carpatsky be set at 45%. Carpatsky believes that these negotiations will be
completed during September 2000. No assurances can be made that Carpatsky will
be successful in these negotiations or the timing of a resolution of this
disagreement. Should Carpatsky be unable to maintain its net revenue interest in
the RC field, the future capital requirements would be adjusted down on a
pro-rata basis.
Carpatsky expects that the Ukrainian projects will develop cash flow
sufficient to fund Carpatsky's operations sometime in late 2000 or early 2001,
but exactly when, or if, this will 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 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, a Ukrainian national joint
stock company. Naftogazukrainy was formed to meet the natural gas needs of
Ukraine. Naftogazukrainy's responsibilities are similar to those of a U.S.
public utility. Many of the country's natural gas consumers have been unable to
meet their financial obligations in hard currency on a timely basis. With
Naftogazukrainy 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 gas sold.
To circumvent this payment problem with Naftogazukrainy, in September 1999
Carpatsky began selling a portion of its 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 Naftogazukrainy. 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 approximately 90% of its natural gas
deliveries.
Carpatsky is vigorously exploring the possibility of exporting its natural
gas for sale to foreign companies. Carpatsky believes that an export contract
with one or more large creditworthy customers could virtually eliminate its
historical problems with receiving payments. 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 oil,
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<PAGE>
gas and natural gas liquids are sold. 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 oil, gas 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.
Oil and Gas
Operating statistics for oil and gas production for the periods presented
are as follows:
<TABLE>
<CAPTION>
For the Three Months For the Year End
Ended March 31, Ended December 31,
---------------------- --------------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Production:
Oil (Bbls) ........................ 6,000 3,000 26,000 12,000 5,000
Gas (Mcf) ......................... 763,000 333,000 2,456,000 472,000 11,000
Average Sales Price:
Oil (per Bbl) ..................... 14.15 8.85 10.36 11.41 14.62
Gas (per Mcf) ..................... 0.72 1.24 0.88 1.35 1.84
Costs Per Mcfe:
Operating Costs: .................. $ .44 $ .49 $ .39 $ .57 $ 1.92
Depreciation, depletion and
amortization ................... $ 0.55 $ 0.52 $ 0.52 $ 0.62 $ 0.44
Change in revenue attributable to:
Price ............................. $ (418,000) $(1,286,000) $ (465,000)
Production ........................ 622,000 2,947,000 1,135,000
----------- ----------- ----------
Net Increase ................... $ 204,000 $ 1,661,000 $ 670,000
=========== =========== ==========
</TABLE>
The increased production and decreasing operating costs (per Mcfe) between
the periods presented can be substantially attributed to Carpatsky's overall
increase in production from new wells in the RC field. Currently there are three
wells producing in the RC field which commenced production in August 1998, March
1999 and May 1999.
Comparison of Three Months Ended March 31, 2000 and 1999
Allowance for Doubtful Accounts. Substantially all of Carpatsky's gas was
sold to Naftogazukrainy, until September 1999. Based on historical receipts from
Naftogazukrainy, Carpatsky provided a substantial allowance for doubtful
accounts of almost 75% of total sales for the quarter ended March 31, 1999. In
September 1999, Carpatsky began selling natural gas on a newly developed "spot
market" in Ukraine. The company is generally able to assess creditworthiness of
potential customers before making sales and often requires substantial
prepayments. For the quarter ended March 31, 2000 the results of this new
marketing approach are evident in the increased collections and in the decrease
in the allowance for doubtful accounts to only 10% of total sales.
Operating Costs. On an absolute dollar basis operating costs, including oil
and gas production costs and production taxes have increased 50% to $336,000 in
the quarter ended March 31, 2000 from $170,000 in the same quarter of the
previous year. The increase is small when compared to the greater than 100%
increase in production on a Mcfe basis. Production taxes mimicked the volume
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<PAGE>
increase with a 107% increase in the three months ended March 31, 2000 over the
$70,000 reported for the quarter ended March 31, 1999. Carpatsky's greatest
savings have been in the area of oil and gas production costs which were $0.24
per Mcfe and $0.28 per Mcfe for the quarters ended March 31, 2000 and 1999,
respectively. The decline is primarily due to the significant increases in
production experienced as new wells come on line in the RC field.
General and Administrative. General and Administrative expenses have
increased for the three months ended March 31, 2000 over the same period in 1999
primarily as a result of legal, accounting and consulting fees associated with
Carpatsky's legal rights and operational activities in Ukraine. Carpatsky is
expending substantial time, effort and money to attempt to extend their legal
rights to the oil and gas reserves in the RC field beyond March 2003.
Accordingly, future general and administrative expenses are expected to be at
least equal to the amount incurred in the first quarter of 2000.
Depreciation, Depletion and Amortization. The large absolute increases in
depreciation, depletion and amortization from $185,000 in the quarter ended
March 31, 1999 to $446,000 in the same period of the next year are directly
related to increased production. Depletion is calculated on a
units-of-production basis. The increase in the depletion rate from $0.52 per
Mcfe to $0.55 per Mcfe for the quarters ended March 31, 1999 and 2000 relates to
decreases in the reserve base. Reserves are impacted by realized prices and,
although sales on the spot market are more collectible, they are at lower
prices. Therefore, realized prices in 2000 declined causing a decline in
reserves and a corresponding increase in the depletion rate.
Impairment. Carpatsky uses the full-cost method of accounting. As a result
of declining commodity prices, Carpatsky's full cost pool exceeded the "ceiling"
by approximately $500,000 using natural gas prices being received at March 31,
2000 of about $0.68 per Mcf. Realized prices subsequent to March 31 have not
increased. Accordingly, Carpatsky recognized an impairment charge of $500,000 in
the first quarter of 2000
Gain on Net Monetary Position. As a result of Ukraine's inflationary
economy, adjustments resulting from foreign currency translations, particularly
monetary assets, which consists of current assets and liabilities, resulted in a
substantial gain during the three month period ended March 31, 1999 due to
current liabilities being significantly greater than current assets during this
period. The increase in current assets and decrease in current liabilities
during the three month period ended March 31, 2000 is the primary reason for the
decline in these gains.
Comparison of Years Ended December 31, 1999, 1998 and 1997
Allowance for Doubtful Accounts. As discussed previously, until September
1999, substantially all of the company's gas was sold to Naftogazukrainy, a
Ukrainian national company similar to a public utility. Naftogazukrainy paid
Carpatsky for gas only as its customers were able to pay it. Carpatsky recorded
an allowance for doubtful accounts in 1999, 1998 and 1997 based upon historical
collection experiences with Naftogazukrainy. The allowance became an
increasingly larger portion of current sales as a pattern of significant
non-payment became evident.
Operating Costs. Production costs have increased each year from 1997 until
1999, but the cost increases have been at a much slower rate than production
increases. When production costs are analyzed on a Mcfe basis, they decline
annually from $1.92 per Mcfe in 1997 to $0.57 per Mcfe in 1998 and finally to
$0.39 in 1999. The decline in production costs per Mcfe is primarily due to the
significant increases in production experienced as new wells come on line in the
RC field. To a lesser extent, the decline is attributable to more efficient
operations as the Ukrainian ventures move from start-ups to more firmly
established enterprises.
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<PAGE>
General and Administrative. General and Administrative expenses have
increased for the year ended December 31, 1999 from previous periods primarily
as a result of the efforts initiated in 1999 and continuing into 2000 which
included:
o restructuring Carpatsky's capital;
o raising additional funds for its Ukrainian operations; and
o legal, accounting and consulting fees associated with Carpatsky's
legal rights and operational activities in Ukraine.
In addition, 1999 includes non-cash charges of $477,000 for stock based
compensation. These changes were attributable to:
o stock issued for services to officers and directors;
o stock issued for services from a third party;
o the issuance of stock in lieu of commission; and
o the estimated fair value of options issued.
General and Administrative expenses decreased for the year ended December
31, 1998, when compared to the same period in 1997, primarily because
approximately $250,000 of consulting related expenses were incurred in 1997 that
were associated with evaluating the potential of the RC field and pursuing
additional capital. These costs were not replicated in 1998.
Depreciation, Depletion and Amortization. Production increases in 1999
resulted in a significant increase in depreciation, depletion and amortization
from 1998. Because production in 1997 was primarily related to the smaller
Bitkov field, comparison to 1997 is not meaningful due to relatively low
production.
Impairment - Oil and Gas Properties. Under the full-cost method of
accounting, the net capitalized costs of proved oil and gas properties are
subject to a "ceiling test," which limits such costs to the discounted present
value, net of related tax effects, of proved reserves. If capitalized costs
exceed this limit, the excess is charged to expense. In 1999 Carpatsky incurred
an impairment charge of $3,050,000 which can be substantially attributed to the
deteriorating price of natural gas from $1.42 per Mcf in December 1998 to $0.82
per Mcf in December 1999. A declining commodity price has the effect of lowering
the "ceiling" of the full cost pool.
Barter Income. As is customary in most cash poor countries, Carpatsky
routinely enters into bartered transactions in Ukraine 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:
<TABLE>
<CAPTION>
For the Three Months For the Years Ended
Ended March 31, December 31,
-------------------- --------------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross barter income.................. $ 9,000 $ 36,000 $ 91,000 $ 104,000 $ 40,000
Costs of bartered goods.............. (2,000) (20,000) (56,000) (100,000) (6,000)
----------- ----------- ----------- ----------- -----------
Net barter income.............. $ 7,000 $ 16,000 $ 35,000 $ 4,000 $ 34,000
=========== =========== =========== =========== ===========
</TABLE>
65
<PAGE>
The total amount of bartered transaction have decreased in 2000 since
Carpatsky is getting paid in hard currency for most of its oil and gas sales.
Gain on Net Monetary Position. Ukraine is transitioning from a
socialistic state to a market economy. During this transition, Ukraine has
suffered from a highly inflationary economy. Even though inflation rates in the
last few years have declined significantly, political, social and economic
instability leaves future inflation rates unpredictable. Accordingly, for
accounting purposes, the functional currency of Carpatsky's Ukrainian operations
is the U.S. dollar. Adjustments resulting from foreign currency translations are
made in the following manner:
o Monetary assets and liabilities in Ukrainian ventures, such as
cash, receivables and payables are translated using the exchange
rate at the end of the respective reporting period.
o Nonmonetary assets and liabilities, such as inventory, fixed
assets and deferred income, are translated using the historical
exchange rates in effect on the date of the transaction. Capital
accounts are also translated using historical exchange rates.
o Revenues and expenses from Ukrainian operations are translated
using average exchange rates for the period presented, except for
items related to nonmonetary assets and liabilities, such as cost
of sales and depreciation, which are translated using historical
exchange rates.
o All translation gains and losses are reflected as a separate line
item in the statement of operations which is included in
determining the income or (loss) for the period presented.
Historically, this translation has resulted in a substantial gain to
Carpatsky due to the deterioration of the Ukraine's local currency. Most of the
monetary gain reported by Carpatsky for the periods presented is a result of
fewer US dollars being required to satisfy the payables of the Ukrainian
operations because of the deterioration of the local Ukrainian currency. The
increase in current liabilities in 1998 over the prior period increased these
foreign currency gains. The subsequent decline in current liabilities in 1999
compared to 1998 resulted in a reduced gain on net monetary position.
Amortization of Debt Discount. In connection with the debt issued in 1998
and 1997, Carpatsky issued warrants to purchase 8.8 million common shares at
$0.25 per share. For financial statement reporting purposes, the estimated fair
value of these warrants which was amortized, using the interest method, over the
original term of the loans was $797,000. Accordingly, Carpatsky recognized a
charge of $658,000 and $139,000 for the years ended December 31, 1998 and 1997,
respectively, in connection with this amortization.
Interest Expense. Interest expense decreased for the year ended December
31, 1999 when compared to the year ended December 31, 19998 due to the
conversion of $2,007,706 of debt and $448,557 of accrued interest into common
stock on September 30, 1999 at $0.125 per share. The converted notes, which were
issued in late 1997 and early 1998, carried an interest rate of 12% per annum.
Income Taxes. Carpatsky incurred a Ukrainian corporate profits tax of
$447,000 and $132,000 for the years ended December 31, 1999 and 1998,
respectively, and an additional $82,000 during the first three months of 2000.
These were incurred despite a reported loss under U.S. generally accepted
accounting principals primarily because the corporate profits tax is computed
using Ukraine's statutory records which gives no consideration to the provision
for doubtful accounts. In addition, depletion under U.S. generally accepted
accounting principals is substantially higher than that allowed by Ukraine's
statutory records policy.
Imputed Dividends. In connection with the issuance of the preferred stock
and warrants to Bellwether in December 1999, Carpatsky recognized a non-cash
charge of $336,000. This charge represents the estimated intrinsic value of the
warrants associated with that financing.
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<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents historical per share data for Pease and
Carpatsky individually and pro forma per share data after giving effect to the
merger. The combined company pro forma per share data was derived by combining
information from the historical consolidated financial statements of Pease and
Carpatsky accounting for the merger as a purchase by Carpatsky. You should read
this table in conjunction with the historical consolidated financial statements
of Pease and Carpatsky that are included in this document. You should not rely
on the pro forma per share data as being necessarily indicative of actual
results had the merger occurred in the past, or of future results.
<TABLE>
<CAPTION>
Pease Carpatsky
------------------------- -----------------------------
Combined
Company Equivalent
Historical ProForma(1) Historical(2) Pro Forma(2)
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Income (loss) from operations per share--basic:
Three months ended March 31, 2000 ...................... $ 0.04 $ (0.01) $ (0.01) $ (0.01)
Year ended December 31, 1999 ........................... (0.43) (0.10) (0.12) (0.06)
Income (loss) from operations per share--diluted:
Three months ended March 31, 2000 ...................... 0.01 (0.01) (0.01) (0.01)
Year ended December 31, 1999 ........................... (0.43) (0.10) (0.12) (0.06)
Cash dividends per share:
Three months ended march 31, 2000 ...................... -- -- -- --
Year ended December 31, 1999 ........................... -- -- -- --
Book value per share:
As of March 31, 2000 ................................... 0.42(3) 0.20 0.03(4) 0.12
As of December 31, 1999 ................................ 0.41(3) N/A(6) 0.04(4) N/A6)
Market value per share:
As of May 26, 1999 (5) ................................. 0.625 N/A .14 N/A
</TABLE>
-------------------
(1) The combined company's pro forma data include the effect of the merger on
the basis described in the notes to the unaudited pro forma combined
financial statements included elsewhere in this document.
(2) Carpatsky's equivalent pro forma amounts have been calculated by
multiplying the combined company's pro forma net earnings (loss), cash
dividends and book value per share amounts by the exchange ratio of .57842
shares of our common stock for each Carpatsky common share, so that the
Carpatsky equivalent pro forma per share amounts are comparable to the
respective values presented with respect to one Carpatsky common share.
(3) Assumes that all of Pease's outstanding preferred stock is converted into
8,865,665 shares of common stock (representing the number of shares they
will receive upon completion of the merger).
(4) Assumes that all of Carpatsky's outstanding preferred stock is converted
into 50 million shares of common stock.
(5) Based on the closing bid price for our common stock and Carpatsky common
shares on the last full trading day prior to the public announcement of the
merger.
(6) Pro-forma combined balance sheet as of December 31, 1999 has not been
prepared.
67
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE
AND RELATED SHAREHOLDER 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." Trading in Carpatsky common shares on
the Canadian Venture Exchange was suspended on January 22, 2000 for failure to
file required financial statements. The following table sets forth the high and
low reported bid prices per share of Pease common stock and the high and low
reported sales prices for Carpatsky common shares for the quarterly periods
indicated, which correspond to the fiscal quarters for financial reporting
purposes. The bid price information for Pease common stock reflects inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
<TABLE>
<CAPTION>
Pease Carpatsky
Common Stock(1) Common Shares(2)
--------------------- --------------------
High Low High Low
<S> <C> <C> <C> <C>
1998:
First quarter................................... 19.69 8.44 0.25 0.14
Second quarter.................................. 13.75 6.56 0.24 0.1
Third quarter................................... 7.5 1.25 0.17 0.04
Fourth quarter.................................. 3.13 0.81 0.14 0.04
1999:
First quarter................................... 1 0.41 0.07 0.03
Second quarter.................................. 0.7 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 (3)............................... 0.75 0.28 0.16 0.07
Second quarter.................................. 0.44 0.17 -- --
</TABLE>
----------------
(1) Adjusted to give effect to a 10 into 1 reverse stock split in the fourth
quarter of 1998.
(2) Adjusted to reflect U.S. dollars using the applicable exchange rate in
effect at the end of each quarter.
(3) Reflects trading prices for Carpatsky common shares for the period from
January 1, 2000 until January 21, 2000.
May 26, 1999 was the last full trading day prior to the public announcement
of the proposed merger. The last reported sales price on the OTC Bulletin Board
of shares of our common stock was $0.625. The last reported sales price of
Carpatsky common shares on the Canadian Venture Exchange on the same day was
$0.14. On July 31, 2000, the last reported sales price was $0.31 for Pease
common stock on the OTC Bulletin Board. 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
shares.
68
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
Pursuant to the terms of the merger agreement, we will acquire all the
outstanding stock of Carpatsky in exchange for approximately 44,959,557 shares
of our common stock plus 102,410,000 shares of our newly designated preferred
stock that will be convertible into 28,921,000 shares of our common stock
subject to future anti-dilution adjustments. The preferred stock will not have a
preferential dividend but will have provisions that provide for majority voting
rights in the surviving entity.
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 merger. Carpatsky's board of directors,
shareholders and management will have control of the surviving entity after the
merger. Therefore, the assets and liabilities of Pease will be recorded at their
estimated fair values in the merger. The fair values of the oil and gas
properties of Pease are lower than their adjusted historical cost bases. The
lower valuation for Pease's oil and gas properties is based on the valuation of
common stock to be issued in the merger. 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 March 31,
2000 balance sheet of Pease and Carpatsky as if the transaction had 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, 1999 and the
three months ended March 31, 2000, as if the merger had occurred as of the
beginning of the periods presented.
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.
69
<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY/CARPATSKY PETROLEUM, INC.
PRO FORMA COMBINED BALANCE SHEET
March 31, 2000
(Unaudited)
Pro Forma
Carpatsky Pease Adjustments Combined
--------- ----- ----------- ---------
<S> <C> <C> <C> <C>
Current Assets:
Cash and equivalents................ $ 1,976,000 $ 909,000 $ (269,000)(a) $ 2,399,000
(217,000)(b)
Trade receivable.................... 296,000 538,000 834,000
Other receivables................... 7,000 -- 7,000
Inventories......................... 120,000 -- 120,000
VAT refundable...................... 50,000 -- 50,000
Prepaid expenses and other.......... 205,000 72,000 277,000
----------- ----------- ------------
Total current assets.............. 2,654,000 1,519,000 3,687,000
------------ ----------- ------------
Oil and Gas Properties, at cost
using the full cost method.......... 9,723,000 20,754,000 (17,417,000)(c) 13,410,000
350,000 (b)
Less accumulated amortization....... (5,768,000) (15,115,000) 15,115,000 (c) (5,768,000)
------------ ----------- ------------
Net oil and gas properties........ 3,955,000 5,639,000 7,642,000
------------ ----------- ------------
Other Assets:
VAT refundable...................... 87,000 -- 87,000
Deferred acquisition costs.......... 133,000 -- (133,000)(b) --
Loan to Ukrainian JV partner........ 72,000 -- 72,000
Office equipment and vehicles....... 37,000 49,000 86,000
Debt issuance costs, net............ -- 150,000 (150,000)(c) --
Deposits and other.................. -- 5,000 5,000
------------ ----------- ------------
Total other assets................ 329,000 204,000 250,000
------------ ----------- ------------
Total Assets............................. $ 6,938,000 $ 7,362,000 $ 11,579,000
============ =========== ============
Current Liabilities:
Current maturities of debt.......... $ 663,000 $ 5,000 $ 668,000
Accounts payable.................... 1,846,000 207,000 2,053,000
Taxes payable....................... 409,000 -- 409,000
Accrued expenses.................... 54,000 105,000 159,000
Due to officers and directors....... -- -- --
Advances received................... 170,000 -- 170,000
------------ ----------- ------------
Total current liabilities......... 3,142,000 317,000 3,459,000
------------ ----------- ------------
Long-Term Debt, less
current maturities.................. -- 2,561,000 238,000 (c) 2,799,000
------------ ----------- ------------
Shareholders' Equity
Preferred Stock-- Series B.......... 4,000,000 1,000 (1,000)(d) 4,000,000
Common Stock........................ 9,395,000 173,000 (4,012,000)(d) 5,556,000
Additional paid-in capital.......... -- 37,636,000 (32,004,000)(d) 5,632,000
Accumulated deficit................. (9,599,000) (33,326,000) 33,327,000 (d) (9,367,000)
------------ ----------- ------------
(269,000)(a)
Total shareholders' equity.......... 3,796,000 4,484,000 5,321,000
------------ ----------- ------------
Total Liabilities and
Shareholders' Equity..................... $ 6,938,000 $ 7,362,000 $ 11,579,000
============ =========== =============
</TABLE>
See accompanying notes to these pro forma financial statements.
70
<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY/CARPATSKY PETROLEUM, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(Unaudited)
Pro Forma
Carpatsky Pease Adjustments Combined
--------- ----- ----------- ---------
<S> <C> <C> <C> <C>
Revenues, net ................................... $ 575,000 $ 799,000 $ 1,374,000
------------ ------------ ------------
Operating Costs and Expenses:
Oil and gas production and
production taxes .......................... 336,000 163,000 499,000
General and administrative ................... 333,000 173,000 506,000
Depreciation, depletion, amortization and
impairment . .............................. 946,000 252,000 (94,000)(e) 1,104,000
------------ ------------ ------------
Total operating costs and
expenses ............................. 1,615,000 588,000 2,109,000
------------ ------------ ------------
Income (Loss) from Operations ................... (1,040,000) 211,000 (735,000)
Other Income (Expense):
Interest expense ............................. (23,000) (90,000) 89,000 (f) (24,000)
Interest income .............................. 9,000 9,000 18,000
Net barter income ............................ 7,000 -- 7,000
Gain on net monetary position ................ 63,000 -- 63,000
------------ ------------ ------------
Total other income (expense) ............ 56,000 (81,000) 64,000
------------ ------------ ------------
Income (Loss) Before Taxes ...................... (984,000) 130,000 (671,000)
------------
Income Tax ...................................... (82,000) -- (82,000)
------------ ------------ ------------
Net Income (Loss) ............................... (1,066,000) 130,000 (753,000)
Preferred Stock Dividends ....................... -- (66,000) 66,000 (g) --
------------ ------------ ------------
Net Income (Loss) Applicable to
Common Shareholders .......................... $ (1,066,000) $ 64,000 $ (753,000)
============ ============ ============
Net Income (Loss) Per Share ..................... $ (0.01) $ (0.04) $ (0.01)
============ ============ ============
Weighted Average Number of
Shares Outstanding ........................... 77,728,263 1,731,000 55,557,000
============ ============ ============
</TABLE>
See accompanying notes to these pro forma financial statements.
71
<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY/CARPATSKY PETROLEUM, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(Unaudited)
Pro Forma
Carpatsky Pease Adjustments Combined
--------- ----- ----------- ---------
<S> <C> <C> <C> <C>
Revenues, net ....................................... $ 800,000 $ 2,144,000 $ 2,944,000
------------ ------------ ------------
Operating Costs and Expenses:
Oil and gas production and
production taxes .............................. 1,017,000 405,000 1,422,000
General administrative ........................... 1,385,000 845,000 2,230,000
Depreciation, depletion, amortization and
impairment . .................................. 4,416,000 1,007,000 $ (417,000)(e) 5,006,000
Consulting expenses--related party ............... -- 38,000 38,000
------------ ------------ ------------
Total operating costs and expenses .......... 6,818,000 2,295,000 8,696,000
------------ ------------ ------------
Income (Loss) from Operations ....................... (6,018,000) (151,000) (5,752,000)
Other Income (Expense):
Interest expense ................................. (260,000) (360,000) 358,000 (f) (262,000)
Interest income .................................. -- 46,000 46,000
Net barter income ................................ 35,000 -- 35,000
Gain on net monetary position .................... 936,000 -- 936,000
------------ ------------ ------------
Total other income (expense) ................ 711,000 (314,000) 755,000
------------ ------------ ------------
Income (Loss) Before Taxes .......................... (5,307,000) (465,000) (4,997,000)
Income Tax .......................................... (447,000) -- (447,000)
------------ ------------ ------------
Net Income (Loss) ................................... (5,754,000) (465,000) (5,444,000)
Preferred Stock Dividends ........................... (336,000) (266,000) 266,000 (g) (336,000)
------------ ------------ ------------
Net Income (Loss) Applicable to Common
Shareholders ..................................... $ (6,090,000) $ (731,000) $ (5,780,000)
============ ============ ============
Net Income (Loss) Per Share ......................... $ (0.12) $ (0.43) $ (0.10)
============ ============ ============
Weighted Average Number of
Shares Outstanding ............................... 49,471,000 1,684,000 55,510,000
============ ============ ============
</TABLE>
See accompanying notes to these pro forma financial statements.
72
<PAGE>
PEASE OIL AND GAS COMPANY
PRO FORMA ADJUSTMENTS
(a) To reflect the accrual and payment of the severance due Pease's employees,
including amounts due to its President and CFO.
(b) To reflect the accrual and payment of the external costs associated with
the Pease acquisition estimated to be incurred after March 31, 2000.
(c) 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.
(d) 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.
(e) 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.
(f) To reflect the reduction in interest expense related to historical
amortization of Pease's deferred loan costs. The related debt will be
recorded at its fair value, which equals its face amount in the
acquisition. The debt discount and other deferred loan costs will not be
assigned a value in the acquisition, resulting in lower pro forma interest
expense.
(g) To reflect the reduction of series B preferred stock dividends that would
not have been incurred had the transaction occurred at the beginning of the
period presented.
73
<PAGE>
BUSINESS OF PEASE
History and Overview
We were 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, we conducted business primarily in Western Colorado and Eastern Utah. In
August 1993, we commenced operating in the Denver-Julesburg Basin of
northeastern Colorado through an acquisition which substantially expanded our
operations. In the years following the acquisition, we invested several million
dollars in an effort to exploit the assets acquired and experienced marginal
success. We initiated efforts in 1996 and 1997 to expand our resource base
through the acquisition and exploration of properties located in the Gulf Coast
region of southern Louisiana and Texas. During 1998, we sold substantially all
of our Rocky Mountain oil and gas assets for approximately $3.2 million.
Accordingly, we now maintain only non-operated interests in three core areas in
southern Louisiana and Texas.
Business Strategy
Since 1997, we have generally participated as a minority, non-operating
interest holder in oil and 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 proven
properties, nurturing strategic alliances and exploiting exploration
opportunities in the Gulf Coast Region. 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 Beta Oil and Gas, Inc.
In addition, we have emphasized the following precepts in seeking to
implement our strategy:
o making disciplined use of advanced exploration technologies such as
3-D seismic and computer- aided exploration 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; and
o pursuing the acquisition of properties and evaluating potential merger
candidates that could build upon and enhance our 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 raising
additional debt or equity capital to fund acquisitions, exploration, drilling
and development activities.
74
<PAGE>
Operations
As of December 31, 1999, we had varying ownership interests in 10 gross (1
net) non-operated wells located in Southern Louisiana and Texas. We are a
non-operator in the oil and gas prospects we pursue in the Gulf Coast region.
The following table presents oil and gas reserve information within our major
operating area as of December 31, 1999:
Net Proved Reserves
--------------------------------------
Region Bbls Mcf BOE (6:1)
-------------------------------------- ----- --- --------
Gulf Coast ........................... 334,000 1,359,000 561,000
principally in S. Louisiana
Principal Oil and Gas Interests
Developed Acreage. Substantially all of our producing oil and gas
properties are located on leases which we hold for as long as production is
maintained. Our producing properties as of December 31, 1999 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 0.47 -- -- 368 33
South Lake Arthur......... Louisiana -- -- 1 0.2 349 73
Maurice................... Louisiana -- -- 2 0.14 196 14
Austin Bayou.............. Louisiana -- -- 3 0.06 505 11
Ganado.................... Texas -- -- 1 0.13 116 15
------ ------ ------ ------- ------ ------
Total................ 3 0.47 7 0.53 1,534 146
====== ======= ====== ======= ====== ======
</TABLE>
75
<PAGE>
---------------------
(1) Wells which produce both oil and gas in commercial quantities are
classified as oil wells for disclosure purposes.
(2) Net wells and net acres refer to our fractional working interests
multiplied by the number of wells or number of acres.
Undeveloped Acreage. Our gross and net working interests in undeveloped
acreage in the Gulf Coast Region as of December 31, 1999 is described in the
following table. These interests include both leased undeveloped acreage and
areas for which we have lease options where 3-D seismic is being or has been
conducted.
<TABLE>
<CAPTION>
Undeveloped Acreage
Prospect Description State Gross Net
------------------------------------------- --------------- ---------------- ----------
<S> <C> <C> <C>
East Bayou Sorrel.......................... Louisiana 90 14(1)
Maurice Prospect........................... Louisiana 894 80(2)
Parallel 3-D Program-Leases................ Texas 11,575 1,446(3)
Austin Bayou............................... Texas 694 15(2)
--------- ----------
Totals:............................... 13,253 1,555
========= ==========
</TABLE>
-------------------------
(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) Unless production has been obtained, 601 net acres will expire in 2000, 829
net acres will expire in 2001 and 16 net acres will expire in 2002.
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. We currently participate as a
non-operating, minority interest partner in three significant areas.
East Bayou Sorrel. During 1997, we 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, the East Bayou Sorrel Field located in Iberville Parish,
Louisiana. This field has been explored with additional well tests and a 3-D
seismic survey was completed in February 1998. As of March 31, 2000, the
production from the three producing wells in this field represent approximately
86% of our net daily production per BOE. 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 database. Additional
development drilling of the East Bayou Sorrel Field, as well as exploratory
drilling based on images from the 3-D seismic, is expected to be conducted
sometime in the future. The prospect "paid out" effective November 15, 1999. The
payout caused our working interest to increase from 8.9% to 15.6% as a result of
our owning the after prospect payout interest.
Maurice Field. In 1997, we joined Davis Petroleum and Amerada Hess 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 represent approximately 8% of
our net daily production per BOE. Our working interests in this field range from
6.9% to 8.4%.
76
<PAGE>
Formosa, Texana and Ganado 3-D Exploration Prospects. During 1997, we
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 was the
designated operator for these wells. Five wells were drilled on this acreage in
1999 of which four were dry holes.
In May 2000, Beta Oil and Gas, Inc. became the designated operator for
these prospects in an effort to better exploit the prospects. As a result of
this change in operator, we expect that some of the 3-D data will be reprocessed
and the drilling program will be significantly accelerated.
Rocky Mountain Properties
During 1998, we sold all of our Rocky Mountain oil and gas assets.
Accordingly, our reserves, revenues and future cash flows are now limited to
Gulf Coast region properties.
Title to Properties
Only a limited, perfunctory title examination is conducted at the time we
acquire interests in oil and gas leases. This practice is customary in the oil
and gas industry. Prior to the commencement of drilling operations, a thorough
title examination is conducted. We believe that title to our properties is good
and defensible in accordance with standards generally accepted in the oil and
gas industry, subject to such exceptions which do not 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 our 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 our proved oil and gas reserves and the standardized measure of
discounted future net cash flows. The estimated proved reserves information for
the Gulf Coast for both 1999 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 three fiscal years
ending December 31, 1999, 1998 and 1997 on a non-escalated basis.
77
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1999 1998 1997
---- ---- -------------------------------------
Gulf Coast Rocky Mtns. Total
---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Estimated Proved Oil Reserves (Bbls) .................... 334,000 275,000 308,000 777,000 1,085,000
Estimated Proved Gas Reserves (Mcf) ..................... 1,359,000 1,368,000 1,360,000 3,175,000 4,535,000
Estimated Future Net Revenues ........................... $ 8,156,700 $ 4,054,000 $ 5,796,000 $ 8,575,000 $14,371,000
Present Value of Estimated Future Net Revenues .......... $ 6,269,700 $ 2,951,000 $ 4,460,000 $ 5,218,000 $ 9,678,000
Prices used to determined reserves:
Estimated Proved Oil Reserves (Bbls) .................... 334,000 275,000 308,000 777,000 1,085,000
Oil (per Bbl) ...................................... $ 24.91 $ 10.15 $ 17.11 $ 16.15
Gas (per Mcf) ...................................... $ 2.77 $ 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 three years, all of
which was from properties located in the United States, was as follows:
Year Ended December 31,
1999 1998 1997
---- ---- ----
Oil (Bbl)
Gulf Coast ......... 74,000 58,000 43,000
Rocky Mtns ......... -- 51,000 80,000
-------- -------- --------
Total .......... 74,000 109,000 123,000
======== ======== ========
Gas (Mcf)
Gulf Coast ......... 337,000 320,000 91,000
Rocky Mtns ......... -- 230,000 392,000
-------- -------- --------
Total .......... 337,000 550,000 483,000
======== ======== ========
The average sales price per barrel of oil and Mcf of gas, and average
production costs per barrel of oil equivalent excluding depreciation, depletion
and amortization were as follows:
<TABLE>
<CAPTION>
Average Sales Prices Average
------------------------------------------- Production
Year Ended December 31, Oil (Bbls) Gas (Mcf) Per BOE Cost Per BOE
---------------------- --------- -------- ------- ------------
<S> <C> <C> <C> <C>
1999:
Gulf Coast ............. $ 17.80 $ 2.46 $ 16.48 $ 3.11
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
</TABLE>
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<PAGE>
Drilling Activity
The following table summarizes our oil and gas drilling activities that
were completed during the last two fiscal years, all of which were located in
the continental United States:
<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 0.09 1 0.1
Gas....................... 3 .27(1) 4 0.14 1 0.08
Non-productive............ 4 0.5 3 0.32 6 0.77
------ ------- ----- ----- ----- -----
Total................. 7 0.77 8 0.55 8 0.95
====== ======= ===== ===== ===== =====
Development
Oil....................... -- -- -- -- -- --
Gas....................... -- -- -- -- -- --
Non-productive............ -- -- -- -- -- --
------ ------ ----- ----- ----- -----
Total................. -- -- -- -- -- --
====== ====== ===== ===== ===== =====
</TABLE>
-----------------
(1) One of these wells is located in the Maurice Field and was
successfully completed 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 was recompleted
during the first quarter of 2000.
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 more
experience. There can be no assurance that we 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 oil, natural gas and natural gas
liquids. We do not currently use commodity futures contracts and price swaps in
sales or marketing of oil and gas.
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 oil
is Plains Marketing, L.P. which buys approximately 80% of our current oil
production. The contracts are month-to- month and subject to change. The market
for our 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
79
<PAGE>
because other arrangements could be made to market our 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 governmental control and regulation.
Natural Gas. We sell, through our operating partners, gas production at the
wellhead. We generally sell to various pipeline purchasers or gas marketing
companies. The property operators sell the gas and pass the revenue on to us
when it is received. Currently, National Energy Group and Amerada Hess sell and
distribute substantially all of our 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 gas and 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. 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 which include oil, 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, the Natural Gas Policy Act of 1978
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 Natural Gas Act. The transportation and resale of
gas transported and resold within the state of its production is usually
regulated by the state involved. Although federal and state regulation of the
transportation and resale of 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 gas production and the price we receive for our 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, 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 gas markets in the United States and have 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 Natural
Gas Act, 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 Natural Gas Policy Act, those transactions are subject to
limited FERC regulation under this act that may ultimately affect the price of
gas which we produce and sell.
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<PAGE>
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. 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 the 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 restrictions. 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.
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. In general, such local regulation 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, 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 is 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 on 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 and 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 methods of operation than other
similar companies in the industry. Although we do not believe our business
operations presently impair environmental quality, compliance with federal,
state and local regulations which have been enacted or adopted regulating the
discharge of materials into the environment could have an adverse effect upon
our capital expenditures, earnings and competitive position, the extent of which
we are presently unable to assess. We are not aware of any environmental
degradation which exists, or any 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.
81
<PAGE>
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 our 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 on a month-to-month basis
approximately 3,400 square feet in an office facility in Grand Junction,
Colorado. The rental rate is $2,400 per month.
Employees. As of December 31, 1999, we had four full time employees and one
part time employee. None of our employees are covered by a collective bargaining
agreement. We believe that our relations with employees are satisfactory.
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<PAGE>
BUSINESS OF CARPATSKY
Predecessors of Carpatsky were formed in 1992 to engage in exploration and
development of oil and gas properties in the Republic of Ukraine. In May 1995, a
predecessor of Carpatsky completed a merger with an Alberta Stock Exchange
listed corporation and became a publicly-traded company.
Oil and Gas Properties
Carpatsky holds interests in the Rudovsko-Chervonozavodskoye gas and gas
condensate field and the Bitkov- Babchensky oil field. Both of these properties
are located in Ukraine.
Rudovsko-Chervonozavodskoye gas and 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
stages of development. Exploration of the basin began in the 1970s and to date
more than 200 oil and gas fields have been discovered. We believe that
prospective anticlinal structures between 14,760' and 18,000' remain as targets
for further exploration.
Carpatsky and its partner Ukrnafta have drilled and completed three wells
in this field. Carpatsky and Ukrnafta are currently drilling three additional
wells. Of these, two wells are in various stages of completion and are expected
to be on production in 2000. The third well is still being drilled. Carpatsky
expects to drill at least two additional wells during the exploratory period
and, subject to the agreement of the parties to the joint activity agreement,
may drill up to 20 additional wells.
Ownership Rights in the RC Field. Carpatsky has no direct rights in the
license to extract gas and gas condensate from the RC field. Ukrnafta is the
sole licensee for the RC field. Carpatsky participates in the operation and
development of the RC field pursuant to a joint activity agreement between
Carpatsky and Ukrnafta. A joint activity agreement is a type of consortium that
dates from Soviet law and was intended to be a mechanism to permit collective
ownership and bartering under the socialist legal system as practiced in the
Soviet Union. Before the passage of appropriate reform legislation in the areas
of company law and civil law, foreign investors, in the period of perestroika
and in the very early years after the dissolution of the Soviet Union, seized
upon the joint activity form as the only available mechanism to create a joint
contractual relationship.
The existing joint activity agreement has been amended several times in
attempts to bring it up to date and more closely in conformity with Western
practices. It is an inherently unstable form compared to the modern Western
corporate form. The joint activity structure does not have the backing of the
body of company law that aids in the interpretation of legal issues arising from
the operation of a state chartered legal entity. In addition, the joint activity
requires an annual meeting to decide upon the budget and contributions from the
parties. The failure of Carpatsky and Ukrnafta to agree on a budget could result
in either dissolution of the joint activity or failure to commence or continue
any drilling or other activity of any kind.
Under the joint activity agreement, Carpatsky is contractually entitled to
receive 45% of the revenue from sale of production in the RC field, and is
required to pay 50% of the exploration, development and production costs.
Payments to the joint activity's account can be made in the form of cash or in
kind by providing materials, equipment and specific services. Under the joint
activity agreement, if Carpatsky or Ukrnafta do not pay their share of costs,
their percent interest in revenues may be reduced, if agreed to by the parties,
until revenues from the sale of production are sufficient to pay the costs
otherwise payable. The actual percentage of Carpatsky's right to revenues is
calculated quarterly, based on the relative cumulative contributions of the
participants as reflected in the books maintained pursuant to the joint activity
agreement.
83
<PAGE>
We have received a legal opinion of Vasil Kisil & Partners, Kiev, Ukraine,
regarding Carpatsky's rights under the joint activity agreement, and its ability
to enforce those rights. The opinion notes that the rights to extract the oil
and gas in the RC field are held by Ukrnafta as the license holder. The opinion
also states that Ukrnafta is not restricted in the manner in which it disposes
of oil and gas extracted from the RC field, including pursuant to the joint
activity agreement. The opinion further states the belief of Vasil Kisil that
Carpatsky could enforce its rights under the joint activity agreement through
injunctive relief in the courts.
The Vasil Kisil opinion also notes the disadvantages of operations under a
joint activity agreement described above, including the lack of a right to
convert ownership of the RC field from an exploration license to a development
license. The opinion is based on a number of assumptions, including that
Ukrnafta took all actions necessary to properly authorize and execute the
documents reviewed, that all signatures were authentic and that reviewed
documents were complete and conformed to originals. The opinion has been filed
as an exhibit to the registration statement of which this proxy statement and
prospectus is part.
Conversion from a Joint Activity Agreement to a Modern Accepted Legal Form.
Ukraine has in recent years adopted company law similar to those common in
European civil law jurisdictions. The two most common forms of corporate entity
are the joint stock company and the limited liability company. Carpatsky intends
to reduce the existing risk arising from the joint activity form by creating a
corporate entity with the cooperation of Ukrnafta. This process is expected to
take place in the next six months pending initiation of direct negotiations.
Although Carpatsky and Ukrnafta share management control over the joint activity
equally, the structure of the joint activity is disadvantageous to Carpatsky.
Carpatsky's remedy for a failure to agree on an annual budget is to dissolve the
joint activity. Because Ukrnafta is the sole licenseholder, Ukrnafta's mineral
rights will not be diminished in any way by dissolution of the joint activity,
but Carpatsky would lose all contractual rights and claims to the RC field. The
disparity in the effects of a dissolution on the parties gives Ukrnafta
substantial bargaining power with respect to setting the annual budget for the
joint activity.
The creation of a modern corporate entity will also ameliorate many of the
accounting problems associated with the joint activity form. The complexity and
peculiarity of books and accounting related to joint property has resulted in
considerable confusion in the past, despite the expenditure of significant
management and accounting time and expense. Ownership of assets and claims by a
true corporate entity is far less complex.
Conversion from Licensing Regime to a Production Sharing Agreement.
Ukrnafta holds an exploration and pilot production license to the RC field which
will expire on March 30, 2003. Unless the exploration license is converted into
a production license, which generally lasts for 20 years, all Ukrnafta's
underlying mineral rights and Carpatsky's indirect rights through the joint
activity mechanism to receive the proceeds of production in the RC field will
terminate when the license terminates. The granting of a production license is
at the discretion of the government of Ukraine.
A statute authorizing production sharing agreements was recently passed by
the Ukraine legislature and was signed into law late last year. The necessary
enabling legislation was enacted in June 2000. The statute provides that any
license granted before June 1, 1999 may be converted into a production sharing
agreement. This grandfathering provision would allow Ukrnafta, but not
Carpatsky, to convert its existing license to a production sharing agreement.
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<PAGE>
A production sharing agreement is a preferable form of conducting oil and
gas operations in the Ukraine because it permits the assignment of interests in
the production sharing agreement. This assignability would enable Carpatsky to
be assigned a direct interest in the mineral rights in the RC field for the
first time. The production sharing agreement legislation also contains other
advantages from a legal perspective, including a provision that establishes a
legislative basis for the Ukraine government to waive its sovereign immunity
vis-a-vis the licensee. The legislation's other provisions include unrestricted
carry-forward of losses, unrestricted use of production share and facilitation
of exports. The most critical aspect of the legislation, as in production
sharing agreements worldwide, is the fact that the production share of the state
takes the place of most taxes, thus reducing uncertainty further and enhancing
the ability to secure financing for the project.
Ukrnafta and Carpatsky have verbally agreed to convert the license covering
the RC field into a production sharing agreement at the earliest practicable
time. Although no assurances can be made, based on discussions with government
officials and legal counsel, Carpatsky believes that it will take at least six
months to receive a production sharing agreement. Because the production sharing
legislation is new, no assurances can be given as to the timing of receipt of a
production sharing agreement or whether Ukrnafta will be able to convert the
license into a production sharing agreement.
If Carpatsky and Ukrnafta are unable to convert the license into a
production sharing agreement, it will be difficult to reduce the risk attendant
to the license ownership issue discussed above. Ukraine's major trading partners
and multilateral lenders may interpret the failure of Ukraine to produce any
valid production sharing contracts as an indication of the failure of economic
reform, which could increase the difficulty of financing projects in Ukraine.
Bitkov-Babchensky oil field (Bitkov Field)
The Bitkov field is located in the western part of Ukraine, 350 miles east
of Vienna, Austria. The geological term for this area is the Precarpathian
foredeep, extending from Poland in the northwest to Romania in 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
between 1950 and 1970. 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.
Under the agreements covering operations in the field, Carpatsky is
entitled to receive a portion of production which exceeds a specified baseline.
Carpatsky's principal operations in the Bitkov field are therefore intended to
increase production by conducting workovers, drilling new infill wells and by
implementing a secondary recovery program. Daily net production to Carpatsky is
approximately 110 Bbls oil and 350 Mcf of gas.
Ownership of Interests in Bitkov Field. Carpatsky conducts operations in
the Bitkov field through Ukrcarpatoil Ltd., a joint venture formed by Carpatsky
and Ukrnafta in 1995. Ukrcarpatoil owns a license to conduct a 20 year
exploitation program in the field which was awarded in 1995. Under the
Ukrcarpatoil joint venture agreement production equal to the level of production
on the date of the agreement remains the property of Ukrnafta and 80% of the
incremental oil and gas production is the property of Ukrcarpatoil. Under the
joint venture agreement, the profit from the sale of incremental production is
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.
85
<PAGE>
Office Facilities
Carpatsky currently maintains office space on a rent free basis at
Bellwether's offices at 1331 Lamar, Suite 1450, Houston, Texas 77010.
In Ukraine, Carpatsky maintains the registered office of its subsidiary in
Kyiv at the offices of Ukrcarpatoil Ltd. The offices are at 6 Ivano Franko,
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 agreement law and a new legal and tax
framework. For the near term, Carpatsky's principal competitors include small
foreign independent oil and gas companies, mainly Canadian, and newly emerging
local companies. As political, legal, tax and financial conditions in Ukraine
become stabilized and more favorable for foreign investment, Carpatsky expects
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 a substantial portion of the gas consumed in
Ukraine and western Europe. Because of its market share, gas prices in Ukraine
can be effectively set by RAO Gazprom. Export prices are, in turn, influenced by
the prices RAO Gazprom charges for gas delivered to western Europe. The
situation is further complicated by the substantial debt Ukraine owes the
Russian Federation for past deliveries of oil and gas.
Markets and Gas Marketing
During 1992-1996, 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 the gas it
produced which was not marketed by Ukrgrazprom.
In 1996 the marketing of gas was conditionally demonopolized. 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 for gas that was sold were in the
form of barter, requiring the sale of the goods received in payment for gas,
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, a national
joint stock company, to meet the gas needs of the entire population of Ukraine.
Naftogazukrainy was formed to settle and pay amounts due to suppliers in Russia
and companies producing gas in Ukraine, including Carpatsky, and 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 Naftogazukrainy and its predecessor for
gas purchased by it from August 1998 to June 30, 1999. Naftagazurkainy has
undergone major management changes over the past year and more changes are
likely. A new natural resource company has been established by the state, but
the implications of this new development for Naftagazukrainy and Ukrnafta are
not yet clear. The governmental licensing authority has also been reorganized.
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 based arrangement. Ukrnafta, Carpatsky's partner in the RC
field, has been restricted by Naftogazukrainy, its parent company, from selling
its gas at auction, requiring it to sell all gas produced to Naftogazukrainy for
which payment has not been forthcoming. Between October 1, 1999 and March 31,
2000, Ukrcarpatoil has sold 113.2 million M3 (3.2 Bcf) of the joint venture's
gas in the auction program, at an average price of $0.90 per Mcf, net of VAT, of
which it has received UAH 16.3 million (U.S.$3.2 million) in payments through
March 31, 2000. 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.
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 Naftogazukrainy 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
Naftogazukrainy and therefore Naftogazukrainy indirectly controls gas exports.
Ukrcarpatoil secured approval from Naftogazukrainy to transport the RC field gas
to the borders of several surrounding countries during 1999. Carpatsky is
seeking approval for 2000 and later years on similar terms. 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 is making efforts to
conclude one or more gas sales contracts with an internationally recognized,
financially reputable and operationally capable firm during 2000.
Carpatsky engaged Ryder Scott Company, L.P., independent petroleum
engineers, to prepare estimates of proved reserves, projected future production,
and related future net cash flows for Carpatsky's properties as of December 31,
1999. Estimates prepared by Ryder Scott were based upon a review of production
histories and other geologic, economic, ownership, volumetric and engineering
data. In determining the estimates of the reserves that are economically
recoverable, oil and gas prices and estimated development and production costs
as of December 31, 1999 were used.
The following table sets forth estimates as of December 31, 1999 derived
from the Ryder Scott reserve report. The present values (discounted at 10
percent) of estimated future net cash flows shown in the table are not intended
to represent the current market value of the estimated oil and gas reserves
owned by Carpatsky. For further information concerning the present value of
future net cash flows from these proved reserves, see Unaudited Supplemental Oil
and Gas Reserve Information in the December 31, 1999 consolidated financial
statements.
Because the license for the RC field expires in March 30, 2003, Carpatsky
is not permitted to report reserves expected to be produced from the RC field
following that date.
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<PAGE>
<TABLE>
<CAPTION>
Estimated Net Proved Reserves
---------------------------------------------------- Pre-Tax
Field Oil (MBbl) Gas (MMcf) MMcfe Discounted Present Value
----- --------- --------- ----- ------------------------
<S> <C> <C> <C> <C>
RC Field ........................ 113 15,604 16,282 $5,279,000
Bitkov Field .................... 86 229 745 351,000
---------- ---------- ---------- ----------
Total ..................... 199 15,833 $ 17,027 5,630,000
========== ========== ========== ==========
</TABLE>
The weighted average sales prices, net of VAT, utilized for purposes of
estimating Carpatsky's proved reserves and future net cash flows therefrom as of
December 31, 1999 was $13.20 per Bbl for oil and $0.82 per Mcf for gas.
The following table shows information about our estimated net proved and
proved developed reserves of oil and gas.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1999 1998 1997
---------------- ----------------- ----------------
Oil Gas Oil Gas Oil Gas
--- --- --- --- --- ---
(MBbl) (MMcf) (MBbl) (MMcf) (MBbl) (MMcf)
<S> <C> <C> <C> <C> <C> <C>
Proved reserves .......................... 199 15,833 360 32,840 370 31,601
Proved developed reserves ................ 70 7,487 47 835 61 207
</TABLE>
The following table sets forth the pre-tax discounted present value of our
estimated net proved oil and gas reserves:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pre-tax discounted present value:
United States...................... $ -- $ -- $ --
International...................... 5,630,000 16,662,000 24,198,000
------------ ------------- -------------
Total........................... 5,630,000 16,662,000 24,198,000
============ ============= =============
</TABLE>
88
<PAGE>
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer. The reserve data set forth herein represent only estimates. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment and the existence of
development plans. In addition, results of drilling, testing and production
subsequent to the date of an estimate may justify revision of such estimates.
Accordingly, reserve estimates are often different from the quantities of oil
and gas that are ultimately recovered. Further, the estimated future net cash
flows from proved reserves and the present value thereof are based upon certain
assumptions, including geologic success, prices, future production levels and
cost, that may not prove correct over time. Predictions about prices and future
production levels are subject to great uncertainty, and the meaningfulness of
such estimates is highly dependent upon the accuracy of the assumptions upon
which they are based. Oil and gas prices have fluctuated widely in recent years.
There is no assurance that prices will not be materially higher or lower than
the prices utilized in estimating Carpatsky's reserves.
Production
The following table sets forth Carpatsky's net oil and gas production,
average sales prices, and costs and expenses associated with such production
during the periods indicated.
Year ended December 31,
---------------------------------
Production 1999 1998 1997
---- ---- ----
Oil (MBbls)............................ 26 12 5
Gas (MMcf)............................. 2,456 472 11
Equivalent (MMcfe)..................... 2,613 541 43
Average sales price per unit:
Oil (Bbl).............................. $10.36 $11.41 $14.62
Gas (Mcf).............................. 0.88 1.35 1.84
Equivalent (Mcfe)...................... 0.93 1.42 2.28
Production costs per Mcfe..................
Carpatsky owned 4 gross (1.8 net) producing oil wells and 3 gross (1.2 net)
producing gas wells as of December 31, 1999. A well is categorized as an oil
well or a gas well based upon the ratio of gas to oil produced when it first
commenced production, and such designation may not be indicative of current
production.
Development, Exploration and Acquisition Expenditures
The following table sets forth certain information regarding the costs
incurred by Carpatsky in its development and exploration activities during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
(in 000's)
1999 1998 1997
------------------- ------------------- -------------------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Development Costs ........................ $1,537 $1,440 $3,746 $1,660 $8,200 $3,449
Exploration Costs ........................ -- -- -- -- -- --
Property Acquisition Costs ............... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total ................................ $1,537 $1,440 $3,746 $1,660 $8,200 $3,449
====== ====== ====== ====== ====== ======
</TABLE>
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<PAGE>
Drilling Activity
The following table sets forth the wells drilled and completed by
Carpatsky during the periods indicated.
Year Ended December 31,
1999
-----------------------
Gross Net
----- ---
Development:
-----------
Oil.................................... -- --
Gas.................................... 2 1
Non-productive......................... -- --
Total.............................. 2 1
Exploration:
-----------
Oil.................................... -- --
Gas.................................... -- --
Non-productive......................... -- --
Total.............................. -- --
90
<PAGE>
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. Russian is commonly used in
business.
Neighboring states: Russia, Moldova, Belarus, Poland, Romania,
Slovakia, Hungary
Currency: Hryvna (UAH)
Exchange rate: UAH 5.18=U.S.$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 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 strategic 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. There is considerable scope for
political interference in the privatization process.
Ukraine - Political and Economic Context
Recent history
Ukraine became a republic of the Soviet Union in 1921 pursuant to the
Treaty of Riga. 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
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<PAGE>
perestroika led to worsening shortages and an intensification of inflationary
pressure. 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. The partial meltdown of Ukraine's
Chernobyl nuclear reactor No. 4 emphasized the failure of Soviet industrial
policy and intensified the disillusionment of the member republics, in addition
to worsening the energy supply situation. President Gorbachev tried to meet the
growing demands for independence by proposing the formation of a confederation
of quasi-independent states under Russian control. 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. This referendum established the Republic of Ukraine. On December
7-8, 1999, Ukraine, Belarus and the Russian Federation signed the treaty
establishing the Commonwealth of Independent States, which legally dissolved the
Soviet Union.
Political institutions
The Constitution of the new state was adopted on June 28, 1996 when it
was ratified by Ukraine's parliament. The Constitution defines Ukraine as a
unitary democratic State and guarantees human and property rights. The
Constitution establishes a balance of power between the Executive branch and the
Legislature (Parliament or Rada). The country is 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 that 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 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 and
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.
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<PAGE>
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, the Communists can block certain parliamentarian
decisions. At present, the majority party in parliament is unstable and depends
on the temporary interests of other factions and groups. President Kuchma was
reelected in November 1999 for a five-year term.
Administrative and economic reforms during the first eight months of
1998 slowed Ukraine's economic decline. Then, 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. Ukraine
continues to struggle economically. The adoption of the Production Sharing
Agreement legislation is regarded as one of the few substantive reforms enacted
recently by the country, and its implementation will be closely watched by
Ukraine's trading partners. The entry into a new tax treaty with the United
States, the timing of which coincided with President Clinton's state visit to
Kiev, is also regarded as a positive development.
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 the spring of 1998,
Ukraine was cut off from its U.S.$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 U.S.$257 million
tranche of a new U.S.$2.2 billion, three-year loan. Subsequently, international
public controversy arose regarding the central bank's overstating of 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. The
country's close links with Russia and 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 has responsibility for, 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.
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.
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Investment protection
Under current Ukrainian legislation, the following guarantees are
available to foreign investors:
o Foreign investors are protected 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 an auditor's
evaluation.
o Foreign investors are compensated for losses due to the negligence of
state bodies.
o Foreign investors have 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 profits, income or other
funds relating to investments in Ukraine without any restrictions, after payment
of any taxes due on the profits. 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 released 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.
Forms of Foreign Investment
Foreign investment in Ukraine may take the form of a wholly owned
subsidiary or a joint venture. Most foreign-invested wholly owned subsidiaries
are either joint stock companies or limited liability companies. The Law on
Business Association also permits the formation of a quasi-limited liability
company, a general partnership or a limited partnership, but these forms are
rarely used in foreign investment due to potential liability. Joint ventures may
take the form of a Western style shareholding in a corporate entity, generally a
joint stock company or a limited liability company, or a contractual
relationship. A special form of contractual relationship that dates from Soviet
times, known as a joint activity is often used for joint ventures formed using a
contractual relationship. Another alternative for foreign investors is to
establish a presence in the form of a representative office corresponding to a
Western liaison office, if non-taxable, or a branch.
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Joint activities
A joint activity is a form of contractual relationship that is treated
separately for tax purposes. Its operating partner is required to file separate
reports in respect of the joint activity's operation. The joint activity
agreement defines the objectives and permitted operations, the use of the
property contributed by the parties, the distribution of profits and other major
issues.
A joint activity agreement between a resident and a foreign entity must
be registered with the state authorities. The management of the venture is
normally delegated to one of the parties. Profits of a joint venture are subject
to withholding tax, and the distribution of profits is treated as dividend
payments for Ukrainian tax purposes.
Joint stock companies
A joint stock company is a 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 according to the company's charter.
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. This type of
company is analogous to limited liability companies in other European civil-law
jurisdictions.
Representative offices
A foreign company can set up a representative office in Ukraine,
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 may be deemed to be conducting business activity in Ukraine through a
permanent establishment, and may be subject to corporate profits tax, if the
office's activities exceed the criteria set forth in the relevant double
taxation treaty.
Taxation
Currently, the main business taxes include a corporate profits tax and
a Value-Added Tax. There are also numerous special charges and local taxes.
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 quarterly reporting period. Gross income is deemed
to be received at the earlier of shipping the goods or rendering services to the
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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.
Permanent establishments
The Ukrainian definition of a permanent establishment is a Ukrainian
resident business entity that has the authority to act in the name of a
non-resident entity. A permanent establishment provides a non-resident entity
with civil rights and subjects the non-resident entity to obligations under
Ukrainian law. A resident is defined as a legal entity or a representative
office. Taxable profits of a Ukrainian permanent establishment can be determined
by the difference between the gross taxable income, which consists of income
attributable to the permanent establishment received onshore or offshore, and
allowable expenses incurred by the permanent establishment, which include
expenses incurred onshore.
The United States-Ukraine double taxation treaty, which recently became
effective, sets forth criteria for permitted activities of a preparatory and
auxiliary character which are presumed not to result in a permanent
establishment. This treaty should provide further stability for U.S. companies
operating in Ukraine.
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 upon the importation 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.
A VAT is incurred at a rate of 16.67% for the value of the oil and gas
production sold and amounts paid for equipment, drilling contractors and
materials create VAT credits. There is no VAT obligation for production sold
outside of the borders of Ukraine. Once a completed well is producing, all the
VAT credits received for payment of drilling and completion expenses will be a
credit against VAT due on revenues from production sales. The VAT incurred for
production 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.
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Taxation on Oil and Gas
The following table summarizes the basic taxes applied to oil and gas
production in Ukraine.
<TABLE>
<CAPTION>
UAH per U.S. Equivalent per
Ukraine Tax 1000m3 of Gas Ton of Oil Mcf of Gas Bbl of Oil
----------- ------------- ---------- ---------- -------------------
<S> <C> <C> <C> <C>
Rental Payment ............................ 5 3 $ 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.
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.
Other taxes
Other Ukrainian taxes include:
o An excise tax is applied to certain goods imported into, or
produced in, Ukraine, including gasoline and diesel fuel.
o 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.
o An Innovation Fund charge is paid by business entities monthly
at the rate of 1% of sales.
o 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.
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o Five percent for those countries having a tax treaty with
Ukraine and 15% for those who do not. Since the U.S. Congress
has yet to approve the treaty, the expatriation tax with the
United States is 15%.
Double Taxation Treaty
A new double taxation treaty between the United States and Ukraine
became effective on June 5, 2000. The treaty replaces the tax treaty between the
United States and the Soviet Union that was signed in 1973. The treaty applies,
with respect to taxes withheld at the source, for amounts paid or credited after
August 1, 2000, and, for all other taxes, beginning on or after January 1, 2001.
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's
accounting records and consolidated financial statements for the periods
commencing January 1, 1996 and ending December 31, 2000. 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 separately
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. As of March
31, 2000, Carpatsky owed approximately $75,000 under this agreement if the
merger does not close, and is expected to owe us $85,000 to $90,000 on September
30, 2000 if the merger does not close.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS OF PEASE
The following table sets forth certain information regarding the beneficial
ownership of our common stock and preferred stock, as of July 31, 2000, by each
of our directors, officers and nominees and each person or entity who we know
owns beneficially more than 5% of our outstanding common stock or preferred
stock. Unless otherwise indicated, all shares are owned directly, and each owner
has sole voting and investment power with respect to the shares.
<TABLE>
<CAPTION>
Name and Address Amount and Nature
of Beneficial Owner of Beneficial Ownership Percent of Class(12)
------------------- ----------------------- -------------------
<S> <C> <C>
Officers and Directors:
Steven Allen Antry ........................ 60,496 Shares(1) 3.39%
Patrick J. Duncan ......................... 36,564 Shares(2) 2.07%
Stephen L. Fischer ........................ 30,115 Shares(3) 1.72%
Homer C. Osborne .......................... 14,657 Shares(4) 0.84%
James C. Ruane ............................ 31,761 Shares(5) 1.83%
Clemons F. Walker ......................... 31,357 Shares(6) 1.80%
J.P. Bryan(15) ............................ -- --
Douglas G. Manner(15) ..................... -- --
Dr. Jack Birks ............................ -- --
B. Dee Davis .............................. -- --
All Officers and Directors as ............. 204,950 Shares(7) 10.99%
a group (10 persons)
Our 5% Shareholders:
Kayne Anderson, et al ......................... 4,984,820 Shares(8) 74.22%
1800 Avenue of the Stars
Second Floor
Los Angeles, CA 90067
State Street, et al ........................... 3,350,971 Shares(9) 65.93%
Chase/Chemical Bank
A/C State Street Bank & Trust Co.
4 New York Plaza
Ground Floor/Receive Window
New York, NY 10004
Howard Amster IRA ............................. 83,744 Shares(10) 4.62%
111 East Kilbourn Ave .....................
Milwaukee, WI 53202
The Madav IX Foundation ....................... 167,549 Shares(11) 8.82%
1750 Euclid Avenue
Cleveland, OH 44115
Ramat Securities, Ltd. ........................ 27,227 Shares(12) 1.55%
23811 Chagrin Blvd., Suite 200
Beachwood, OH 44122
Tamar Securities, Inc. ........................ 251,323 Shares(13) 12.68%
23811 Chagrin Blvd., Suite 200
Beachwood, OH 44122
Security Ownership of Series B ................ 8,865,664 Shares(14) 83.66%(13)
Preferred Shareholders
as a Group (10 Entities)
</TABLE>
---------------------
(1) Includes 8,100 shares that are owned directly by Mr. Antry, 750 shares
underlying presently exercisable options, 6,146 shares underlying presently
exercisable warrants and 45,500 shares underlying presently exercisable
warrants that are held by Mr. Antry's wife.
(2) Includes 1,564 shares owned directly by Mr. Duncan, 35,000 shares
underlying presently exercisable options.
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(3) 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.
(4) Includes 10,376 shares owned directly by Mr. Osborne and 4,281 shares
underlying presently exercisable options.
(5) 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 and 3,483 shares underlying presently
exercisable options.
(6) Includes 16,335 shares owned directly by Mr. Walker, 14,272 shares
underlying presently exercisable warrants and 750 shares underlying
presently exercisable options.
(7) Includes 72,123 shares owned, directly or indirectly, 45,014 shares
underlying presently exercisable options and 87,813 shares underlying
presently exercisable warrants.
(8) Represents shares of common stock which have been or will be issued in
exchange for outstanding series B convertible preferred stock upon
consummation of the merger with Carpatsky. The preferred stock is held by
four entities which are effectively controlled by Kayne Anderson Investment
Management, Inc., a Nevada corporation, which is 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.
(9) Represents shares of common stock which will be issued in exchange for
outstanding series B convertible preferred stock upon consummation of the
merger with Carpatsky. 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.
(10) Represents shares of common stock which will be issued in exchange for
outstanding series B convertible preferred stock upon consummation of the
merger with Carpatsky.
(11) Represents shares of common stock which will be issued in exchange for
outstanding series B convertible preferred stock upon consummation of the
merger with Carpatsky.
(12) Represents shares of common stock which will be issued in exchange for
outstanding series B convertible preferred stock upon consummation of the
merger with Carpatsky.
(13) Represents shares of common stock which will be issued in exchange for
outstanding series B convertible preferred stock upon consummation of the
merger with Carpatsky.
(14) As of the record date, there are 80,325 shares of series B preferred
outstanding. The 10 beneficial owners of the series B preferred stock have
agreed to exchange all of their preferred stock for an aggregate 8,865,665
shares of common stock. As of the record date, 25,503 shares of preferred
stock have been exchanged for 2,136,496 shares of common stock. We are
presently authorized to issue up to 4.0 million shares of common stock, an
insufficient number of authorized shares for exchange of the outstanding
series B preferred stock into common stock. Prior to, or concurrently with,
the closing of the merger, the currently outstanding 80,325 shares of
preferred stock will be exchanged for 6,729,168 shares of common stock.
(15) Beneficially own shares of Carpatsky that will be converted into shares of
Pease in the merger. See "Security Ownership of Management and Certain
Beneficial Owners of Carpatsky."
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SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS OF CARPATSKY
The following table sets forth certain information regarding the beneficial
ownership of Carpatsky common shares and preferred shares, its only classes of
voting securities as of July 31, 2000, by each of Carpatsky's directors and
officers, and each person or entity who is known to Carpatsky to beneficially
own more than 5% of the outstanding common shares or preferred shares. Unless
otherwise indicated, all shares are owned directly and each owner has sole
voting and investment power with respect to the shares.
<TABLE>
<CAPTION>
Name and Address Common Preferred Percent
Of Officer or Director Shares Shares of Class(1)
---------------------- ------ --------- ----------
<S> <C> <C> <C>
Officers and Directors:
J. P. Bryan(2) ................................... 13,605,528 -- 7.58%
Douglas G. Manner(3) ............................. 18,037,283 95,450,000(4) 60.80%
Dr. Jack Birks ................................... -- --
Robert J. Bensh .................................. -- --
Cliff M. West .................................... -- --
James D. Thomson ................................. 100,000 -- 0.06%
David A. Melman ....................................... 3,310,833(5) -- 1.91%
Aaron Engen ...................................... -- --
David F. Phillips ................................ -- -- --
John Sparks ...................................... -- -- --
All Officers and Directors as a group ............ 35,053,644 95,450,000(4) 67.54%
(10 persons)
5% Shareholders:
Bellwether Exploration Co. ............................ 8,037,283(6) 95,450,000(4) 60.80%
1331 Lamar, Suite 1450
Houston, Texas 77010
Carpe Fund ............................................ 8,976,000(7) -- 5.12%
127 Peachtree St., Ste. 1551
Atlanta, Georgia 30303
Green Acres Enterprises, Inc. ......................... 9,011,186(8) -- 5.13%
7/F California Entertainment Bldg
34-36 D'Aguilar Street, Central
Hong Kong, PRC
Torch Energy Advisors Incorporated .................... 13,605,528(9) -- 7.58%
1221 Lamar, Ste. 1600
Houston, Texas 77010
Attention: B. D. Davis, Jr.
</TABLE>
--------------------
(1) Preferred stock and common shares 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 77,728,263
outstanding shares and the 95,450,000 outstanding preferred shares, or
173,178,263 total voting shares.
(2) Includes 7,397,720 common shares and 6,207,808 shares underlying presently
exercisable warrants beneficially owned by Torch Energy Advisors
Incorporated. Mr. Bryan disclaims beneficial ownership of these shares. Mr.
Bryan is Senior Managing Director, and a holder of 120,920 shares of common
stock, representing a 23% ownership interest on a fully diluted basis, of
Torch Acquisition Company, the parent corporation of Torch Energy Advisors.
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(3) Includes 4,569,987 common shares, 13,467,296 shares underlying presently
exercisable warrants and 95,450,000 preferred shares beneficially owned by
Bellwether Exploration Company. Mr. Manner disclaims beneficial ownership
of these shares. Mr. Manner is President, Chief Executive Officer and a
director of Bellwether.
(4) The preferred stock may be converted into 50,000,000 common shares.
(5) Includes 357,500 shares underlying a presently exercisable warrant
(6) Includes 4,569,987 common shares and 13,467,296 shares underlying presently
exercisable warrants.
(7) Includes 2,000,000 shares underlying presently exercisable warrants.
(8) Includes 2,529,586 shares underlying presently exercisable warrants.
(9) Includes 6,207,808 shares underlying presently exercisable warrants.
DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The following table sets forth the names, ages and position of the persons
who will serve as our directors and executive officers following the merger.
Directors serve three year terms and until their successors are elected. Each
year shareholders elect one class of directors. Executive officers serve terms
of one year or until their death, resignation or removal by the board of
directors. There are no family relationships between any of the directors and
executive officers. In addition, there was no arrangement or understanding
between any executive officer and any other person pursuant to which any person
was selected as an executive officer.
Our directors and executive will be:
Name Age Position With Radiant Energy
---- --- --------------------------------------------
J. P. Bryan 60 Chairman and Director Nominee (Term
Expires 2003)
Douglas G. Manner 45 Chief Executive Officer, President and Director
Nominee (Term Expires 2003)
Dr. Jack Birks 80 Director Nominee (Term Expires 2002)
Patrick J. Duncan 37 Director Nominee (Term Expires 2002)
B. Dee Davis 47 Director Nominee (Term Expires 2001)
Robert J. Bensh 33 Executive Vice President and Chief
Operating Officer
Cliff M. West 60 Vice President and Assistant Secretary
J. P. Bryan. Mr. Bryan has been Senior Managing Director of Torch Energy
Advisors Incorporated since October 1988. He was also Chairman of the Board and
Chief Executive Officer of Torch and its predecessor from January 1985 to May
1997. Mr. Bryan has been Chairman of the Board of Bellwether Exploration Company
since August 1999 and has been a Director of Bellwether since June 1997. Mr.
Bryan served as Chief Executive Officer of Bellwether Exploration Company from
August 1999 until May 2000. Mr. Bryan has been a director of Carpatsky since
December 1999. Mr. Bryan served as Carpatsky's Chief Executive Officer from
December 1999 until June 2000. 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 is also a
member of the Board of Directors of Auto Nation, Inc.
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<PAGE>
Douglas G. Manner. Mr. Manner has been President and Chief Executive
Officer of Bellwether Exploration Company since May 2000 and of Carpatsky
Petroleum Inc. since June 2000. He has also been a Director of Carpatsky since
June 2000. He served as Vice President and Chief Operating Officer of Gulf
Canada Resources from 1997 until May 2000. Mr. Manner joined Ryder Scott
Petroleum Engineers in 1981 as a Consulting Reservoir Engineer and in 1995, as
Senior Vice-President, he established and operated a branch office in Calgary,
Canada until 1997. Prior to joining Ryder Scott, he was an Operations Reservoir
Engineer and then a District Manager at Amoco Production Company. Mr. Manner is
a member of the Board of Directors of Equatorial Energy based in Calgary. Mr.
Manner received a B.S. degree in Mechanical Engineering from Rice University in
1977.
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
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.
Patrick J. Duncan. Mr. Duncan has been the President of Pease since
November 1998, the Chief Financial Officer of Pease since September 1994, and
the Treasurer of Pease since March 1996. 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 Accounts. Mr.
Duncan received a B.S. degree from the University of Wyoming in 1985.
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).
Robert J. Bensh. Mr. Bensh has served as Executive Vice President and Chief
Operating Officer of Carpatsky Petroleum, Inc. since June 2000. He has served as
Senior Vice President--Finance and Corporate Secretary of Bellwether Exploration
Company since September 1999. He had served as Vice President--Corporate
Relations and Capital Markets and Corporate Secretary since joining the company
in January of 1998. Mr. Bensh was Director of Investor Relations at Torch from
August 1996 until joining Bellwether in 1998. From April 1995 until August 1996,
Mr. Bensh was Director of Investor Relations and Strategic Planning for Box
Energy.
Cliff M. West. Mr. West has served as Vice President and Assistant
Secretary of Carpatsky Petroleum, Inc. since June 2000. He has served as Senior
Vice President--Exploration and Exploitation of Bellwether since September 1999.
Mr. West served as Bellwether's acting International General Manager from June
1998 until August 1999. From November 1994 until joining Bellwether in November
1997 as a geophysicist consultant, Mr. West served as Vice President of Norcen
Energy Resources Limited. He served as Vice President of Norcen Explorer from
1987 to November 1994. Mr. West has over 35 years of experience in the oil and
gas industry.
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In Ukraine Carpatsky currently maintains, and we will continue to maintain,
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. 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
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.
Executive Compensation
The summary compensation table shows certain compensation information for
services rendered in all capacities to either Pease or Carpatsky during each of
the last three fiscal years by each company's Chief Executive Officer and those
executive officers who received salary, bonus or other compensation in excess of
$100,000 during 1999. The following information for these named executive
officers includes the dollar value of base salaries, bonus awards, the number of
stock options granted and certain other compensation, if any, whether paid or
deferred.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Awards
---------------------------------------------- ----------------------------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying All Other
Position Year Salary Bonus Compensation Awards Options/SARs(#) Compensation($)
------------------ ---- ------ ----- ------------ ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
J. P. Bryan 1999 None None None None None None
Chairman and CEO (1)
Patrick J. Duncan 1999 $ 98,000(2) None None None None None
Former President and 1998 $ 104,000(2) None None None None None
CFO of Pease(3) 1997 $ 80,000(2) $ 5,000 None None 24,500 None
Leslie C. Texas (4) 1999 $ 110,000 None None 100,000(5) None None
Former CEO and 1998 $ 107,000 None None None None None
President of Carpatsky 1997 $ 85,000 None None None 400,000 None
</TABLE>
----------------------
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<PAGE>
(1) Mr. Bryan served as Carpatsky's Chief Executive Officer from December 1999
until June 2000. He did not receive any compensation.
(2) Includes $240 contributed by Pease each year to a qualified 401(k)
retirement plan.
(3) Mr. Duncan was appointed by the board of directors as Pease's President to
succeed Mr. Pease in October 1998. 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.
(4) Mr. Texas resigned as an officer and director in 2000.
(5) In December 1999, Mr. Texas surrendered 400,000 options, all of his
outstanding options, in exchange for 100,000 Carpatsky common shares. For
financial statement purposes, these shares were valued at $.10 per share.
Option Grants in the Last Fiscal Year
There were no grants of stock options to the Named Executive Officers
pursuant to Pease's or Carpatsky's Stock Option Plans during the fiscal year
ended December 31, 1999.
Aggregated Option Exercises in the Last Fiscal Year and the Fiscal Year-End
Option Values
Set forth below is information with respect to the unexercised options to
purchase our common stock held by named executive officers at December 31, 1999.
No options were exercised during fiscal 1999.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-the-Money Options/
Shares Acquired Value FY-End (#) SARs at FY-End ($)
Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
--------------------------- ------------------- ------------------ --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Patrick J. Duncan None None 35,000/35,000 $0/0(1)
President and
Chief Financial Officer
Leslie C. Texas None None None $0/0
Former CEO and
President of Carpatsky (2)
</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.
(2) 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."
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<PAGE>
Long Term Incentive Plan
At this time, we do not have a long-term incentive plan for our employees,
other than our stock option plan.
Employment Contract
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 WITH PEASE
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
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.
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<PAGE>
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 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 stock and $7,000 cash in the transaction.
Transactions with Former Officers
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS WITH CARPATSKY
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 $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 $308,100 for:
o 2,464,800 common shares;
o a warrant to acquire 535,934 shares of common shares at U.S.$.20 per
share on or before December 31, 2000; and
o as additional consideration, existing warrants to acquire 1,040,000
common shares were modified to extend the expiration date to December
31, 2000 and 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 common shares and warrants to purchase up to 3,900,000 additional
common shares. Mr. Richards resigned as a director on December 30, 1999 in
connection with the Bellwether transaction.
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 shares. 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
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<PAGE>
period. Torch holds 9.5% of Carpatsky's common shares 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 shares 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 shares 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 shares 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 shares and warrants to purchase 357,500 shares of
common shares 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 $20,000 has been paid and (3) committed to issue to 2
million shares of Carpatsky common shares to Mr. Melman upon completion of the
merger with Pease. Subsequently, and with approval of the Canadian Venture
Exchange, Carpatsky issued these shares to Mr. Melman in connection with the
Bellwether transaction.
In December 1999, Carpatsky, with the consent of the option holders,
canceled options to purchase up to 1,422,224 common shares held by Clive
Richards, Andrew Burgess, Larry Braun, Jim Thomson, Fred Hofheinz and Les Texas,
each of whom is a present or former director, and issued 100,000 shares each to
the six persons.
In December 1999, Bellwether Exploration Company purchased 95.45
million shares of a newly issued class of Carpatsky preferred shares and
warrants to purchase 12.5 million Carpatsky common shares for one year at an
exercise price of U.S.$.20 per share. The purchase price for the preferred
shares and warrants was U.S.$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 shareholders 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.
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
shareholders, including the election of directors. Bellwether will therefore
control all matters voted on by our shareholders after the merger.
In addition, Messrs. Bryan, Manner and Davis and Dr. Birks will become
members of our board of directors and Mr.Manner will be our chief executive
officer following completion of the merger.
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DESCRIPTION OF CAPITAL STOCK
We are 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, and 684,700 shares are undesignated. As of the date of this
proxy statement and prospectus there were outstanding 3,867,894 shares of common
stock, warrants to purchase up to 213,532 shares of common stock, 80,325 shares
of Series B preferred and options to purchase up to 42,514 shares of common
stock.
Following the merger and adoption of the amended and restated articles of
incorporation, we 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 shareholders. 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 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 available funds, 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. 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 our board of directors. 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.
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Series B 5% PIK Convertible Preferred Stock
We designated 145,300 shares of series B preferred in 1997. There are
80,325 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 quarterly, which amount may
be paid, at our election, in cash or in kind. Each share issued as a PIK
dividend is 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.
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%.
The outstanding series B preferred would be convertible into approximately
25,197,143 shares of our common stock as of December 31, 1999, using the
reported sales price for our common stock on that date.
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.
Upon a decision by a holder to convert series B preferred 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 $62.50 per share of series B preferred subject to
anti-dilution adjustments plus any accumulated unpaid dividends through the date
of repurchase.
Pursuant to the terms of the exchange agreements, the holders of the
series B preferred have agreed that dividends will not cumulate or be paid
through the completion of the merger and that the holders will exchange their
shares of series B preferred for an aggregate of 8,865,665 shares of our common
stock. Holders of series B preferred have already exchanged 25,503 shares of
series B preferred for our common stock under these agreements. The 80,325
shares of series B preferred currently outstanding will be exchanged for
6,729,168 shares of our common stock 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. Our series B preferred stock is fully
paid and nonassessable.
Class A Preferred Stock
In the merger, we will issue 102,410,000 shares of our 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 shareholders, 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 shareholders. 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 our
shareholders. 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 the votes on matters submitted to shareholders. We
have agreed not to issue capital stock with voting rights other than our common
stock and the class A preferred stock.
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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
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. When issued in exchange for Carpatsky
preferred shares, the class A preferred stock will be fully paid and
nonassessable.
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.
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, 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 us or
our shareholders for negligence by individuals while acting as officers or
directors. 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 us to indemnify officers and directors to the
fullest extent of Nevada law.
The merger agreement provides that we 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. Such indemnification is to to the full extent we are permitted under
Nevada law, our amended and restated articles of incorporation, Carpatsky's
articles of incorporation, Carpatsky's bylaws or any indemnification agreement
to which Carpatsky is a party, in each case as in effect on the date of the
merger agreement.
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Anti-Takeover Statutes
Nevada law contains two provisions, described below, that would make more
difficult the accomplishment of unsolicited or hostile takeover transactions.
Restrictions on Certain Combinations Between Nevada Resident Corporations
and Interested Shareholders. Nevada law includes provisions prohibiting business
combinations, generally including certain mergers, disposition of assets
transactions and share issuance or transfer transactions, between a resident
domestic corporation and a 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 shareholder first obtained a 10%
interest in the corporation's stock. These combination provisions apply unless
the corporation elects against their application in its articles of
incorporation or bylaws. Our amended and restated articles of incorporation
contain a provision electing not to be covered by these combination provisions
of Nevada law.
Nevada Control Share Act. Nevada law also imposes procedural hurdles on
greenmail practices of corporate raiders. These provisions of Nevada law
temporarily disenfranchise the voting power of control shares of a person or
group purchasing a controlling interest in a corporation not opting out of these
provisions of Nevada law. In this regard, the control share provisions will
apply to a 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. Our amended and restated
articles of incorporation currently contain a provision electing not to be
covered by the Nevada Control Share Act.
Transfer Agent and Registrar
Computershare Trust Company, 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.
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 shares and the rights of holders of common shares
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 shares will become
shareholders 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. Unless otherwise specified, the articles of incorporation and bylaws of
Radiant Energy after the merger will contain identical provisions to the
articles of incorporation and bylaws of Pease prior to 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.
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The material differences that affect the rights and interests of
shareholders 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. 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.
Carpatsky is authorized to issue an unlimited number of common and
preferred shares 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.
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.
Classified board
Nevada law provides that the board may be divided into classes provided
that at least one-fourth of the total number of directors is elected at each
annual meeting of shareholders. Furthermore, under Nevada law, the articles of
incorporation may provide that individual directors or classes of directors may
have voting power that is greater than or less than the other directors or
classes of directors. Pease's articles 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, and each will have equal voting power. 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
shareholders 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 do not proved for a
classified board; therefore, directors are elected annually.
Vacancies on the board.
Nevada law and Pease's bylaws provide that vacancies, including those
caused by newly-created directorships, may be filled by a majority of the
remaining directors then in office, even if the remaining directors do not
constitute a quorum.
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Under the law of Alberta, a quorum of directors may fill a vacancy
among the directors, except for vacancies 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
promptly 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. However, if the
holders of a class or series of shares are entitled to elect a director, then
removal is by two-thirds vote of that class.
Pease's articles of incorporation 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 may be removed from office only for cause. The term cause with respect
to the removal of any director shall mean:
o conviction of a felony or plea of nolo contendere after a charge of
felony;
o declaration of unsound mind by an order of a court of competent
jurisdiction;
o gross dereliction of duty;
o commission of action involving moral turpitude; or
o 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 a majority of the votes cast by shareholders
at a special meeting of shareholders.
Action by written consent of shareholders
Nevada law provides that any action that may be taken at a meeting of
shareholders may be taken without a meeting, without prior notice and without a
vote if the holders of outstanding stock having not less than the minimum number
of votes that would be necessary to authorize the action at a meeting at which
all shares entitled to vote were present and voted, sign a written consent
setting forth the action taken. 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 shareholders
Nevada law does not have a separate provision for the calling of a
special meeting. Special meetings are called in accordance with the bylaws of
the company or the requirements of a specific provision of Nevada law. Pease's
bylaws provide that a special meeting of shareholders may be called for any
purpose by either:
o the chairman of the board, the president or Pease's board of director;
or
o the president or secretary upon written request of either a majority
of the directors or shareholders holding at least 10% of the issued
and outstanding shares entitled to vote.
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Alberta law provides that the board of directors 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 may
request that the directors call a meeting of shareholders. On receiving the
request, the directors must, except in limited circumstances, call a meeting of
shareholders within 21 days. 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 shareholders may amend
the corporation's articles of incorporation if the board of directors recommends
the amendment and the holders of at least a majority of shares of stock entitled
to vote approve the amendment.
Alberta law provides that a corporation's articles of incorporation may
be amended if the amendment is approved by not less than two-thirds of the votes
cast by the shareholders who voted. Where classes of shareholders are entitled
to vote separately, the amendment must be approved by each class.
Adoption, amendment or repeal of bylaws
Nevada law and the articles of incorporation of Pease authorize the
directors to adopt, amend and repeal the bylaws, subject to bylaws, if any,
adopted by shareholders.
Alberta law provides that directors may make, amend and repeal bylaws.
All such bylaw amendments must be submitted to shareholders at the next annual
meeting and the shareholders may confirm, reject or amend the submitted bylaw.
An amendment of the bylaws by directors is effective from the date it is adopted
by the directors until it is submitted to the shareholders. If confirmed by the
shareholders, the bylaw continues in effect in the form in which it is so
confirmed. If a bylaw is rejected by the shareholders, or if the directors do
not submit an amendment to the bylaws to the shareholders as required, the bylaw
ceases to be effective and no subsequent resolution of the directors to make,
amend or repeal a bylaw having substantially the same purpose or effect is
effective until it is approved by the shareholders.
Notice of shareholder proposals and nomination of directors
Neither Nevada law nor the articles of incorporation or bylaws of Pease
limit the right of a shareholder to bring business before an annual meeting of
shareholders or make nominations of directors at shareholder 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 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. Under Alberta law a statutory amalgamation or a
disposition of all or substantially all of the corporation's assets must be
approved by a majority of not less than 2/3rds of the votes cast by the
shareholders who voted.
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Nevada law includes provisions relating to the acquisition of a
controlling interest and combinations with interested shareholders. These
provisions would apply to and limit transactions that involve a change of
control or a transaction with a shareholder 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 elect not to be subject
to the provisions limiting certain transactions with interested shareholders.
Neither Alberta law nor the articles of Carpatsky contain comparable provisions.
Appraisal Rights
Under Nevada law, a shareholder is entitled to obtain payment of the
fair value of his shares:
o in the event of a merger requiring approval by shareholders when
the holder is entitled to vote on the merger;
o if the corporation is a subsidiary corporation, upon the merger
with its corporate parent; or
o if the corporation is party to a plan of exchange that the
shareholder is entitled to vote on, if the shareholders' interest
in the corporation will be acquired.
However, a shareholder's right to dissent and obtain payment for his
shares is limited. Holders of securities listed on a national exchange, included
in the national market system by the NASD or held by at least 2,000 holders of
record are not entitled to appraisal rights unless the articles of incorporation
of the corporation issuing the shares provide otherwise or the holders of the
shares are required under the plan of merger or exchange to accept for the
shares anything except cash and/or owner's interests of:
o the surviving or acquiring entity; or
o any other entity which, at the effective date of the merger, was
either listed on a national securities exchange, included in the
national market system by the NASD, or held of record by at least
2,000 holders.
Under Alberta law, a holder of shares of any class of stock of a
corporation is entitled to dissent if the corporation resolves to:
o amend its articles to add, change or remove any provisions
restricting or constraining the issue or transfer of shares of
that class;
o amend its articles to add, change or remove any restrictions on
the business or businesses that the corporation may conduct;
o amalgamate with a corporation other than a wholly owned
subsidiary;
o be continued under the laws of another jurisdiction; or
o sell lease or exchange all or substantially all its property.
In addition, holders of shares of a particular class that are entitled to vote
separately as a class on an amendment to the articles that changes the terms of
or affect the priority of such shares are entitled to dissent.
Limitation of personal liability of directors
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. The limitation of liability does not apply if the breach involved
intentional misconduct, fraud, a knowing violation of law or payment of a
dividend in violation of Nevada law. Such provision limits recourse for money
damages which might otherwise be available to us or our shareholders for
negligence by individuals while acting as officers or directors. Although this
provision would not prohibit injunctive or similar actions against directors or
officers, the practical effect of such relief would be limited.
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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
bylaws. 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 under conditions similar to Nevada law.
Carpatsky has given its directors indemnity to the full extent permitted by
Alberta law and Pease's bylaws provide for indemnity to the full extent of
Nevada law.
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 Haynes and Boone,
LLP, McManus and Thomson, Calgary, Alberta, Canada and Feleski Flynn, Calgary,
Alberta, Canada.
EXPERTS
The consolidated financial statements of Pease at December 31, 1999, and
for the years ended December 31, 1999 and 1998, 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 consolidated financial statements of Carpatsky at December 31, 1999 and
1998, and for each of the years in the three-year period ended December 31,
1999, 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.
RESERVE ENGINEERS
The estimates of net proved reserves of Pease and related future cash flows
have been prepared by Netherland Sewell and are included herein in reliance on
their being experts in the preparation of reserve reports. The estimates of net
proved reserves of Carpatsky and related future cash flows as of December 31,
1999, 1998 and 1997 have been prepared by Ryder Scott Company, L.P., Petroleum
Engineers and are included herein in reliance on their being experts in the
preparation of reserve reports.
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GLOSSARY OF OIL AND GAS TERMS
Terms used to describe quantities of oil and natural gas
Bbl -- One stock tank barrel, or 42 U.S. gallons liquid volume, of
crude oil or other liquid hydrocarbons.
Bcf -- One billion cubic feet of natural gas.
Bcfe -- One billion cubic feet of natural gas equivalent, computed on
an approximate energy equivalent basis that one Bbl equals six Mcf.
BOE -- One barrel of oil equivalent, converting gas to oil at the ratio
of six Mcf of gas to one Bbl of oil.
Mbbl-- One thousand Bbls.
Mcf -- One thousand cubic feet of natural gas.
Mcfe -- One thousand cubic feet of natural gas equivalent, computed on
an approximate energy equivalent basis that one Bbl equals six Mcf.
MMcf -- One million cubic feet of natural gas.
MMcfe -- One million cubic feet of natural gas equivalent, computed on
an approximate energy equivalent basis that one Bbl equals six Mcf.
Terms used to describe our interests in wells and acreage
Gross oil and gas wells or acres. Our gross wells or gross acres
represent the total number of wells or acres in which we own a working interest
(or, where we do not own a working interest, a royalty interest).
Net oil and gas wells or acres. Determined by multiplying "gross" oil
and natural gas wells or acres by the working interest (or, where we do not own
a working interest, a royalty interest) that we own in such wells or acres.
Terms used to assign a present value to our reserves
Standardized measure of proved reserves. The present value, discounted
at 10%, of the pre-tax future net cash flows attributable to estimated net
proved reserves. We calculate this amount by assuming that we will sell the oil
and gas production attributable to the proved reserves estimated in our
independent engineer's reserve report for the prices we received for the
production on the date of the report, unless we had a contract to sell the
production for a different price. We also assume that the cost to produce the
reserves will remain constant at the costs prevailing on the date of the report.
The assumed costs are subtracted from the assumed revenues resulting in a stream
of future net cash flows. Estimated future income taxes using rates in effect on
the date of the report are deducted from the net cash flow stream. The after-tax
cash flows are discounted at 10% to result in the standardized measure of our
proved reserves.
Discounted present value. The discounted present value of proved
reserves is identical to the standardized measure, except that estimated future
income taxes are not deducted in calculating future net cash flows. We disclose
the discounted present value without deducted estimated income taxes to provide
what we believe is a better basis for comparison of our reserves to other
producers who may have different tax rates.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which, upon analysis of geological and engineering data,
appear with reasonable certainty to be recoverable in the future from known oil
and natural gas reservoirs under existing economic and operating conditions.
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The Securities and Exchange Commission definition of proved oil and gas
reserves, as set forth in Article 4-10(a) (2) of Regulation S-X, is as follows:
Proved oil and gas reserves. 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, i.e.,
prices and costs as of the date the estimate is made. Prices include
consideration of changes in existing prices provided only by
contractual arrangements, but not on escalations based upon future
conditions.
(i) Reservoirs are considered proved if economic
producibility is supported by either actual production
or conclusive formation test. The area of a reservoir
considered proved includes (A) that portion delineated
by drilling and defined by gas-oil and/or oil-water
contacts, if any; and (B) the immediately adjoining
portions not yet drilled, but which can be reasonably
judged as economically productive on the basis of
available geological and engineering data. In the
absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
(ii) Reserves which can be produced economically through
application of improved recovery, techniques (such as
fluid injection) are included in the "proved"
classification when successful testing by a pilot
project, or the operation of an installed program in
the reservoir, provides support for the engineering
analysis on which the project or program was based.
(iii)Estimates of proved reserves do not include the
following: (A) oil that may become available from known
reservoirs but is classified separately as "indicated
additional reserves;" (B) crude oil, natural gas, and
natural gas liquids, the recovery of which is subject
to reasonable doubt because of uncertainty as to
geology, reservoir characteristics, or economic
factors; (C) crude oil, natural gas, and natural gas
liquids, that may occur in undrilled prospects; and (D)
crude oil, natural gas, and natural gas liquids, that
may be recovered from oil shales, coal, gilsonite and
other such sources.
Proved developed reserves. Proved reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required.
Terms used to describe the legal ownership of our oil and gas properties
Royalty interest. A real property interest entitling the owner to
receive a specified portion of the gross proceeds of the sale of oil and natural
gas production or, if the conveyance creating the interest provides, a specific
portion of oil and natural gas produced, without any deduction for the costs to
explore for, develop or produce the oil and natural gas. A royalty interest
owner has no right to consent to or approve the operation and development of the
property, while the owners of the working interest have the exclusive right to
exploit the mineral on the land.
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Working interest. A real property interest entitling the owner to
receive a specified percentage of the proceeds of the sale of oil and natural
gas production or a percentage of the production, but requiring the owner of the
working interest to bear the cost to explore for, develop and produce such oil
and natural gas. A working interest owner who owns a portion of the working
interest may participate either as operator or by voting his percentage interest
to approve or disapprove the appointment of an operator and drilling and other
major activities in connection with the development and operation of a property.
Terms used to describe seismic operations
Seismic data. Oil and gas companies use seismic data as their principal
source of information to locate oil and gas deposits, both to aid in exploration
for new deposits and to manage or enhance production from known reservoirs. To
gather seismic data, an energy source is used to send sound waves into the
subsurface strata. These waves are reflected back to the surface by underground
formations, where they are detected by geophones which digitize and record the
reflected waves. Computers are then used to process the raw data to develop an
image of underground formations.
2-D seismic data. 2-D seismic survey data has been the standard
acquisition technique used to image geologic formations over a broad area. 2-D
seismic data is collected by a single line of energy sources which reflect
seismic waves to a single line of geophones. When processed, 2-D seismic data
produces an image of a single vertical plane of sub-surface data.
3-D seismic. 3-D seismic data is collected using a grid of energy
sources, which are generally spread over several miles. A 3-D survey produces a
three dimensional image of the subsurface geology by collecting seismic data
along parallel lines and creating a cube of information that can be divided into
various planes, thus improving visualization. Consequently, 3-D seismic data is
a more reliable indicator of potential oil and natural gas reservoirs in the
area evaluated.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
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Pease Oil and Gas
Independent Auditor's Report.............................................. F-2
Consolidated Balance Sheets - March 31, 2000 (Unaudited)
and December 31, 1999................................................ F-3
Consolidated Statements of Operations - For the Three Months Ended
March 31, 2000 and 1999 (Unaudited) and the Years Ended
December 31, 1999 and 1998........................................... F-4
Consolidated Statements of Shareholders' Equity - For the
Three Months Ended March 31, 2000 (Unaudited) and For the
Years Ended December 31, 1999 and 1998............................... F-5
Consolidated Statements of Cash Flows - For the Three Months
Ended March 31, 2000 and 1999 (Unaudited) and the Years Ended
December 31, 1999 and 1998........................................... F-6
Notes to Consolidated Financial Statements................................ F-7
CARPATSKY PETROLEUM, INC.
Independent Auditor's Report.............................................. F-22
Consolidated Balance Sheets - March 31, 2000 (Unaudited) and
December 31, 1999 and 1998 .......................................... F-23
Consolidated Statements of Operations - For the Three Months Ended
March 31, 2000 and 1999 (Unaudited) and for the Years Ended
December 31, 1999, 1998 and 1997..................................... F-24
Consolidated Statement of Changes in Shareholders' Equity -
For the Period January 1, 1997 through December 31, 1999 and
January 1, 2000 through March 31, 2000 (Unaudited)................... F-25
Consolidated Statements of Cash Flows - For the Three Months
Ended March 31, 2000 and 1999 (Unaudited), and the Years Ended
December 31, 1999, 1998 and 1997..................................... F-26
Notes to Consolidated Financial Statements................................ F-27
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, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pease Oil and Gas
Company and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. As discussed in Note 1 to the Financial Statements, the Company has
historically incurred net operating losses resulting in an accumulated deficit
of $33.5 million as of December 31, 1999. These conditions and other matters
discussed in Note 1 raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also discussed in Note 1. The Financial Statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Hein + Associates LLP
Denver, Colorado
February 18, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, December 31,
2000 1999
---------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents ...................................................... 909,000 724,000
Trade receivables, net .................................................... 538,000 403,000
Prepaid expenses and other ................................................ 72,000 76,000
----------- -----------
Total current assets .................................................... 1,519,000 1,203,000
Oil and Gas Properties, at cost (full cost method):
Unevaluated properties .................................................... 2,370,000 2,282,000
Costs being amortized ..................................................... 18,384,000 18,278,000
----------- -----------
Total oil and gas properties ............................................ 20,754,000 20,560,000
Less accumulated amortization ............................................. (15,115,000) (14,868,000)
----------- -----------
Net oil and gas properties .............................................. 5,639,000 5,692,000
----------- -----------
Other Assets:
Debt issuance costs, net .................................................. 150,000 184,000
Office equipment and vehicles, net ........................................ 49,000 54,000
Deposits and other ........................................................ 5,000 8,000
----------- -----------
Total other assets ...................................................... 204,000 246,000
----------- -----------
Total Assets ................................................................... 7,362,000 7,141,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ...................................... 5,000 6,000
Accounts payable, trade ................................................... 207,000 141,000
Accrued expenses .......................................................... 105,000 134,000
----------- -----------
Total current liabilities ............................................... 317,000 281,000
Long-Term Debt, less current maturities: ....................................... 2,561,000 2,506,000
----------- -----------
Stockholders' Equity:
Preferred Stock, par value $0.01 per share, 2,000,000 shares authorized, 105,828
shares of Series B 5% PIK Cumulative (liquidation
preference of $5,445,000 at March 31, 2000) .............................. 1,000 1,000
Common shares, par value $0.10 per share, 4,000,000 shares authorized,
1,731,398 shares issued and outstanding ................................... 173,000 173,000
Additional paid-in capital ..................................................... 37,636,000 37,636,000
Accumulated deficit ............................................................ (33,326,000) (33,456,000)
----------- -----------
Total Stockholders' Equity .............................................. 4,484,000 4,354,000
----------- -----------
Total Liabilities and Stockholders' Equity ..................................... 7,362,000 7,141,000
=========== ===========
</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 Three Months For the Years
Ended March 31, Ended December 31,
----------------------- ------------------------
2000 1999 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales ............................. $ 799,000 $ 412,000 $ 2,144,000 $ 2,360,000
Gas plant, service and supply ................. -- -- -- 528,000
------------ ------------ ------------ ------------
Total revenue ............................. 799,000 412,000 2,144,000 2,888,000
------------ ------------ ------------ ------------
Expenses:
Oil and gas production costs .................. 163,000 84,000 405,000 1,049,000
Gas plant, service and supply ................. -- -- -- 571,000
General and administrative .................... 173,000 180,000 845,000 1,587,000
Consulting expense-related party .............. -- 38,000 38,000 247,000
Depreciation, depletion and
amortization ................................ 252,000 263,000 1,007,000 2,241,000
Impairment expense:
Oil and gas properties ...................... -- -- -- 7,279,000
Assets held for sale ........................ -- -- -- 314,000
------------ ------------ ------------ ------------
Total expenses ............................ 588,000 565,000 2,295,000 13,288,000
------------ ------------ ------------ ------------
Income (Loss) from Operations ...................... 211,000 (153,000) (151,000) (10,400,000)
------------ ------------ ------------ ------------
Other Income (Expenses):
Interest expense .............................. (90,000) (90,000) (360,000) (399,000)
Interest and other income ..................... 9,000 11,000 45,000 169,000
Gain (Loss) on sale of assets ................. -- -- 1,000 3,000
------------ ------------ ------------ ------------
Total other income (expenses, net) ........ (81,000) (79,000) (314,000) (227,000)
------------ ------------ ------------ ------------
Net Income (Loss) .................................. $ 130,000 $ (232,000) $ (465,000) $(10,627,000)
============ ============ ============ ============
Net Income (Loss) Available to
Common Stockholders ................................ $ 64,000 $ (298,000) $ (731,000) $(12,695,000)
============ ============ ============ ============
Basic:
Earnings (Loss) Per Share ..................... $ 0.04 $ (0.18) $ (0.43) $ (7.99)
Weighted Avg Shares Outstanding ............... 1,731,000 1,626,000 1,684,000 1,588,000
Diluted:
Earnings (Loss) Per Share ..................... $ .01 $ (0.18) $ (0.43) $ (7.99)
Weighted Avg Shares Outstanding ............... 18,326,000 1,626,000 1,684,000 1,588,000
</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, 1999 and 1998
and Three Months Ended March 31, 2000 (unaudited)
Preferred Stock Common Stock
--------------------- -------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCES, December 31, 1997 ................. 113,333 $ 1,000 1,579,353 $ 158,000
Purchase and retirement of series B preferred
stock ................................... (4,500) -- -- --
Issuance of common shares for:
Exercise of warrants .................... -- -- 125 --
Conversion of series B preferred stock .. (1,497) -- 21,584 2,000
Series B preferred stock dividends .......... -- -- -- --
Net Loss .................................... -- -- -- --
----------- ---------- ---------- ---------
BALANCES, December 31, 1998 ................. 107,336 1,000 1,601,062 160,000
Purchase and retirement of series B preferred
stock ................................... (825) -- -- --
Series B Preferred Stock dividends .......... -- -- -- --
Issuance of Common shares for:
Conversion of series B preferred stock .. (683) -- 87,636 9,000
Services of Directors in lieu of cash ... -- -- 42,700 4,000
Net loss .................................... -- -- -- --
----------- ---------- ---------- ---------
BALANCES, December 31, 1999 ................. 105,828 1,000 1,731,398 173,000
Net income (unaudited) ...................... -- -- -- --
----------- ---------- ---------- ---------
BALANCES, March 31, 2000 (unaudited) ........ 105,828 $ 1,000 1,731,398 $ 173,000
=========== ========== ========== =========
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity
---------- ----------- ------------
<S> <C> <C> <C>
BALANCES, December 31, 1997 ................. 38,296,000 $ (22,364,000)$ 16,091,000
Purchase and retirement of series B preferred
stock ................................... (206,000) -- (206,000)
Issuance of common shares for:
Exercise of warrants .................... 1,000 -- 1,000
Conversion of series B preferred stock .. (2,000) -- --
Series B preferred stock dividends .......... (278,000) -- (278,000)
Net Loss .................................... -- (10,627,000) (10,627,000)
----------- ----------- -----------
BALANCES, December 31, 1998 ................. 37,811,000 (32,991,000) 4,981,000
Purchase and retirement of series B preferred
stock ................................... (51,000) -- (51,000)
Series B Preferred Stock dividends .......... (178,000) -- (178,000)
Issuance of Common shares for:
Conversion of series B preferred stock .. (9,000) -- --
Services of Directors in lieu of cash ... 63,000 -- 67,000
Net loss .................................... -- (465,000) (465,000)
----------- ----------- -----------
BALANCES, December 31, 1999 ................. 37,636,000 (33,456,000) 4,354,000
Net income (unaudited) ...................... -- 130,000 130,000
----------- ----------- -----------
BALANCES, March 31, 2000 (unaudited) ........ 37,636,000 $ (33,326,000)$ 4,484,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months For the Years
Ended March 31, Ended December 31,
----------------------------------- ---------------------------
2000 1999 1999 1998
----------------- ----------------- ----------------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) ..................................... $ 130,000 $ (232,000) $ (465,000) $(10,627,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for depreciation and depletion .............. 252,000 263,000 1,007,000 2,241,000
Amortization of intangible assets ..................... 89,000 89,000 358,000 397,000
Bad debt expense ...................................... -- -- 24,000 --
Provision for impairment .............................. -- -- -- 7,593,000
Loss (gain) on sale of assets ......................... -- -- (1,000) (4,000)
Other ................................................. -- -- 30,000 13,000
Changes in operating assets and/or liabilities:
(Increase) decrease in:
Trade receivables ................................. (134,000) 159,000 (6,000) 337,000
Inventory ......................................... -- -- -- 385,000
Prepaid expenses and other assets ................. (8,000) (8,000) 24,000 8,000
Increase (decrease) in:
Accounts payable .................................. 22,000 7,000 (148,000) (41,000)
Accrued expenses .................................. (29,000) (46,000) (84,000) (513,000)
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities .............................. 322,000 232,000 739,000 (211,000)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Expenditures for property and equipment ............... (150,000) (294,000) (934,000) (7,364,000)
Proceeds from sale of property and equipment .......... -- 72,000 101,000 3,823,000
Redemption of certificate of deposit .................. 15,000 -- 70,000 25,000
------------ ------------ ------------ ------------
Net cash used in investing activities ............... (135,000) (222,000) (763,000) (3,516,000)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from exercise of warrants .................... -- -- -- 1,000
Repayment of long-term debt ........................... (2,000) (2,000) (6,000) (1,208,000)
Series B preferred stock dividends .................... -- (67,000) (245,000) (211,000)
Offering costs - Series B preferred ................... -- -- -- (147,000)
Purchase and retirement of Series B
preferred stock ..................................... -- (31,000) (51,000) (206,000)
------------ ------------ ------------ ------------
Net cash used in financing activities ............... (2,000) (100,000) (302,000) (1,771,000)
------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and
Equivalents ........................................... 185,000 (90,000) (326,000) (5,498,000)
Cash and Equivalents, beginning of year ............... 724,000 1,050,000 1,050,000 6,548,000
------------ ------------ ------------ ------------
Cash and Equivalents, end of year ..................... $ 909,000 $ 960,000 $ 724,000 $ 1,050,000
============ ============ ============ ============
Supplemental Disclosure of Cash Flow
Information:
Cash paid for interest ................................ $ 71,000 $ 71,000 $ 280,000 $ 400,000
Supplemental Disclosure of Non-Cash
Investing and Financing Activities:
Debt incurred for purchase of vehicles ................ $ -- $ -- $ -- $ 33,000
Increase (decrease) in payables for:
Oil and gas properties .............................. 44,000 40,000 (22,000) (1,002,000)
Offering costs ...................................... -- -- -- (147,000)
Series B preferred stock dividends .................. -- -- (67,000) 67,000
Capitalized portion of amortized debt ...................... -- -- -- 486,000
issuance/discount costs
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------------------------------
Nature of Operations - At December 31, 1999 the principal business of
Pease Oil and Gas Company ("Pease") is to participate as a
non-operating, minority interest owner in exploration, development,
production and sale of oil, natural gas and natural gas liquids. Pease
was previously engaged in the processing and marketing of natural gas
at a gas processing plant, the sale of oil and gas production equipment
and oilfield supplies, and oil and gas well completion and operational
services. However, as discussed in Note 2, during 1998, Pease's gas
processing plant and the oilfield service and supply businesses were
sold. Pease conducted its operations through the following wholly-owned
subsidiaries: Loveland Gas Processing Company, Ltd.; Pease Oil Field
Services, Inc.; Pease Oil Field Supply, Inc.; and Pease Operating
Company, Inc. All the subsidiaries are currently inactive.
Continuing Operations - Pease has historically incurred net operating
losses resulting in an accumulated deficit of $33.5 million as of
December 31, 1999. As a result of the continuing losses, Pease's
stockholders' equity has been reduced to approximately $4.3 million. At
December 31, 1999, the liquidation preference of the series B preferred
stock is in excess of total stockholders' equity and the hyperdilutive
potential of the conversion feature has resulted in Pease's inability
to raise additional equity capital which is critical to carry out
development and exploration activities that are planned for the next
several years. Pease may be required to redeem the series B preferred
stock on December 31, 2002 at a price equal to the liquidation
preference. Alternatively, Pease can force the holders to convert to
common shares which would result in ownership by the Preferred holders
in excess of 90% (based on the current trading price of the common
shares). 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 $2,783,000. During
1998 and into 1999, Pease has taken several steps to reduce general and
administrative costs and management believes Pease will be able to
generate positive operating cash flows in 2000. Management believes
capital requirements for 2000 will be between $200,000 and $1,200,000.
Accordingly, management believes that existing working capital, plus
cash expected to be generated from operating activities will be
sufficient to meet commitments for capital expenditures and other
obligations of Pease through at least the first quarter of 2001.
However, should the existing working capital not be sufficient to meet
future obligations, Pease may have to consider other alternatives,
including the sale of existing assets, cancellation of existing
exploration agreements, farmouts, joint ventures, restructuring under
the protection of the Federal Bankruptcy Laws and/or liquidation.
During 1998, in response to a series of dry holes and other factors
that contributed to the historically poor financial results, Pease
restructured its management and began to vigorously pursue a merger
candidate. Pease's Board of Directors believed that a merger would,
among other things, increase Pease's asset base and improve the chances
of financing future opportunities. As a result of these efforts, Pease
F-7
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
signed an Agreement and Plan of Merger ("Merger Agreement") on
September 1, 1999 (and amended in December 1999) with Carpatsky
Petroleum, Inc. ("Carpatsky"), a publicly held company traded on the
Alberta Stock Exchange under the symbol "KPY." Carpatsky is engaged in
production and development of oil, gas and condensate in the Republic
of Ukraine with proven reserves much greater than Pease's. The
transaction is still conditioned upon, among other things, regulatory
and shareholder approvals. Pursuant to the terms of the proposed merger
transaction, Pease will issue approximately 44.96 million shares of
common shares 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 shares
at the close of the transaction. All holders of the series B preferred
stock have agreed that dividends subsequent to September 2000 shall not
be paid on their holdings if the contemplated transaction with
Carpatsky is ultimately consummated. They have also agreed not to sell
or convert any outstanding shares of the Series B Preferred until the
contemplated transaction with Carpatsky is either completed or
abandoned. The Merger Agreement contemplates an "opt-out" break-up fee
of $250,000 payable by the defaulting party to the merger. If this
merger occurs, Carpatsky will have control of Pease as Pease will have
only one of the expected seven board of director positions. It is
expected current management will also be replaced.
Principles of Consolidation - The accompanying financial statements
include the accounts of Pease and its wholly-owned subsidiaries. All
material intercompany transactions and accounts have been eliminated in
consolidation.
Cash and Equivalents - Pease considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Oil and Gas Properties - Pease's oil and gas producing activities are
accounted for using the full cost method of accounting. Pease has one
cost center (full cost pool) since all of its oil and gas producing
activities are conducted in the United States. Under the full cost
method, all costs associated with the acquisition, development and
exploration of oil and gas properties are capitalized, including
payroll and other internal costs that are directly attributable to
these activities. For the years ended December 31, 1999 and 1998,
capital expenditures include internal costs of $24,000 and $237,000,
respectively. Proceeds from sales of oil and gas properties are
credited to the full cost pool with no gain or loss recognized unless
such adjustments would significantly alter the relationship between
capitalized costs and proved oil and gas reserves.
Acquisition costs of unproved properties and costs related to
exploratory drilling and seismic activities are initially excluded from
amortization. These costs are periodically evaluated for impairment and
transferred to properties being amortized when either proved reserves
are established or the costs are determined to be impaired.
F-8
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The capitalized costs related to all evaluated oil and gas properties
are amortized using the units of production method based upon
production and estimates of proved reserve quantities. Future costs to
develop proved reserves, as well as site restoration, dismantlement and
abandonment costs, are estimated based on current costs and are also
amortized to expense using the units of production method.
The capitalized costs of evaluated oil and gas properties (net of
accumulated amortization and related deferred income taxes) are not
permitted to exceed the full cost ceiling. The full cost ceiling
involves a quarterly calculation of the estimated future net cash flows
from proved oil and gas properties, using current prices and costs and
an annual discount factor of 10%. Accordingly, the full cost ceiling
may be particularly sensitive in the near term due to changes in oil
and gas prices or production rates.
Impairment of Long-Lived Assets - Pease performs an assessment for
impairment whenever events or changes in circumstances indicate that
the carrying amount of a long-lived asset may not be recoverable. If
the net carrying value exceeds estimated undiscounted future net cash
flows, then impairment is recognized to reduce the carrying value to
the estimated fair value.
Property, Plant and Equipment - Property, plant and equipment is stated
at cost. Depreciation of property, plant and equipment was calculated
using the straight-line method over the estimated useful lives of the
assets, as follows:
Years
-----
Gas plant 17
Service equipment and vehicles 4-7
Buildings and office equipment 7-15
Depreciation expense related to property, plant and equipment amounted
to $22,000 and $327,000 for the years ended December 31, 1999 and 1998,
respectively.
The costs of normal maintenance and repairs are charged to operating
expenses as incurred. Material expenditures which increase the life of
an asset are capitalized and depreciated over the estimated remaining
useful life of the asset. The cost of properties sold, or otherwise
disposed of, and the related accumulated depreciation or amortization
are removed from the accounts, and any gains or losses are reflected in
current operations.
Debt Issuance Costs - Debt issuance costs relate to the $5 million
private placement of convertible debentures discussed in Note 3. These
costs are being amortized using the interest method.
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.
F-9
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pease's financial statements are based on a number of significant
estimates including the allowance for doubtful accounts, assumptions
affecting the fair value of stock options and warrants, and oil and gas
reserve quantities which are the basis for the calculation of
amortization and impairment of oil and gas properties. Management
emphasizes that reserve estimates are inherently imprecise and that
estimates of more recent discoveries are more imprecise than those for
properties with long production histories.
Income Taxes - Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on previously recorded deferred tax
assets and liabilities resulting from a change in tax rates is
recognized in earnings in the period in which the change is enacted.
Revenue Recognition - Pease recognizes revenues for oil and gas sales
upon delivery to the purchaser. Revenues from oil field services were
recognized as the services are performed. Oil field supply and
equipment sales were recognized when the goods were shipped to the
customer.
Net Loss Per Common Share -Net loss per common share is presented in
accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share, which requires
disclosure of basic and diluted earnings per share ("EPS"). Basic EPS
excludes dilution for potential common shares and is computed by
dividing the net loss applicable to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common shares were exercised or converted into
common shares. Basic and diluted EPS are the same in 1999 and 1998 as
all potential common shares were antidilutive.
Stock Split - Effective December 1, 1998, the Board of Directors
declared a 1 for 10 reverse stock split related to Pease's common
shares. 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 shares 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.
F-10
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Information - Pease's balance sheet as of March 31, 2000 and
the statement of shareholders' equity for the period then ended as well
as the statement of operations and cash flows for the three months
ended March 31, 2000 and March 31, 1999 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.
Comprehensive Income - There are no components of comprehensive income
which have been excluded from net income (loss) and, therefore, no
separate statement of comprehensive income has been presented.
2. ASSETS DIVESTITURE:
------------------
During the fourth quarter of 1997, Pease's Board of Directors
determined that Pease's long-term strategy had shifted to exploration
and development activities in the Gulf Coast region and that the Rocky
Mountain assets should be divested. Accordingly, Pease evaluated these
assets in 1997 for impairment and reduced the net carrying value to the
estimated fair value. These assets were sold during 1998 for cash
proceeds of $3,054,000 and an additional payment of $100,000 was
received in April 1999.
The Company recognized an impairment charge in 1998 of $313,953, to
account for the difference between the net realizable value estimated
in 1997 and the actual amount realized in 1998. The results of
operations during 1998, exclusive of the impairment charge, related to
the Rocky Mountain assets are as follows:
The results of operations, exclusive of the impairment charge, related
to the Rocky Mountain assets are as follows:
1998 1997
---- ----
Revenues............................ $ 1,489,000 $ 3,683,000
Operating costs and expenses........ (1,394,000) (2,368,000)
Depreciation and amortization....... (550,000) (1,606,000)
----------- -----------
Loss from operations................ $ (455,000) (291,000)
=========== ===========
F-11
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DEBT FINANCING ARRANGEMENTS:
---------------------------
Long-Term Debt - Long-term debt consists of the following:
March 31, December 31,
2000 1999
--------- -----------
(Unaudited)
Convertible debentures, interest at 10%
due April 2001, unsecured, ...................... $ 2,783,000 $ 2,783,000
Less unamortized discount ........................... (238,000) (293,000)
---------- ----------
Net carrying value .......................... 2,545,000 2,490,000
---------- ----------
Note payable to bank, interest at 8.5%,
monthly payments of $669, due March 2003,
collateralized by vehicle ...................... 21,000 22,000
---------- ----------
Total long-term debt ....................... 2,566,000 2,512,000
---------- ----------
Less current maturities .................... (5,000) (6,000)
---------- ----------
Long-term debt, less current maturities .... $2,561,000 $ 2,506,000
========== ==========
Current maturities of long-term debt, excluding unamortized discounts
are as follows:
As of
Year Ending December 31,
December 31, 1999
-------------- ------------
2000 $ 6,000
2001 2,789,000
2002 8,000
2003 2,000
-----------
$ 2,805,000
===========
Convertible Debentures and Consulting Agreement - In March 1996, Pease
entered into a consulting agreement with a company (the "Consultant")
that specializes in developing and implementing capitalization plans,
including the utilization of debt capital in business operations. The
agreement expired in February 1999, and provided for minimum monthly
cash payments of $17,500. In addition to cash compensation, Pease
agreed to grant warrants to purchase 100,000 shares of Pease's common
shares. 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 shares
at $12.50 per share (see Note 7 for additional information with respect
to the warrants). In November 1996, the offering was completed and
Pease was successful in selling the entire $5,000,000 generating net
cash proceeds of $4,300,000. The estimated fair value of the detachable
warrants of $1,829,000 has been treated as a discount and is being
amortized using the interest method. The debentures were initially
collateralized by a first priority interest in certain Rocky Mountain
oil and gas properties owned and operated by Pease.
The debentures are convertible, at the holder's option, into Pease's
common shares for $30.00 per share and may be redeemed by Pease, in
whole or in part, at a premium to the original principal amount. During
the year ended December 31, 1997, the holders of $1,025,000 of
debentures elected to convert to 341,665 shares of common shares.
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.
F-12
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INCOME TAXES:
------------
Deferred tax assets (there are no deferred tax liabilities) as of
December 31, 1999 are comprised of the following:
1999
----
Long-term Assets
Net operating loss carryforwards . $ 9,646,000
Property, plant and equipment .... 968,000
Tax credit carryforwards ......... 294,000
Percentage depletion carryforwards 160,000
Other ............................ 8,000
------------
Total .......................... 11,076,000
Less valuation allowance ......... (11,076,000)
------------
Net long-term asset ............ $ --
============
During the years ended December 31, 1999 and 1998, Pease increased the
valuation allowance by $1,525,000 and $3,050,000, respectively,
primarily due to an increase in the net operating loss carryforwards
which are not considered to be realizable. Pease has provided a
valuation allowance for the net operating loss and credit carryforwards
based upon the various expiration dates and the limitations which exist
under IRS Sections 382 and 384.
At December 31, 1999, Pease had net operating loss carryforwards for
income tax purposes of approximately $24 million, which expire
primarily in 2008 through 2019. Some of these net operating losses are
subject to limitations under IRS Sections 382 and 384, particularly
should a significant number of series B preferred stock convert into
common shares in the future or the merger with Carpatsky is
consummated. Additionally, Pease has tax credit carryforwards at
December 31, 1998, of approximately $294,000 and percentage depletion
carryforwards of approximately $429,000.
5. COMMITMENTS AND CONTINGENCIES:
Employment Agreements - During 1994, the Board of Directors approved an
employment agreement with Pease's current President/CFO and formally
reaffirmed that commitment in 1999. The agreement may be terminated by
the officer upon 90 days notice or by Pease without cause upon 30 days
notice. In the event of a termination by Pease without cause, Pease
would be required to pay the officer one year's salary. If the
termination occurs following a change in control, which includes a
merger, Pease would be required to make a lump sum payment equivalent
to two year's salary.
Profit Sharing Plan - Pease has established a 401(k) profit sharing
plan that covers all employees with six months of service who elect to
participate in the Plan. The Plan provides that the employees may elect
to contribute up to 15% of their salary to the Plan. All of Pease's
contributions are discretionary and amounted to $3,862 and $5,401 for
the years ended December 31, 1999 and 1998, respectively.
Environmental - Pease is subject to extensive Federal, state and local
environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment and
may require Pease to remove or mitigate the environmental effects of
the disposal or release of petroleum or chemical substances at various
sites. Environmental expenditures are expensed or capitalized depending
F-13
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Bankruptcy of Third Party Operator - In December 1998, NEG filed an
Involuntary Petition for an Order and Relief under Chapter 11 of Title
11 of the United States Bankruptcy Code in United States Bankruptcy
Court for the Northern District of Texas, Dallas Division. As operator
of the East Bayou Sorrel field, which represents a majority of Pease's
current production, the bankruptcy petition might adversely effect
future development or operation of the field; however, Pease does not
expect that its interest in the field or production from currently
existing wells will be affected.
Pease does have an unsecured claim in the bankruptcy proceeding for
various amounts which Pease believes were overpaid to the operator in
connection with the drilling of existing wells. Collection of these
amounts may be delayed or may not occur, pending disposition of NEG's
reorganization proceeding. The total claim is approximately $60,000.
However, no amount has been recorded in the financial statements as of
December 31, 1999.
Contingencies - Pease may from time to time be involved in various
claims, lawsuits, disputes with third parties, actions involving
allegations of discrimination, or breach of contract incidental to the
operations of its business. Pease is not currently involved in any such
incidental litigation which it believes could have a materially adverse
effect on its financial conditions or results of operations.
6. PREFERRED STOCK
---------------
Pease has the authority to issue up to 2,000,000 shares of Preferred
Stock, which may be issued in such series and with such preferences as
determined by the Board of Directors. During 1993, Pease issued
1,170,000 shares of Series A Cumulative Convertible Preferred Stock
(the "Series A Preferred Stock"). Each share of Series A Preferred
Stock was entitled to receive dividends at 10% per annum when, as and
if declared by Pease's Board of Directors. Unpaid dividends accrued and
were cumulative. During 1997, the holders of all remaining shares of
Series A Preferred Stock elected to convert to 56,990 shares of common
shares pursuant to the original conversion terms. Upon conversion, the
holders also received warrants to purchase 56,990 shares of common
shares at $60.00 per share through August 13, 1998. On March 4, 1998,
the expiration date of these warrants was extended for one year and
therefore expired on August 13, 1999.
In December 1997, the Board of Directors authorized a new series of
preferred stock which was designated as the Series B 5% PIK Cumulative
Convertible Preferred Stock (the "series B preferred stock"). Pease has
authority to issue up to 145,300 shares of series B preferred stock. On
December 31, 1997, Pease issued 113,333 shares of series B preferred
stock for $5,666,650. The series B preferred stock is convertible into
common shares at a conversion price equal to a 25% discount to the
average trading price of the common shares 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 shareholders 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.
F-14
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
However, in connection with the contemplated merger with Carpatsky, the
Preferred stockholders have signed Agreements Not to Sell or Convert
Securities which, among other things, stated that Pease's obligation to
accrue and pay additional dividends on the series B preferred stock
shall be deferred from the date that an Agreement and Plan of Merger
with Carpatsky is signed. Therefore, dividends were accrued and paid to
the Preferred stockholders through the close of business on September
1, 1999. If the merger with Carpatsky is consummated, there will be no
further dividends paid. If the merger is not consummated, Pease shall
be obligated at that time to accrue and pay dividends for the period
from September 1, 1999 through the date on which the merger is
abandoned. For financial statement presentation purposes, however, the
preferred dividends for September 1, 1999 to December 31, 1999 have
been deducted in determining net loss applicable to common shareholders
as if such amounts were required to be paid.
Beginning in June 1999, Pease may force the holders to convert to
common shares at a conversion price that generally represents a 25%
discount from the fair value of the common shares. If not previously
converted, Pease is required to redeem the series B preferred stock on
December 31, 2002 at a price equal to the Liquidation Preference.
In connection with the issuance of this preferred stock, Pease agreed
to issue warrants to the placement agent for 32,380 shares of common
shares 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 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 shares on the date of grant. The maximum term
of options granted under the plan is 10 years and options granted to
employees expire three months after the termination of employment. None
of the options may be exercised during the first six months of the
option term.
No options may be granted after 10 years from the adoption date of each
plan. The following is a summary of activity under these stock option
plans for the years ended December 31, 1999 and 1998:
1999 1998
-------------------- -------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- -------- --------- --------
Outstanding, beginning of year 71,030 $ 13.85 118,880 9.61
Canceled ..................... (6,250) 13.75 (46,350) 21.36
Expired ...................... -- -- (1,500) 29.4
Repriced ..................... -- -- (20,000) 26.9
Granted ...................... -- -- 20,000 11.25
Exercised .................... -- -- -- --
------- ------- ------- -----
Outstanding, end of year ..... 64,780 $ 13.86 71,030 13.85
======= ======= ======= =====
F-15
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For all options granted, the market price of Pease's common shares on
the date of grant was equal to the exercise price. All options are
currently exercisable and if not previously exercised, will expire as
follows:
Range of Weighted
Exercise Prices Average
---------------- Exercise Number
Low High Price of Shares
Year Ending December 31, --- ---- -------- ---------
-----------------------
2000 $ 7.00 $ 8.30 $ 7.77 $ 22,265
2001 10.00 18.10 12.8 10,015
2002 5.00 29.70 18.35 32,500
------ --------
$ 13.86 64,780
====== ========
Warrants and Non-Qualified Stock Options - The Company has also granted
warrants and non-qualified options which are summarized as follows for
the years ended December 31, 1999 and 1998:
1999 1998
--------------------- ---------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- -------- --------- --------
Outstanding, beginning of year ... 570,071 $ 40.87 587,790 $ 43.11
Granted to former officers and
directors for severance .......... -- -- 39,850 14.88
Expired .......................... (339,546) 57.61 (57,444) 45.81
Exercised ........................ -- -- (125) 7.5
-------- ------- -------- ------
Outstanding, end of year ......... 230,525 $ 16.21 570,071 $ 40.87
======== ======= ======== ======
If not previously exercised, warrants and non-qualified options will
expire as follows:
Range of Weighted
Exercise Prices Average
---------------- Exercise Number
Low High Price of Shares
Year Ending December 31, --- ---- -------- ---------
-----------------------
2000................. $ 5.0 $ 71.9 $ 18.58 66,845
2001................. 7.5 37.5 10.79 98,900
2002................. 17.5 30.3 22.05 64,780
-------- -------
$ 16.21 230,525
======== =======
Pro Forma Stock-Based Compensation Disclosures - The Company applies
APB Opinion 25 and related interpretations in accounting for stock
options and warrants which are granted to employees. Accordingly, no
compensation cost has been recognized for grants of options and
warrants to employees since the exercise prices were not less than the
fair value of the Company's common shares on the grant dates. Had
compensation cost been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of FAS
123, the Company's net loss and loss per share would have been changed
to the pro forma amounts indicated below.
F-16
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31,
1999 1998
---- ----
Net loss applicable to common shareholders:
As reported ......... $ (731,000) $ (12,695,000)
Pro forma ........... (731,000) (16,507,000)
Net loss per common share:
As reported ......... $ (0.43) $ (7.99)
Pro forma ........... (0.43) (8.29)
The weighted average fair value of options and warrants granted to
employees for the year ended December 31, 1998 was $2.24. No options or
warrants were granted in 1999. The fair value of each employee option
and warrant granted in 1998 was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted
average assumptions:
Year Ended December 31,
1999 1998
----------------------
Expected volatility ........... N/A 80.0%
Risk-free interest rate ....... N/A 5.6%
Expected dividends ............ N/A --
Expected terms (in years) ...... N/A 2.2
8. FINANCIAL INSTRUMENTS
---------------------
Statement of Financial Accounting Standards No. 107 requires all
entities to disclose the fair value of certain financial instruments in
their financial statements. Accordingly, at December 31, 1999,
management's best estimate is that the carrying amount of cash,
receivables, notes payable to unaffiliated parties, accounts payable,
and accrued expenses approximates fair value due to the short maturity
of these instruments. Management estimates that fair value is
approximately equal to carrying value of the convertible debentures
since market interest rates have not changed significantly since the
offering commenced.
F-17
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SIGNIFICANT CONCENTRATIONS:
--------------------------
Substantially all of Pease's accounts receivable at December 31, 1999,
resulted from crude oil and natural gas sales to companies in the oil
and gas industry. This concentration of customers and joint interest
owners may impact our overall credit risk, either positively or
negatively, since these entities may be similarly affected by changes
in economic or other conditions. In determining whether to require
collateral from a significant customer or joint interest owner, Pease
analyzes the entity's net worth, cash flows, earnings, and/or credit
ratings. Receivables are generally not collateralized; however,
receivables from joint interest owners are subject to collection under
operating agreements which generally provide lien rights. Historical
credit losses incurred on trade receivables by Pease have been
insignificant.
For the years ended December 31, 1999 and 1998, the Company had oil
sales to a single customer which accounted for 46% and 20% of total
revenues, respectively.
At December 31, 1999, substantially all of Pease's cash and temporary
cash investments were held at a single financial institution. The
Company does not maintain insurance to cover the risk that cash and
temporary investments with a single financial institution may be in
excess of amounts insured by federal deposit insurance.
10. OIL AND GAS PRODUCING ACTIVITIES:
--------------------------------
Property Acquisitions - In January 1997, Pease completed the
acquisition of a 7.8125% after prospect payout working interest in a
producing oil and gas prospect in Louisiana. The prospect is operated
by National Energy Group, Inc. (NEGX), an independent oil and gas
producer. The purchase price was $1,750,000 which consisted of $875,000
in cash and the issuance of 31,500 shares of Pease's common shares with
a fair value of $875,000. In February 1997, the Company entered into
agreements with unaffiliated parties for the purchase of a 10% working
interest in this prospect for $2.5 million. The assets acquired from
this acquisition account for 77% of Pease's proved reserves at December
31, 1999.
Full Cost Amortization Expense - Amortization expense amounted to
$985,000 and $1,914,000 for the years ended December 31, 1999 and 1998,
respectively. Amortization expense per equivalent units of oil and gas
produced amounted to $7.64 and $9.52 for the years ended December 31,
1999 and 1998 respectively. Natural gas is converted to equivalent
units of oil on the basis of six Mcf of gas to one equivalent barrel of
oil.
Unevaluated Oil and Gas Properties - At December 31, 1999, unevaluated
oil and gas properties consist of the following:
Unproved acquisition costs.............. $ 961,000
Geologic and geophysical costs.......... 926,000
Interest and other costs................ 395,000
---------
$ 2,282,000
=========
F-18
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SIGNIFICANT CONCENTRATIONS:
--------------------------
All unevaluated costs were incurred during 1997, 1998 and 1999 and
management expects that planned activities will enable the evaluation
of substantially all of these costs by the end of 2000.
Capitalization of Interest - For the years ended December 31, 1999 and
1998, the Company capitalized interest costs of $278,000 and $854,000,
respectively, related to unevaluated oil and gas properties and other
exploration activities.
Full Cost Ceiling - During 1998, Pease recognized an impairment charge
of $7,279,000 due to the full cost ceiling limitation of which
$4,740,000 was recognized in the fourth quarter. The fourth quarter
impairment charge was substantially attributed to the expiration of
certain previously unevaluated leases, the collapse of oil prices
during that period and dry holes. No impairment charge has been
recognized in 1999 since the ceiling is substantially higher at
December 31, 1999 as a result of increased oil prices and additional
discoveries and extensions of the Company's oil and gas reserves.
Costs Incurred in Oil and Gas Producing Activities - The following is a
summary of costs incurred in oil and gas producing activities for the
years ended December 31, 1999 and 1998:
1999 1998
---- ----
Lease acquisition costs ................. $ 77,000 $ --
Development costs ....................... 239,000 14,000
Exploration costs ....................... 593,000 6,799,000
------- ---------
Total .................................. $ 909,000 $6,813,000
======= ==========
Results of Operations from Oil and Gas Producing Activities - Results
of operations from oil and gas producing activities (excluding well
administration fees, general and administrative expenses, and interest
expense) for the years ended December 31, 1999 and 1998 are presented
below.
1999 1998
---- ----
Oil and gas sales....................... $ 2,144,000 $ 2,360,000
Production costs........................ (405,000) (1,050,000)
Amortization expense.................... (985,000) (1,914,000)
Impairment expense...................... -- (7,279,000)
---------- -----------
Results of operations from oil/gas
producing activities.................... $ 754,000 $(7,883,000)
========== ===========
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
F-19
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consulting petroleum engineers, Netherland, Sewell & Associates, Inc.
Reserve estimates require substantial judgment on the part of petroleum
engineers resulting in imprecise determinations, particularly with
respect to new discoveries. Accordingly, it is expected that the
estimates of reserves will change as future production and development
information becomes available. All proved oil and gas reserves are
located in the United States. The following table presents estimates of
our net proved oil and gas reserves, and changes therein for the years
ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf)
---- --- ---- ---
<S> <C> <C> <C> <C>
Proved reserves, beginning of year ............ 275,000 1,368,000 1,085,000 4,535,000
Purchase of minerals in place ............ -- -- -- --
Sale of minerals in place ................ -- -- (725,000) (2,848,000)
Extensions, discoveries, and
other additions .......................... 130,000 330,000 129,000 517,000
Revisions of previous estimates .......... 3,000 (2,000) (105,000) (286,000)
Production ............................... (74,000) (337,000) (109,000) (550,000)
---------- ---------- ---------- ----------
Proved reserves, end of year .................. 334,000 1,359,000 275,000 1,368,000
========== ========== ========== ==========
Proved developed reserves, beg. of year ....... 261,000 920,000 930,000 3,833,000
========== ========== ========== ==========
Proved developed reserves, end of year ........ 310,000 648,000 261,000 920,000
========== ========== ========== ==========
</TABLE>
The downward revisions of "previous estimates" in 1998 were primarily
attributable to previously recorded undeveloped reserves were removed
as a result of drilling dry holes. The upward revisions of "extensions,
discoveries and other additions" in both 1998 and 1999 were primarily
attributable to significant extensions of the estimated ultimate
recoveries of oil and gas at the East Bayou Sorrel Field.
F-20
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Standardized Measure of Discounted Future Net Cash Flows (Unaudited) -
Statement of Financial Accounting Standards No. 69 prescribes
guidelines for computing a standardized measure of future net cash
flows and changes therein relating to estimated proved reserves. We
have followed these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated
quantities of oil and gas to be produced. Estimated future income taxes
are computed using current statutory income tax rates including
consideration for estimated future statutory depletion and tax credits
and the utilization of net operating loss carryforwards. The resulting
future net cash flows are reduced to present value amounts by applying
a 10% annual discount factor.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do
not necessarily reflect our expectations for actual revenues to be
derived from those reserves nor their present worth. The limitations
inherent in the reserve quantity estimation process, as discussed
previously, are equally applicable to the standardized measure
computations since these estimates are the basis for the valuation
process.
The following summary sets forth the Company's future net cash flows
relating to proved oil and gas reserves as of December 31, 1999 and
1998 based on the standardized measure prescribed in Statement of
Financial Accounting Standards No. 69.
1999 1998
---- ----
Future cash inflows........................... $ 12,080,000 $ 6,117,000
Future production costs....................... (3,089,100) (1,519,000)
Future development costs...................... (834,200) (544,000)
Future income tax expense..................... -- --
---------- ----------
Future net cash flows..................... 8,156,700 4,054,000
10% annual discount for estimated time
of cash flow.............................. (1,887,000) (1,103,000)
---------- ----------
Standardized Measure of Discounted
Future Net Cash Flows..................... $ 6,269,700 $ 2,951,000
========== ==========
Average prices used to estimate the reserves:
Oil (per bbl)............................. $ 24.91 $ 10.15
Gas (per Mcf)............................. $ 2.77 $ 2.43
Changes in Standardized Measure (Unaudited) - The following are the
principal sources of change in the standardized measure of discounted
future net cash flows for the years ended December 31, 1999 and 1998:
1999 1998
---- ----
Standardized measure, beginning of year ........... $ 2,951,000 $ 9,678,000
Sale of oil and gas produced, net of production
costs ........................................... (1,739,000) (1,310,000)
Sale of minerals in place ......................... -- (5,109,000)
Net changes in prices and production costs ........ 2,504,000 (1,031,000)
Net changes in estimated development costs ........ (245,000) 907,000
Revisions of previous quantity estimates .......... (267,000) (2,874,000)
Discoveries, extensions, and other additions ...... 2,771,000 1,722,000
Accretion of discount ............................. 295,000 968,000
----------- -----------
Standardized Measure, end of year ................. $ 6,270,000 $ 2,951,000
=========== ===========
F-21
<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, 1999 and 1998,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
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 and its future operations. Carpatsky has been affected and will
likely, for the foreseeable future, continue to be affected by economic
instability in 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, which, in conjunction with 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
Denver, Colorado
March 13, 2000
F-22
<PAGE>
<TABLE>
<CAPTION>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
March 31, 2000 1999 1998
-------------- ---- ----
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents ................................................ $ 1,976,000 $ 3,227,000 $ 25,000
Restricted cash ..................................................... -- 500,000 --
Trade receivables, net of allowance for bad debts of $1,944,000
(unaudited), $1,925,000 and $760,000, respectively ............... 296,000 70,000 45,000
Other receivables ................................................... 7,000 48,000 --
Inventories ......................................................... 120,000 120,000 47,000
VAT refundable ...................................................... 50,000 58,000 87,000
Prepaid expenses and other .......................................... 205,000 1,000 4,000
----------- ----------- -----------
Total current assets ........................................... 2,654,000 4,024,000 208,000
----------- ----------- -----------
Oil and Gas Properties, using the full cost method:
Evaluated properties ................................................ 9,723,000 8,868,000 9,161,000
Accumulated depreciation, depletion and impairment .................. (5,768,000) (4,757,000) (396,000)
-----------
Net oil and gas properties ..................................... 3,955,000 4,111,000 8,765,000
----------- ----------- -----------
Other Assets:
VAT refundable ...................................................... 87,000 133,000 420,000
Deferred acquisition costs .......................................... 133,000 133,000 --
Loan to Ukrainian joint venture partner ............................. 72,000 72,000 55,000
Furniture and equipment, net of accumulated depreciation of
$68,000 (unaudited), $65,000 and $49,000 ......................... 37,000 34,000 41,000
----------- ----------- -----------
Total other assets ............................................. 329,000 372,000 516,000
----------- ----------- -----------
Total Assets ........................................................... $ 6,938,000 $ 8,507,000 $ 9,489,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable:
Related party .................................................... $ 663,000 $ -- $ --
Other ............................................................ -- 575,000 549,000
Accounts payable .................................................... 1,846,000 2,148,000 3,645,000
Taxes payable ....................................................... 409,000 711,000 291,000
Accrued expenses .................................................... 54,000 211,000 325,000
Advances received ...................................................... 170,000 -- --
Due to officers and directors ....................................... -- -- 40,000
----------- ----------- -----------
Total current liabilities ...................................... 3,142,000 3,645,000 4,850,000
----------- ----------- -----------
Long-Term Debt:
Convertible note .................................................... -- -- 1,228,000
Debentures .......................................................... -- -- 780,000
----------- ----------- -----------
-- -- 2,008,000
----------- ----------- -----------
Commitments and Contingencies (Notes 1, 2, and 3)
Stockholders' Equity:
Preferred stock, no par value; 500,000,000 shares authorized,
95,450,000 shares issued and outstanding ......................... 4,000,000 4,000,000 --
Common shares, no par value; unlimited authorized shares; 77,728,263
shares issued and outstanding .................................... 9,395,000 9,395,000 5,410,000
Accumulated deficit ................................................. (9,599,000) (8,533,000) (2,779,000)
----------- ----------- -----------
Total stockholders' equity ..................................... 3,796,000 4,862,000 2,631,000
----------- ----------- -----------
Total Liabilities and Shareholders' Equity ............................. $ 6,938,000 $ 8,507,000 $ 9,489,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-23
<PAGE>
<TABLE>
<CAPTION>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, For the Years Ended December 31,
----------------------------------- ------------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Oil and Gas Sales
Total sales ............................ $ 638,000 $ 434,000 $ 2,430,000 $ 769,000 $ 99,000
Less allowance for doubtful accounts ... (63,000) (323,000) (1,630,000) (543,000) (13,000)
------------ ------------ ------------ ------------ ------------
Net oil and gas sales ............... 575,000 111,000 800,000 226,000 86,000
------------ ------------ ------------ ------------ ------------
Operating Costs and Expenses:
Oil and gas production costs ........... 191,000 100,000 454,000 196,000 80,000
Production taxes ....................... 145,000 70,000 563,000 113,000 3,000
Depreciation, depletion and amortization 446,000 185,000 1,366,000 337,000 29,000
Impairment ............................. 500,000 -- 3,050,000 -- --
General and administrative ............. 333,000 104,000 1,385,000 552,000 805,000
------------ ------------ ------------ ------------ ------------
Total operating costs and expenses .. 1,615,000 459,000 6,818,000 1,198,000 917,000
------------ ------------ ------------ ------------ ------------
Loss From Operations ...................... (1,040,000) (348,000) (6,018,000) (972,000) (831,000)
------------ ------------ ------------ ------------ ------------
Other Income (Expenses):
Interest income ........................ 9,000 -- -- -- 6,000
Net barter income ...................... 7,000 16,000 35,000 4,000 34,000
Interest expense ....................... (23,000) (84,000) (260,000) (318,000) (90,000)
Amortization of debt discount .......... -- -- -- (658,000) (139,000)
Gain on the net monetary position ...... 63,000 297,000 936,000 1,477,000 44,000
------------ ------------ ------------ ------------ ------------
Total other income (expenses) ....... 56,000 229,000 711,000 505,000 (145,000)
------------ ------------ ------------ ------------ ------------
Loss Before Taxes ......................... (984,000) (119,000) (5,307,000) (467,000) (976,000)
Income Taxes ........................... (82,000) (55,000) (447,000) (132,000) --
------------ ------------ ------------ ------------ ------------
Net Loss .................................. (1,066,000) (174,000) (5,754,000) (599,000) (976,000)
Imputed preferred stock dividend for
valuation of warrants ............... -- -- (336,000) -- --
------------ ------------ ------------ ------------ ------------
Loss attributable to common shareholders .. $ (1,066,000) $ (174,000 $ (6,090,000) $ (599,000) $ (976,000)
============ ============ ============ ============ ============
Net Loss Per Share, Basic and Diluted ..... $ (.01) $ -- $ (.12) $ (0.01) $ (0.03)
============ ============ ============ ============ ============
Weighted Average Number of Shares
Outstanding ............................ 77,728,263 40,796,246 49,471,164 40,796,246 31,691,266
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-24
<PAGE>
<TABLE>
<CAPTION>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH MARCH 31, 2000 (Unaudited)
Voting
Common Stock Preferred Stock
-------------------- ---------------------- Accumulated
Shares Amount Shares Amount Deficit Total
------ ------ ------ ------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997...................... 24,074,677 $ 1,440,000 -- -- $ (1,204,000) $ 236,000
Exercise of options and warrants ........... 1,501,161 279,000 -- -- -- 279,000
Issuance of stock in private placements .... 14,681,108 2,914,000 -- -- -- 2,914,000
Issuance of stock in lieu of commission .... 539,300 108,000 -- -- -- 108,000
Issuance costs ............................. -- (226,000) -- -- -- (226,000)
Estimated fair value of warrants and options
issued .................................. -- 427,000 -- -- -- 427,000
Net loss ................................... -- -- -- -- (976,000) (976,000)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1997 ................... 40,796,246 4,942,000 -- -- (2,180,000) 2,762,000
Estimated fair value of warrants and options
issued .................................. -- 468,000 -- -- -- 468,000
Net loss ................................... -- -- -- -- (599,000) (599,000)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1998 ................... 40,796,246 5,410,000 -- -- (2,779,000) 2,631,000
Conversion of long-term debt to equity ..... 18,525,344 2,456,000 -- -- -- 2,456,000
Issuance of stock in private placements .... 13,333,340 1,000,000 -- -- -- 1,000,000
Settlement of liabilities for stock ........ 1,520,000 220,000 -- -- -- 220,000
Issuance of stock in lieu of commission .... 953,333 72,000 -- -- -- 72,000
Issuance costs ............................. -- (45,000) -- -- -- (45,000)
Issuance of preferred stock ................ -- -- 95,450,000 4,000,000 -- 4,000,000
Estimated fair value of options issued ..... -- 22,000 -- -- -- 22,000
Common stock issued for services to officers
and directors ........................... 2,600,000 260,000 -- -- -- 260,000
Net loss ................................... -- -- -- -- (5,754,000) (5,754,000)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1999 ................... 77,728,263 9,395,000 95,450,000 4,000,000 (8,533,000) 4,862,000
Net loss (unaudited) ....................... -- -- -- -- (1,066,000) (1,066,000)
----------- ----------- ----------- ----------- ----------- -----------
Balances, March 31, 2000 (unaudited) .......... 77,728,263 $ 9,395,000 95,450,000 $ 4,000,000 $(9,599,000) $ 3,796,000
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-25
<PAGE>
<TABLE>
<CAPTION>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months For the Years Ended
Ended March 31, December 31,
-------------------- ----------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss ........................................... $(1,066,000) $ (174,000) $(5,754,000) $ (599,000) $ (966,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and depletion ....................... 446,000 185,000 1,366,000 337,000 19,000
Amortization of debt issuance costs .............. -- -- -- 658,000 139,000
Impairment ....................................... 500,000 -- 3,050,000 -- --
Provision for doubtful accounts .................. 63,000 323,000 1,630,000 545,000 13,000
Stock and options issued for services ............ -- -- 477,000 43,000 55,000
Net monetary (gain) or loss ...................... (64,000) (297,000) (937,000) (1,477,000) (44,000)
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables .................................... (276,000) (317,000) (1,654,000) (534,000) (202,000)
Prepaid expenses and other ..................... 70,000 29,000 211,000 (295,000) (33,000)
Inventory ...................................... 114,000 (25,000) (100,000) 41,000 (73,000)
Increase (decrease) in:
Accounts payable ............................... (225,000) 20,000 281,000 226,000 63,000
Accrued expenses ............................... (353,000) 249,000 754,000 586,000 113,000
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities ............ (791,000) (7,000) (676,000) (469,000) (916,000)
Cash Flows from Investing Activities:
Capital expenditures, principally for
oil and gas activities ............................. (1,016,000) (539,000) (1,404,000) (1,660,000) (3,449,000)
Loan to Ukrainian joint venture .................... -- -- (16,000) (6,000) (50,000)
Deferred acquisition costs ......................... (8,000) -- (133,000) -- --
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities ............ (1,024,000) (539,000) (1,553,000) (1,666,000) (3,499,000)
Cash Flows from Financing Activities:
Proceeds from issuance of:
Common shares .................................... -- 250,000 1,000,000 -- 2,914,000
Convertible term note ............................ -- -- -- 600,000 600,000
Preferred stock .................................. -- -- 4,000,000 -- --
Debentures ....................................... -- -- -- -- 1,000,000
Warrants and options ............................. -- -- -- -- 279,000
Offering costs related to issuance of shares ....... -- -- (6,000) -- (119,000)
Payment on debentures .............................. -- -- -- -- (230,000)
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities ........ -- 250,000 4,994,000 600,000 4,444,000
Effect of Changes in Foreign
Exchange on Cash Flows ................................ 64,000 297,000 937,000 1,477,000 44,000
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash
and Equivalents ....................................... (1,751,000) 1,000 3,702,000 (58,000) 73,000
Cash and Equivalents, beginning of period ............... 3,727,000 25,000 25,000 83,000 10,000
----------- ----------- ----------- ----------- -----------
Cash and Equivalents, at end of period .................. $ 1,976,000 $ 26,000 $ 3,727,000 $ 25,000 $ 83,000
=========== =========== =========== =========== ===========
Supplemental Cash Flow Information:
Cash payments for:
Interest ......................................... $ -- $ -- $ 15,000 $ 16,000 $ 40,000
=========== =========== =========== =========== ===========
Income taxes ..................................... $ 80,000 $ 55,000 $ 450,000 $ 130,000 $ --
=========== =========== =========== =========== ===========
Supplemental Disclosure of Non-cash Investing
and Financing Activities:
Increase (decrease) in payables for
oil and gas properties ............................. $ (141,000) $ (328,000) $ 366,000 $ 794,000 $ 2,467,000
=========== =========== =========== =========== ===========
Conversion of notes/debentures, including
principal and accrued interest, to common
stock .............................................. $ -- $ -- $ 2,456,000 $ -- $ --
=========== =========== =========== =========== ===========
Settlement of liabilities for stock ................ $ -- $ -- $ 220,000 $ -- $ --
=========== =========== =========== =========== ===========
Fair value of warrants issued for debt discount .... $-- $ -- $ -- $ 425,000 $ 372,000
=========== =========== =========== =========== ===========
Accrued interest transferred to long-term debt ..... $ -- $ -- $ -- $ 86,000 $ 1,000
=========== =========== =========== =========== ===========
Common shares issued in lieu of commission ......... $ -- $ -- $ 72,000 $ -- $ 108,000
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-26
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 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
Ukraine as a non- operating interest owner through joint ownership and
joint venture arrangements. Carpatsky is organized under laws of the
Province of Alberta, Canada.
Continued Operations - Carpatsky has incurred operating losses and
negative cash flow in operations since inception. Additionally,
Carpatsky has not paid its joint venture partners on a timely basis,
which could result in Carpatsky's interest in its Ukrainian projects
being permanently reduced (see Note 2). 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 December 1999, Carpatsky closed a significant
preferred stock sale with an industry partner and raised an additional
$4,000,000 (see Note 6). In late 1999, Carpatsky also began selling oil
and gas on a newly developed spot market in Ukraine, which has resulted
in additional cash flow to Carpatsky. In addition, Carpatsky entered
into a merger agreement with Pease Oil and Gas Company ("Pease"), a
public company (see Note 9). While no assurance can be given, it is
hopeful that with the increased and diversified asset base of the newly
combined entity and with the continued financial support of its
preferred stockholder, Carpatsky will be able to raise additional
capital to further develop its Ukrainian 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, among
other things, upon the continued funding of its share of current joint
venture obligations, as well as future exploration, development, and
overhead costs; and ultimately Carpatsky must achieve profitable
operations and repatriate funds from Ukraine.
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-27
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
As a developer and a producer of natural resources Carpatsky is
subjected to additional regulation, foreign taxes and market
restrictions. In addition, the ultimate transfer of funds is subject to
repatriation taxes on the net currency to be transferred.
Furthermore, 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, inflation is expected to
continue and could increase as a result of unforeseen political and
economic pressures.
Through August 1999, a substantial portion of Carpatsky's natural gas
was sold to a state owned utility, which is an affiliate of Carpatsky's
joint venture partner in Ukraine (Ukrnafta) (see Note 2). The utility
is dependent upon payment by its customers, which are primarily
commercial enterprises, in order to generate revenues to pay Carpatsky.
Ukraine is a "cash poor" country and many of the gas consumers are
unable to, or because of past socialistic practices do not, meet their
financial obligations on a timely basis. Carpatsky experienced
significant losses as a result of uncollected billings to the utility.
In September 1999, Carpatsky began selling natural gas on a newly
developed "spot market" in Ukraine. While the price per mcf is less
than on the world market or quoted from the affiliated utility,
Carpatsky has been generally paid for the gas sold on the spot market.
Assuming additional oil and gas reserves are developed by Carpatsky and
others, management believes gas will become available for export,
irrespective of Ukraine remaining a net importer of gas. Assuming
Carpatsky enters into arrangements to export its gas, transportation of
gas to export points will subject the joint ventures to additional
transportation charges.
Management believes the opportunities in the Ukraine exceed the
associated risks, however, no assurances can be made in connection with
any of the above assumptions and Carpatsky will be successful in
overcoming the associated risks of operating in Ukraine.
Principles of Consolidation - The accompanying financial statements
include the accounts of Carpatsky and its wholly-owned Delaware
subsidiary, Carpatsky Petroleum Corp. (CPC). CPC is a partner 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.
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 placed a lien on the RC
Joint Venture (Note 2) cash account until certain taxes (which have
been accrued) were paid. As a condition to the equity sale (see Note 6)
at December 30, 1999, $500,000 of this cash infusion was used to pay
past delinquent taxes in the Ukraine and is reflected as restricted
cash at December 31, 1999, and the balance of delinquent taxes was paid
from gas revenues subsequent to year-end.
Inventories - Inventories generally consist of supplies and are valued
cost, based on specific identification.
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 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.
F-28
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
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.
Carpatsky has estimated its oil and gas reserves based on the term of
Ukrnafta's current exploration license. Even though management believes
the license will be extended or other regulatory changes will be made
to allow Carpatsky's Ukrainian joint venture to continue producing oil
and gas reserves beyond the current license period (see Note 2), no
assurance can be given. Therefore, in 1999, Carpatsky recognized a
$3,050,000 impairment to reduce the oil and gas properties to the full
cost ceiling based on estimated reserves through the current term of
the license which is through March 2003. In the first quarter of 2000,
an additional $500,000 impairment was recognized, based on the full
cost ceiling limitation.
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
Office equipment ................................ 3 to 7
Depreciation expense related to other property and equipment amounted
to $16,000, $14,000 and $15,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
F-29
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
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 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.
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 Ukrainian authorities. Because of the lack of official
interpretation available and the fact that the relevant Ukrainian
authorities have little experience in interpretations 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 may be subject to repatriation and withholding
taxes. The foreign joint ventures are also subject to (i) a current
value added tax (VAT) of 20% for items purchased, which is currently
computed for oil and gas companies on a cash basis and (ii) profits tax
of 30% currently computed on a 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
F-30
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
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 - Oil and gas revenues are recognized upon delivery
to the purchaser. Due to uncertainty surrounding the collection of
receivables from past sales of gas, primarily to a government
controlled affected utility in Ukraine, Carpatsky has provided for a
substantial allowance against its prior unpaid gas sales.
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:
<TABLE>
<CAPTION>
For the Three Months Ended For the Years Ended
March 31, December 31,
----------------- -----------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross barter income ... $ 9,000 $ 36,000 $ 91,000 $ 104,000 $ 40,000
Costs of bartered goods (2,000) (20,000) (56,000) (100,000) (6,000)
--------- --------- --------- --------- ---------
Net barter income ..... $ 7,000 $ 16,000 $ 35,000 $ 4,000 $ 34,000
========= ========= ========= ========= =========
</TABLE>
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 1999, 1998, and 1997 as all potential common shares
were antidilutive.
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-31
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
In October 1995, the SFAS issued a 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 information be provided in the notes to the financial
statements for the fair value of options granted to employees and
directors. Fair value is generally determined under an option pricing
model using the criteria set forth in SFAS No. 123.
Foreign Currency - Because Ukraine is considered to have a highly
inflationary economy, the functional currency for accounting purposes
of Carpatsky's Ukrainian operations is the U.S. dollar. Even though the
Ukrainian government has reported reduced inflation rates in the last
few years, Carpatsky feels the true inflation factor in Ukraine is more
accurately reflected in the continuing substantial decline of Ukrainian
currency relative to other currencies. The political, social, and
economic instability leaves the inflation rates relative to other
currencies unpredictable. Therefore, for accounting purposes,
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 Carpatsky's investment
in its oil and gas properties) are translated at the historical
exchange rate. The net effect of these transaction adjustments are
reflected in the statement of operations along with exchange gains and
losses in foreign currency transactions. During 1997, 1998, and 1999,
this has 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 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, or substantial complete
liquidation of Carpatsky's interest in the foreign joint ventures.
Impact of Recently Issued Accounting Pronouncements - In June 1998,
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and for
hedging activities. Carpatsky does not currently engage in any
activities that would be covered by SFAS No. 133.
Unaudited Information - Carpatsky's balance sheet as of March 31, 2000
and the statement of shareholders' equity for the period then ended as
well as the statement of operations and cash flows for the three months
F-32
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
ended March 31, 2000 and 1999 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 principles.
2. JOINT VENTURE ARRANGEMENTS:
--------------------------
Carpatsky's 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. But rather its rights and obligations are
governed by the joint ownership/venture arrangements. The first
arrangement, Ukrcarpatoil, Ltd., a joint venture, was formed in 1994 to
develop the Bitkov-Babchensky Oil Field in Western Ukraine (Bitkov)
with Ukrnafta, a joint stock company controlled by the Ukranian
government. Carpatsky owns a 45% interest in the joint venture at
Bitkov, which extends for a period of up to 20 years. Under the
Ukrcarpatoil joint venture agreement production equal to the level of
production on the date of the agreement remains the property of
Ukrnafta and 80% of the incremental oil and gas production is the
property of Ukrcarpatoil. The profit from the sale of oil and gas
production is shared 45% to Carpatsky and 55% by Ukrnafta. Also during
the first 10 years of the joint venture, the remaining 20% of
incremental production is allocated to Carpatsky. Carpatsky's
investment in Bitkov joint venture is approximately $1,026,000 as of
December 31, 1999 and revenues and expenses of its operations have not
yet been significant.
In 1995, Carpatsky executed a joint activity agreement (Agreement) with
Ukrnafta to undertake the joint development of the
Rudovsko-Chervonozavodskoye natural gas and condensate field (the "RC
Field" or "RC Joint Venture") in Eastern Ukraine. Ukrnafta's initial
contribution was certain uncompleted oil and gas wells. Carpatsky's
investment has been based on its contributions, which have primarily
been cash. Substantially all of Carpatsky's oil and gas reserves are
attributable to this field. Production operations in the field
initially commenced after completion of the first well in February
1997. The Agreement contemplated both joint venture parties 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., Carpatsky would have a 45% net revenue interest if both
parties have contributed an equal 50% to the joint account). Under the
current operating agreement, the ownership percentage is based on the
capital contributions computed on a quarterly basis. Carpatsky's
investment in the RC field was approximately $4,780,000 at December 31,
1999.
Carpatsky has proportionately consolidated its interest based on
relative ownership interest as of the end of each quarter for both the
Bitkov and RC Field joint arrangements. For the year ended December 31,
1999 and 1998 and March 2000 and 1999 these amounts were 38.8%, 45.0%,
and 39.23%, 45.0%, respectively, for the RC Field. The Bitkov field was
consolidated using 45% for all periods presented.
Ukrnafta holds an exploration and pilot production license to the RC
Field which will expire on March 30, 2003. Unless the exploration
license is converted into a production license, which generally lasts
for 20 years, Carpatsky's rights to continue receiving the proceeds of
production under the joint agreement will terminate when the license
terminates. The granting of a production license is at the discretion
of the government of Ukraine.
F-33
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
Carpatsky's share of net revenues is based on capital contributions to
the joint activity's account and is computed on a quarterly basis.
Based on a recent review of the payments to and withdrawals from the
joint activity's account, Carpatsky notified Ukrnafta that Carpatsky
disagreed with certain of the charges to and withdrawals from the
account. Ukrnafta and Carpatsky are currently negotiating an agreement
to adjust the relative ownership interest of Carpatsky in the joint
activity's account. Carpatsky has proposed to Ukrnafta that the
relative net revenue interest of Carpatsky be set at 45%. Carpatsky
believes that these negotiations will be completed during September
2000. No assurances can be made that Carpatsky will be successful in
these negotiations or the timing of a resolution of this disagreement.
Any change to the relative ownership will be accounted for on a
prospective basis.
Ukrnafta and Carpatsky have verbally agreed to convert the joint
activity agreement and the license covering the RC Field into a
production sharing agreement at the earliest practicable time. Because
the regulations adopted under the production sharing legislation have
not yet been enacted in Ukraine, no assurances can be given as to the
timing of receipt of a production sharing agreement.
If Carpatsky and Ukrnafta are unable to convert the license into a
production sharing agreement, the joint venture will continue to
operate under the license agreement.
3. DEBT
----
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Promissory note, interest at 12%, collateralized by common shares of
CPC, past due ....................................................... $ 355,000 $ 329,000
Series 1 debenture, interest of 12%, collateralized by common shares of
CPC, past due, subordinated to the above promissory note ............ 220,000 220,000
---------- ----------
Total current debt ......................................... 575,000 549,000
Debt converted into common shares in September 1999:
Other Series 1 debentures .................................. -- 780,000
Convertible notes, uncollateralized ........................ -- 1,228,000
---------- ----------
$ 575,000 $2,557,000
========== ==========
</TABLE>
Subsequent to December 31, 1999, the outstanding debt was purchased by
the preferred stockholder from the note holders, and the Promissory
Note with a principal balance of $355,000 was repaid in full.
F-34
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
4. INCOME TAXES:
------------
Carpatsky is delinquent in filing its US and Canadian tax returns. The
amounts presented below may change based on the filing of such tax
returns, but management believes any change would be offset by a
corresponding change in the valuation allowance. As amounts are based
on estimates and subject to change without any expected significant
impact to Carpatsky's financial position, 1998 comparative amounts are
not presented.
Deferred tax assets (liabilities) as of December 31, 1999 are estimated
to be comprised of the following.
<TABLE>
<CAPTION>
1999
----------------------------------------
U.S.
Subsidiary Ukrainian Canadian
Operations Operations Operations
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Current:
Allowance for bad debts .............. $ -- $ 575,000 $ --
Non-Current:
Property basis differences ........... 1,000,000 1,200,000 --
Tax effect of net operating loss
carryforwards ...................... 300,000 -- 900,000
Less valuation allowance ..................... (1,300,000) (1,775,000) (900,000)
----------- ----------- --------
Net deferred tax assets ..................... $ -- $ -- $ --
=========== =========== ========
</TABLE>
Total income tax expense (benefit) differed from the amounts computed
by applying the U.S. statutory tax rates to pre-tax income as follows:
<TABLE>
<CAPTION>
For the Years Ending
December 31,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Total benefit computed by applying the
statutory rate .............................. $(1,808,000) $ (158,000) $(332,000)
Increase in valuation allowance ............... 2,043,000 271,000 332,000
Effect of foreign tax rates ................... 212,000 19,000 --
----------- ----------- --------
Income tax expense ............................ $ 447,000 $ 132,000 $ --
=========== =========== ========
</TABLE>
Income tax expense included in the financial statements represents
amounts payable to the Ukraine government. For Canada and U.S. tax
reporting purposes, Carpatsky has net operating loss carryforwards
(NOL) estimated at approximately $2,000,000 and 900,000, respectively.
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 NOL has
been fully provided for by a valuation allowance.
F-35
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
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 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.
Stock Exchange Compliance Issues - Carpatsky has received notification
from the Venture Capital Stock Exchange (formerly the Alberta Stock
Exchange) that it is noncompliant with the filing of its annual report.
Carpatsky intends to file such information with the inclusion of
December 31, 1999, financial statements in the near future. Until the
annual report is filed and accepted by the Exchange, Carpatsky's common
stock has been delisted and cannot be sold on the public market. While
no claims have been made against Carpatsky, until such time as
Carpatsky's common stock is relisted for sale, Carpatsky may be exposed
to various adverse consequences.
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 one share of
common stock exercisable at $0.20 through December 31, 2000. Officers
and directors of Carpatsky subscribed and paid $475,000 of this private
placement. 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
4,387,904 warrants. In addition, 7,920,000 warrants, which were
previously outstanding to those debtholders and other creditors, were
canceled and re-issued with new terms in connection with these
conversions. The warrants are on the same terms as the private
placement. For certain of these common shares Carpatsky has agreed to
register for resale at its cost.
F-36
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
On December 30, 1999, Carpatsky sold 95.45 million of its preferred
shares and warrants to acquire 12,500,000 common shares to Bellwether
Exploration Company (Bellwether) for $4 million. The warrants are
exercisable at $.20 per share through December 31, 2000. Carpatsky
recognized $336,000 as the implied fair value attributable to the
warrants. (This amount was based upon a Black Scholes Model using the
same assumptions in computing fair values for options [see below]). 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. Furthermore, if Carpatsky issues for any
reason additional shares of voting stock, Bellwether will receive at no
cost a like number of additional shares of preferred stock. However,
any additional preferred shares issued will not be convertible into
common shares. Therefore, the effect of such additional preferred
shares is to enable Bellwether to maintain voting control upon the
issuance of additional voting stock. In connection with this
investment, the Chairman and CEO of Bellwether became the Chairman and
CEO of Carpatsky and three Carpatsky directors retired and were
replaced by three Bellwether appointees, giving Bellwether four of the
current seven directorships of Carpatsky. The funds received were
placed in a company cash account, but Bellwether maintains signing
control over the disbursements.
Common Shares Issued for Services - Based on the success of the private
offering in September, Carpatsky granted an individual 953,333 shares
of common stock, 357,000 warrants (issued on the same terms as the
private placement) valued at $72,500. This individual subsequently
became an officer of Carpatsky (COO) and such amounts were expensed in
operations.
In connection with the Bellwether financing, the COO was granted
2,000,000 shares of common stock which were previously contingent upon
the completion of the Pease merger. These shares were valued at their
estimated fair value of $200,000 for financial reporting purposes.
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 Venture Capital
Stock 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.
F-37
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
The following is a summary of activity under this stock option plan for
the years ended December 31, 1999, 1998, and 1997:
<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 1,622,000 $ .18 1,822,000 $ .21 850,000 $ .14
Granted ................... -- -- 200,000 .20 1,700,000 .22
Canceled .................. -- -- (400,000) .36 -- --
Surrendered ............... 1,422,000) (.18) -- -- -- --
Exercised ................. -- -- -- -- (728,000) .14
---------- ------ ---------- ------ ---------- ------
Outstanding, end of period ..... 200,000 $ .20 1,622,000 $ .18 1,822,000 $ .21
========== ====== ========== ====== ========== ======
</TABLE>
In December 1999, certain officers and directors surrendered 1,422,000
options and were issued an aggregate of 600,000 shares of common stock
which was valued at their estimated fair value of $60,000 for financial
reporting purposes.
For all options granted during 1998 and 1997, the exercise price of
Carpatsky's common stock on the grant date was greater than the market
price. Options which are currently exercisable 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.
F-38
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
Warrants - Carpatsky has also granted warrants and non-qualified
options which are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -----------------------
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 $ 0.25 21,303,415 $ 0.25 3,142,500 $ 0.25
Exercised ............................... -- -- -- -- (773,385) 0.29
Expired ................................. (15,814,300) 0.25 (2,369,115) 0.25 -- --
Canceled ................................ (7,920,000) 0.25 -- -- (773,385) 0.29
Private placement of debt ............... -- -- 4,800,000 0.25 4,000,000 0.25
Granted to:
Brokers and underwriter in
private placements .................. 357,500 0.20 -- -- 1,987,685 0.25
Private placement of common stock ....... 5,000,000 0.20 -- -- 13,720,000 0.25
Granted for conversion of debt .......... 12,307,904 0.20 -- -- -- --
Preferred shareholder ................... 12,500,000 0.20 -- -- -- --
----------- -------- ----------- ------- ----------- --------
Outstanding, end of period .................. 30,165,404 $ 0.20 23,734,300 $ 0.25 21,303,415 $ 0.25
=========== ======== =========== ======== =========== ========
</TABLE>
All warrants 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.
1999 1998 1997
---- ---- ----
Net loss
As reported............... $ (6,090,000) $ (599,000) $ (966,000)
Pro forma................. (6,114,000) (611,000) (1,233,000)
Net loss per common share:
As reported............... (0.12) (0.01) (0.03)
Pro forma................. (0.12) (0.01) (0.03)
The weighted average fair value of options and warrants granted to
employees for the years ended December 31, 1998 and 1997 was $.21 and
$.16, respectively. All options granted in 1998 and 1997 were
exercisable below the market price. The fair value of options and
warrants granted was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
F-39
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
1999 1998 1997
---- ---- ----
Expected volatility .................... 160.0% 154.0% 170.0%
Risk-free interest rate ................ 6.0% 6.0% 6.0%
Expected dividends ..................... -- -- --
Expected terms (in years) .............. 1 3.5 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, 1999, management's best estimate is that
the carrying amount of cash, receivables, notes payable to unaffiliated
parties, accounts payable, and accrued expenses approximates fair value
due to the short maturity of these instruments. However, due to changes
in the Ukraine inflation rate or foreign currency exchange, these
accounts may ultimately be settled at different amounts. Further, the
joint
ventures have a VAT refundable amount 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, since these entities may be similarly
affected by changes in economic or other conditions. Carpatsky does not
obtain collateral from any of its customers. Historically, a
substantial portion of these sales were to an affiliate of Ukrnafta in
the RC field. Sales to this affiliate were approximately 47%, 53%, and
10%, respectively, for the years ended December 31, 1999, 1998, and
1997. As previously discussed, prior to the sale of Carpatsky's gas
on the spot market, the ultimate payment of the joint venture's
receivables were dependent upon payment of this affiliate's customers,
which in the past has resulted in significant delinquencies or
non-payment. As of December 31, 1999, the net receivable balance from
the affiliated entity was not significant, as it has been
substantially reserved as uncollectible.
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 and
Carpatsky and Pease are in the process of finalizing a new amendment to
F-40
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
the agreement in connection with a financing arrangement entered into
by Carpatsky with Bellwether Exploration Company (see Note 6). Pursuant
to the terms of the amended Merger Agreement, the newly combined entity
will have approximately 84.5 million shares outstanding distributed as
follows: approximately 87.5% to Carpatsky's former Carpatsky
shareholders (including Bellwether who would receive 102,410,000 shares
of preferred stock of Pease and assuming these shares were converted
into 28,920,984 common shares); approximately 10.5% to former Pease
Series B Preferred stockholders; and approximately 2.0% to Pease's
current common stockholders. If the merger with Pease is successful,
Bellwether's 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.
The Merger Agreement is still conditioned upon, among other things,
shareholder approvals. However, the Merger Agreement was unanimously
approved by the Boards of Directors of both companies, and the
directors and officers of Pease 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 fee of $250,000 payable by the defaulting company. In addition,
Carpatsky would be required to reimburse Pease for certain accounting
and administrative services provided them under a separate agreement
dated October 1, 1999.
10. OIL AND GAS PRODUCING ACTIVITIES:
--------------------------------
Costs Incurred in Oil and Gas Producing Activities - The following is a
summary of Carpatsky's proportionate costs incurred in oil and gas
producing activities for the years ended December 31, 1999, 1998 and
1997:
1999 1998 1997
---- ---- ----
Property acquisition costs...... $ -- $ -- $ --
Development costs............... 1,768,000 2,441,000 5,672,000
Exploration costs............... -- -- --
--------- ---------- ---------
Total................... $1,768,000 $2,441,000 $5,672,000
========= ========== =========
Full Cost Amortization Expense - Amortization expense amounted to
$1,361,000, $329,000, and $27,000 for the years ended December 31,
1999, 1998, and 1997, respectively. Amortization expense per equivalent
units of natural gas produced (mcfe) amounted to $0.52, $0.60, and
$0.33 per mcfe for the years ended December 31, 1999, 1998, and 1997,
respectively. Oil is converted to equivalent units of natural gas on
the basis of 6 mcf of gas to one barrel of oil.
F-41
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
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 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,
1999, 1998 and 1997.
The reserve estimates are based on Carpatsky's portionate interest as
of year end in its joint ventures (see Note 2 regarding Carpatsky's
ownership interest). Because the current license in the RC field
expires on March 30, 2003, Carpatsky is not permitted to report
reserves expected to be produced from the RC field following that date.
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------- -----------------
Oil Gas Oil Gas Oil Gas
(bbls) (mcf) (bbls) (mcf) (bbls) (mcf)
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Proved reserves, beginning of year ............ 360,000 32,840,000 370,000 31,601,000 375,000 31,612,000
Extensions, discoveries, revisions and other (96,000) (11,081,000) 20,000 2,375,000 -- --
Production .................................. (65,000) (5,926,000) (30,000) (1,136,000) (5,000) (11,000)
----------- ----------- ----------- ----------- -----------
Proved reserves, end of year .................. 199,000 15,833,000 360,000 32,840,000 370,000 31,601,000
=========== =========== =========== =========== =========== ===========
Proved developed reserves, beginning of year .. 47,000 835,000 61,000 207,000 66,000 218,000
=========== =========== =========== =========== =========== ===========
Proved developed reserves, end of year ........ 70,000 7,487,000 47,000 835,000 61,000 207,000
=========== =========== =========== =========== =========== ===========
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows (Unaudited) - Statement
of Financial Accounting Standards No. 69 prescribes guidelines for computing a
standardized measure of future net cash flows and changes therein relating to
estimated proved reserves. 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, the highest tax
applicable assuming offsetting benefits will be available for income taxes paid
in Ukraine. Repatriation taxes of 15% for funds transferred outside Ukraine have
not been considered as such amount ultimately repatriated is not certain.
F-42
<PAGE>
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is Unaudited)
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 computation 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, 1999 and 1998 based on the
standardized measure prescribed in Statement of Financial Accounting Standards
No. 69.
1999 1998
---- ----
Future cash inflows ........................... $ 18,706,000 $ 60,963,000
Future production costs ....................... (8,344,000) (20,112,000)
Future development costs ...................... (3,302,000) (17,090,000)
Future income tax expense ..................... (2,191,000) (8,362,000)
------------ ------------
Future net cash flows ........... 4,869,000 15,399,000
10% annual discount for estimated timing of
cash flow ................................... (1,463,000) (4,620,000)
------------ ------------
Standardized Measure of Discounted Future Net
Cash Flows .................................. $ 3,406,000 $ 10,779,000
============ ============
Changes in Standardized Measure (Unaudited) - The following are the
principal sources of change in the standardized measure of discounted
future net cash flows for the years ended December 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Standardized Measure, beginning of year ............. $ 10,779,000 $ 15,357,000 $ 13,975,000
Sale of oil and gas produced, net of production costs (1,401,000) (461,000) (16,000)
Net changes in prices and production costs .......... (18,427,000) (12,218,000) --
Net changes in estimated development costs .......... 10,667,000 370,000 --
Revisions of previous quantity estimates and other .. (4,225,000) 2,699,000 --
Discoveries, extensions, and other additions ........ -- -- --
Accretion of discount ............................... 1,078,000 1,536,000 1,398,000
Changes in income taxes, net ........................ 4,943,000 3,496,000 --
------------ ------------ ------------
Standardized Measure, end of year ................... $ 3,414,000 $ 10,779,000 $ 15,357,000
============ ============ ============
</TABLE>
F-43
<PAGE>
APPENDIX B
CONFIDENTIAL
June 27, 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 44.96
million shares of common stock plus approximately 102.41 million shares of newly
designated preferred stock to acquire all of the outstanding stock of 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.
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 for each of the
last three fiscal years audited by Hein + Associates and the unaudited
financial statements for each company for the quarter ended March 31,
2000.
f. Reviewed internal financial and capitalization schedules describing
the operations of Pease prepared by Pease management.
B-1
<PAGE>
g. Reviewed reserve reports as of January 1, 1999 and 2000 of Pease oil
and natural gas reserves as prepared by Netherland, Sewell &
Associates, Inc. and dated March 16, 1999, and February 21, 2000
respectively. 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, L.P. and
dated June 21 and 23, 1999. These reports represent the full
contractual interest reserves as well as the paid-in interest reserves
assuming Carpatsky will retain an interest in the RC Field for the
full economic life of the field beyond March 2001. In addition, we
have reviewed reserve reports dated December 31, 1999, 1998 and 1997
of certain leasehold interests of Carpatsky as prepared by Ryder Scott
Company, L.P. and dated May 26, 2000. These latter reports establish
the reserves attributable to Carpatsky's interest in its principal
property under existing arrangements through expiration of those
agreements in 2003. 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.
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.
B-2
<PAGE>
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 revised reserves booked for accounting
purposes in response to SEC comments, (3) the allocation between preferred and
common shareholders of Pease as negotiated by Pease and documented in the
Exchange Agreement and Irrevocable Proxy; (4) the historical cash flows of Pease
and Carpatsky, (5) the conditions of closing of the Merger, (6) the risks
associated with the Merger, (7) the upside potential of the Merger, as described
in the due diligence conducted by Pease management, and (8) 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.
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 of 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
B-3
<PAGE>
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
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, 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.:
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.
D. Grey Merryman, CFA
Vice President
B-4
<PAGE>
APPENDIX C
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.
C-1
<PAGE>
(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.
(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,
C-2
<PAGE>
(b) giving judgment in that amount against the corporation and in favor of
each of those dissenting shareholders, and
(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 favor 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
(b) the realizable value of the corporation's assets would thereby be less
than the aggregate of its liabilities.
C-3
<PAGE>
APPENDIX D
DELAWARE GENERAL CORPORATION LAW
SECTION 262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title, Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof, at the
record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000
holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the
vote of the stockholders of the surviving corporation as provided in
subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares
of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to Section 251, 252, 254, 257, 258, 263 and 264
of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository
receipts in respect thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of
stock (or depository receipts in respect thereof) or
depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities
exchange or designated as a national market system security
on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by
more than 2,000 holders;
D-1
<PAGE>
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs
a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs
a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this title
is not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsection (b) or (c)
hereof that appraisal rights are available for any or all of the shares
of the constituent corporations, and shall include in such notice a
copy of this section. Each stockholder electing to demand the appraisal
of such stockholder's shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand
for appraisal of such stockholder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. A proxy or vote against the
merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, each constituent corporation,
either before the effective date of the merger or consolidation or
within ten days thereafter, shall notify each of the holders of any
class or series of stock of such constituent corporation who are
entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all
shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section;
provided that, if the notice is given on or after the effective date of
the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
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<PAGE>
series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within twenty days after
the date of mailing of such notice, demand in writing from the
surviving or resulting corporation the appraisal of such holder's
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If
such notice did not notify stockholders of the effective date of the
merger or consolidation, either (i) each such constituent corporation
shall send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of
stock of such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to
all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only
be sent to each stockholder who is entitled to appraisal rights and who
has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of
the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the
day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, 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 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
D-3
<PAGE>
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
D-4
<PAGE>
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
D-5
<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 shareholders 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 78.7532 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
---------- -------
2.1 Agreement and Plan of Merger dated August 31, 1999.(3)
2.2 First Amendment to Agreement and Plan of Merger dated December 30,
1999.(4)
2.3 Amended and Restated Agreement and Plan of Merger (draft dated August
__, 2000).
3.1 Articles of Incorporation.(1)
3.2 Certificate of Amendment to the Articles of Incorporation filed on
June 23, 1993.(1)
3.3 Certificate of Amendment to the Articles of Incorporation filed on
June 29, 1993.(1)
3.4 Plan of Recapitalization.(1)
3.5 Certificate of Amendment to the Articles of Incorporation filed on
July 5, 1994.(1)
3.6 Certificate of Amendment to the Articles of Incorporation filed on
December 19, 1994.(1)
II-1
<PAGE>
3.7 Certificate of Amendment to Article IV of the Articles of
Incorporation as filed with the Nevada Secretary of State, increasing
the authorized shares of common stock of Registrant to 40,000,000
shares, $0.10 par value.(5)
3.8 Certificate of Change in Number of Authorized Shares of Common Stock
dated November 18, 1998.(1)
3.9 Bylaws as amended and restated.(1)
3.10 Amended and Restated Articles of Incorporation in the form proposed to
be amended.
3.11 Amendment to the Certificate of Designation of Series B 5% PIK
Cumulative Convertible Preferred Stock.(6)
5.1 Opinion of Alan W. Peryam, LLC as to legality of Pease common and
preferred stock.(2)
5.2 Opinion of McManus Thomson as to certain matters of Canadian law(2).
8.1 Opinion of Haynes and Boone, 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 1993 Stock Option Plan.(1)
10.2 1994 Employee Stock Option Plan.(1)
10.3 Employment Agreement effective December 27, 1994 between Pease Oil and
Gas Company and Patrick J. Duncan.(7)
10.4 Agreement between Beta Capital Group, Inc., and Pease Oil and Gas
Company dated March 9, 1996.(1)
10.5 Form of Warrants issued to Beta Capital Group, Inc.(1)
10.6 1996 Stock Option Plan.(1)
10.7 1997 Long Term Incentive Option Plan (1)
10.8 Preferred Stock Investment Agreement dated December 31, 1997.(1)
10.9 Exploration Agreement dated 1/1/97 between Parallel Petroleum
Corporation, Sue-Ann Production Company, TAC Resources, Inc., Allegro
Investments, Inc., Beta Oil and Gas Company, Pease Oil and Gas
Company, Meyer Financial Services, Inc., Four-Way Texas, LLC regarding
the Ganado Prospect (1)
10.10 Retirement, Severance and Termination of Employment Agreement from
James N. Burkhalter dated 1/1/98 (1)
10.11 Severance and Termination of Employment Agreement effective December
7, 1998 between Willard H. Pease, Jr. and Pease Oil and Gas
Company.(1)
10.12 Confirmation of Employment Contract effective January 11, 1998
between Patrick J. Duncan and Pease Oil and Gas Company.(1)
10.13 Engagement Letter of San Jacinto Securities, Inc. dated September 4,
1998 with Pease Oil and Gas Company.(1)
II-2
<PAGE>
10.14 Securities Purchase Agreement between Carpatsky Petroleum Inc. and
Bellwether Exploration Company, dated December 30, 1999, with
exhibits.
10.15 Bellwether/Carptsky Employment Agreement with Lex Texas dated
June 1, 2000.
23.1 Consent of HEIN + ASSOCIATES LLP with respect to Pease.
23.2 Consent of Ryder Scott Company, L.P.
23.3 Consent of Alan W. Peryam, LLC (included with Exhibits 5.1).(2)
23.4 Consent of Haynes and Boone, 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 Houlihan Smith & Company, Inc.(2)
23.7 Consent of Feleski Flynn (Canadian counsel).(2)
23.8 Consent of Vasil Kisil & Partners.(2)
23.9 Consent of Netherland, Sewell & Associates, Inc.
24 Power of Attorney
27.1 Financial Data Schedule-Pease Oil and Gas Company
27.2 Financial Data Schedule-Carpatsky Petroleum Inc.
99 Letter dated 28 April 2000 to Registrant and Carpatsky Petroleum, Inc.
from Vasil Kisil & Partners and referenced Carpatsky agreements 1-13.
---------------
(1) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998.
(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.
(5) Incorporated by reference to Exhibit 3(i) to Registrant's Form 8-K
dated June 11, 1997.
(6) Incorporated by reference to Exhibit 3.2 to Registrant's Form 8-K
dated December 3, 1997.
(7) Incorporated by reference to Registrant's Annual Report on Form 10-KSB
for the fiscal year ended 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
II-3
<PAGE>
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.
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.
The undersigned Registrant undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it become effective.
II-4
<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 city of Grand
Junction, state of Colorado on August 11, 2000.
PEASE OIL AND GAS COMPANY
(Registrant)
By: /s/ Patrick J. Duncan
---------------------------------
Patrick J. Duncan, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Patrick J. Duncan President and director August 11, 2000
----------------------- (Principal Executive
Patrick J. Duncan Officer, Principal
Financial and
Accounting Officer
Director August 11, 2000
Steve A. Antry
Director August 11, 2000
Stephen L. Fischer
Director August 11, 2000
Homer C. Osborne
Director August 11, 2000
James C. Ruane
Director August 11, 2000
slemons F. Walker
By: /s/ Patrick J. Duncan
------------------------
Attorney-in-Fact
II-5
<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 does 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.
/s/ Doug Manner /s/ Robert Bensh
Douglas G. Manner Robert Bensh
Chief Executive Officer Chief Operating Officer
II-6
<PAGE>
EXHIBIT INDEX
Exhibit No. Document
---------- -------
2.1 Agreement and Plan of Merger dated August 31, 1999.(3)
2.2 First Amendment to Agreement and Plan of Merger dated December 30,
1999.(4)
2.3 Amended and Restated Agreement and Plan of Merger (draft dated August
__, 2000).
3.1 Articles of Incorporation.(1)
3.2 Certificate of Amendment to the Articles of Incorporation filed on
June 23, 1993.(1)
3.3 Certificate of Amendment to the Articles of Incorporation filed on
June 29, 1993.(1)
3.4 Plan of Recapitalization.(1)
3.5 Certificate of Amendment to the Articles of Incorporation filed on
July 5, 1994.(1)
3.6 Certificate of Amendment to the Articles of Incorporation filed on
December 19, 1994.(1)
3.7 Certificate of Amendment to Article IV of the Articles of
Incorporation as filed with the Nevada Secretary of State, increasing
the authorized shares of common stock of Registrant to 40,000,000
shares, $0.10 par value.(5)
3.8 Certificate of Change in Number of Authorized Shares of Common Stock
dated November 18, 1998.(1)
3.9 Bylaws as amended and restated.(1)
3.10 Amended and Restated Articles of Incorporation in the form proposed to
be amended.
3.11 Amendment to the Certificate of Designation of Series B 5% PIK
Cumulative Convertible Preferred Stock.(6)
5.1 Opinion of Alan W. Peryam, LLC as to legality of Pease common and
preferred stock.(2)
5.2 Opinion of McManus Thomson as to certain matters of Canadian law(2).
8.1 Opinion of Haynes and Boone, 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 1993 Stock Option Plan.(1)
10.2 1994 Employee Stock Option Plan.(1)
<PAGE>
10.3 Employment Agreement effective December 27, 1994 between Pease Oil and
Gas Company and Patrick J. Duncan.(7)
10.4 Agreement between Beta Capital Group, Inc., and Pease Oil and Gas
Company dated March 9, 1996.(1)
10.5 Form of Warrants issued to Beta Capital Group, Inc.(1)
10.6 1996 Stock Option Plan.(1)
10.7 1997 Long Term Incentive Option Plan (1)
10.8 Preferred Stock Investment Agreement dated December 31, 1997.(1)
10.9 Exploration Agreement dated 1/1/97 between Parallel Petroleum
Corporation, Sue-Ann Production Company, TAC Resources, Inc., Allegro
Investments, Inc., Beta Oil and Gas Company, Pease Oil and Gas
Company, Meyer Financial Services, Inc., Four-Way Texas, LLC regarding
the Ganado Prospect (1)
10.10 Retirement, Severance and Termination of Employment Agreement from
James N. Burkhalter dated 1/1/98 (1)
10.11 Severance and Termination of Employment Agreement effective December
7, 1998 between Willard H. Pease, Jr. and Pease Oil and Gas
Company.(1)
10.12 Confirmation of Employment Contract effective January 11, 1998
between Patrick J. Duncan and Pease Oil and Gas Company.(1)
10.13 Engagement Letter of San Jacinto Securities, Inc. dated September 4,
1998 with Pease Oil and Gas Company.(1)
10.14 Securities Purchase Agreement between Carpatsky Petroleum Inc. and
Bellwether Exploration Company, dated December 30, 1999, with
exhibits.
10.15 Bellwether/Carptsky Employment Agreement with Lex Texas dated
June 1, 2000.
23.1 Consent of HEIN + ASSOCIATES LLP with respect to Pease.
23.2 Consent of Ryder Scott Company, L.P.
23.3 Consent of Alan W. Peryam, LLC (included with Exhibits 5.1).(2)
23.4 Consent of Haynes and Boone, 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 Houlihan Smith & Company, Inc.(2)
23.7 Consent of Feleski Flynn (Canadian counsel).(2)
23.8 Consent of Vasil Kisil & Partners.(2)
23.9 Consent of Netherland, Sewell & Associates, Inc.
24 Power of Attorney
27.1 Financial Data Schedule-Pease Oil and Gas Company
27.2 Financial Data Schedule-Carpatsky Petroleum Inc.
99 Letter dated 28 April 2000 to Registrant and Carpatsky Petroleum, Inc.
from Vasil Kisil & Partners and referenced Carpatsky agreements 1-13.
---------------
(1) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998.
(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.
(5) Incorporated by reference to Exhibit 3(i) to Registrant's Form 8-K
dated June 11, 1997.
(6) Incorporated by reference to Exhibit 3.2 to Registrant's Form 8-K
dated December 3, 1997.
(7) Incorporated by reference to Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1999.
