-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TpZkWrCuFw3S5S3ps9t+2OE0sxUuUIrGIRk7Geql/CwecLUhTIcqSHMuqhHBVXWO E7UpYS9KsxUF15QxO/lw5A== 0000076878-01-000004.txt : 20010417 0000076878-01-000004.hdr.sgml : 20010417 ACCESSION NUMBER: 0000076878-01-000004 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEASE OIL & GAS CO /CO/ CENTRAL INDEX KEY: 0000076878 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 870285520 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-06580 FILM NUMBER: 1603090 BUSINESS ADDRESS: STREET 1: 751 HORIZON COURT STE 203 STREET 2: P O BOX 60219 CITY: GRAND JUNCTION STATE: CO ZIP: 81506-8718 BUSINESS PHONE: 9702455917 MAIL ADDRESS: STREET 1: 751 HORIZON CT STE 203 STREET 2: P O BOX 60219 CITY: GRAND JUNCTION STATE: CO ZIP: 81506-8758 FORMER COMPANY: FORMER CONFORMED NAME: WILLARD PEASE OIL & GAS CO DATE OF NAME CHANGE: 19920703 10KSB 1 0001.txt DECEMBER 31, 2000 FORM 10-KSB - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 Commission File Number 0-6580 [GRAPHIC OMITTED] PEASE OIL AND GAS COMPANY (Name of small business issuer as specified in its charter) Nevada 87-0285520 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 751 Horizon Court, Suite 203 Grand Junction, Colorado 81506 (Address of principal executive offices) (970) 245-5917 (Issuer's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Par Value $.10 Per Share) Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ The issuer's revenues for its most recent fiscal year were $3,585,245. As of March 30, 2001 the issuer had 1,924,398 shares of its $0.10 par value Common Stock issued and outstanding. Based upon the closing sale price of $1.94 per share on March 30, 2001, the aggregate market value of the common stock, the Registrant's only class of voting stock, held by non-affiliates was $3,279,000. Transitional Small Business Issuer Disclosure Format Yes __ No X ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- TABLE OF CONTENTS
PART I PAGE ITEM 1 BUSINESS 1 History and Overview ........................ 1 Recent Developments ......................... 1 Business Strategy ........................... 1 Operations .................................. 2 Competition ................................. 2 Markets ..................................... 2 Regulations ................................. 2 Operational Hazards and Insurance ........... 4 Business Risks .............................. 4 Administration .............................. 9 ITEM 2 PROPE10IES Principal Oil and Gas Interests ............. 10 Gulf Coast Properties and Prospects ......... 10 Title to Properties ......................... 11 Estimated Proved Reserves ................... 11 Net Quantities of Oil and Gas Produced ...... 12 Drilling Activity ........................... 13 ITEM 3 LEGAL13ROCEEDINGS ITEM 4 SUBMI13ION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ......................... 14 Stockholders ............................ 14 Dividends ............................... 14 Recent Sales of Unregistered Securities . 14 ITEM 6 MANAG15ENT'S DISCUSSION AND ANALYSIS Liquidity and Capital Resources ............. 15 Results of Operations ....................... 16 Other Matters ............................... 20 ITEM 7 FINAN22AL STATEMENTS ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 40 PART III ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 40 ITEM 10 EXECUTIVE COMPENSATION 42 ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 43 ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 45 PART IV ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K 46
PART I ITEM 1 - BUSINESS HISTORY AND OVERVIEW Pease Oil and Gas Company (the "Company") was incorporated in the state of Nevada on September 11, 1968 to engage in the oil and gas acquisition, development and production business. Prior to 1993, the Company conducted business primarily in Western Colorado and Eastern Utah. In August 1993, the Company commenced operating in the Denver-Julesburg Basin ("DJ Basin") of northeastern Colorado through an acquisition which substantially expanded the Company's operations. In the years following the acquisition, the Company invested several million dollars in an effort to exploit the assets acquired and experienced marginal success. The Company initiated efforts in 1996 and 1997 to expand its resource base through the acquisition and exploration of properties located in the Gulf Coast region of southern Louisiana and Texas. During 1998, the Company sold substantially all of its Rocky Mountain oil and gas assets for approximately $3.2 million and now maintains only non-operated interests in three core areas in southern Louisiana and Texas. These assets are discussed more thoroughly below under the caption "Properties and Prospects." RECENT DEVELOPMENTS Debt Restructuring The Company recently restructured $2.4 million, or 86%, of its $2.8 million convertible debentures that were due April 15, 2001. Essentially, the restructured debt has been extended for two years in exchange for a lower conversion price and a higher interest rate. This restructuring, which is discussed in greater detail later in this report (see Footnote 2 of the financial statements beginning on page 30), has substantially improved the Company's working capital and will allow the Company to continue exploiting its prospect inventory in 2001 using its existing funds. Termination of Carpatsky Merger and Restructuring of Death Spiral Preferred Stock The Company previously announced that its proposed merger with Carpatsky Petroleum, Inc. ("Carpatsky") had been terminated on November 7, 2000. Concurrently, the Company exchanged its outstanding Series B Convertible Preferred Stock for a new Series C Preferred eliminating the Series B's hyper-dilutive "death spiral" conversion feature. These transactions, which are discussed in greater detail later in this report (see Footnotes 5 and 6 of the financial statements beginning on page 32), combined with the debt restructuring, has given the Company the opportunity to build upon its existing asset base and actively pursue future growth. 2000 Results The Company has had its best year ever in 2000 with record net income of $1.2 million, or $.66 per share. Net cash provided by operating activities exceeded $2.28 million, representing a 300% increase from 1999. These unprecedented results reflect the restructuring of the convertible death spiral preferred stock, the success with the drilling program that offset declining production, and the higher commodity prices enjoyed in 2000. BUSINESS STRATEGY We participate as a minority, non-operating interest holder in oil and natural gas drilling projects with industry partners. Although we do not operate our properties or originate any exploration prospects, we actively participate in evaluating opportunities presented by our industry partners. Our current and future business strategy will focus on expanding our reserve base and future cash flows by continuing to develop the reserves within our proven properties, exploiting select exploration opportunities and pursuing growth through acquisitions of companies or properties that have proved reserves with developmental potential. For the foreseeable future, our developmental activities, exploration efforts and resources will be focused on our three core areas in the Gulf Coast, which are: 1. The East Bayou Sorrel Field in Iberville Parish, Louisiana, operated by National Energy Group, Inc.; 1 2. The Maurice Field in Vermillion Parish, Louisiana, operated by Amerada Hess Corporation; and 3. The Formosa, Texana and Ganado 3-D seismic exploration prospects, encompassing 130,000 acres in and around Jackson County, Texas, operated by Parallel Petroleum Corporation. OPERATIONS As of December 31, 2000, we had varying ownership interests in 12 gross (1.55 net) non-operated wells located in Southern Louisiana and Texas. The following table presents oil and gas reserve information within our major operating areas (onshore Louisiana and Texas) as of December 31, 2000:
Net Proved Reserves ------------------------------------------------------------------ Bbls Mcf Mcfe (1:6) BOE (6:1) ------- --------- --------- -------- 377,000 1,498,000 3,760,000 627,000
COMPETITION The oil and gas industry is highly competitive in many respects, including identification of attractive oil and gas properties for acquisition, drilling and development, securing financing for such activities and obtaining the necessary equipment and personnel to conduct such operations and activities. We compete with a number of other companies, including large oil and gas companies and other independent operators with greater financial resources and with more experience. Many other oil and gas companies in the industry have financial resources, personnel, and facilities substantially greater than ours. There can be no assurance that 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 crude oil, natural gas and natural gas liquids. We do not currently use commodity futures contracts and price swaps in sales or marketing of natural gas and crude oil. Crude Oil - Oil produced from our properties is generally transported by truck, barge or pipeline to unaffiliated third-party purchasers at the prevailing field price. Currently, the primary purchaser of our proportionate share of crude oil is Plains Marketing, L.P. which bought over 80% of our crude oil production in 2000. The contracts are month-to-month and subject to change. The market for our crude oil is competitive and therefore we do not believe that the loss of one of our primary purchasers would have a material adverse effect on our business because other arrangements could be made to market our crude oil products. We do not anticipate problems in selling future oil production because purchases are made based on current market conditions and pricing. Oil prices are subject to volatility due to several factors beyond our control including: political turmoil; domestic and foreign production levels; OPEC's ability to adhere to production quotas; and possible governmental control or regulation. Natural Gas - We sell, through our operating partners, our natural gas production at the wellhead to various pipeline purchasers or natural gas marketing companies. Our third party operators distribute the corresponding revenues once the funds are received from the purchaser. The wellhead contracts have various terms and conditions, including contract duration. Under each wellhead contract, the purchaser is generally responsible for gathering, transporting, processing and selling the natural gas and natural gas liquids and we receive a net price at the wellhead. REGULATIONS General - All aspects of the oil and gas industry are extensively regulated by federal, state, and local governments in all areas in which we have operations. The following discussion of regulation of the oil and gas industry is 2 necessarily brief and is not intended to constitute a complete discussion of the various statutes, rules, regulations or governmental orders to which our operations may be subject. Price Controls on Liquid Hydrocarbons - There are currently no federal price controls on liquid hydrocarbons (including oil, natural gas and natural gas liquids). As a result, we sell oil produced from our properties at unregulated market prices which historically have been volatile. Federal Regulation of Sales and Transportation of Natural Gas - The transportation and sale of natural gas in interstate commerce was regulated until 1993 pursuant to the Natural Gas Act ("NGA"), the Natural Gas Policy Act of 1978 ("NGPA") and regulations promulgated thereunder. The Natural Gas Wellhead Decontrol Act of 1989 eliminated all regulation of wellhead gas sales effective January 1, 1993. As a result, gas sales are no longer regulated. The transportation and resale in interstate commerce of natural gas we produce continues to be subject to regulation by the Federal Energy Regulatory Commission ("FERC") under the NGA. The transportation and resale of natural gas transported and resold within the state of its production is usually regulated by the state involved. Although federal and state regulation of the transportation and resale of natural gas we produce currently does not have any material direct impact on us, such regulation does have a material impact on the market for our natural gas production and the price we receive for our natural gas production. Adverse changes in the regulation affecting our gas markets could have a material impact on us. Commencing in the mid -1980s and continuing until the present, the FERC promulgated several orders designed to correct market distortions and to make gas markets more flexible and competitive. These orders have had a profound influence on natural gas markets in the United States and have, among other things, increased the importance of interstate gas transportation and encouraged development of a large spot market for gas. In addition to FERC regulation of interstate pipelines under the NGA, various state commissions also regulate the rates and services of pipelines whose operations are purely intrastate in nature. To the extent intrastate pipelines elect to transport gas in interstate commerce under certain provisions of the NGPA, those transactions are subject to limited FERC regulation under the NGPA and may ultimately effect the price of natural gas which we produce and sell. There are many legislative proposals pending in Congress and in the legislatures of various states that, if enacted, might significantly affect the oil and gas industry. We are not able to predict what will be enacted and thus what effect, if any, such proposals would ultimately have on us. State and Local Regulation of Drilling and Production - State regulatory authorities have established rules and regulations requiring permits for drilling, bonds for drilling, reclamation and plugging operations, limitations on spacing and pooling of wells, and reports concerning operations, among other matters. The states in which we have oil and gas interests also have statutes and regulations governing a number of environmental and conservation matters, including the unitization and pooling of oil and gas properties. In addition, a few states also prorate production to the market demand for oil and gas or establish maximum rates of production from certain oil and gas wells. Although none of our wells currently exceed any mandated production limits, these statutes and regulations may limit the rate at which oil and gas could otherwise be produced or the prices obtained from our properties. Also in recent years, political pressure has increased in states where the Company has been active to mandate compensation to surface owners for the effects of oil and gas operations and to increase regulation of the oil and gas industry at the local government level. 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, increase the cost, or even prohibit entirely, future drilling activities. Environmental Regulations - The production, handling, transportation and disposal of oil and gas and by-products are subject to regulation under federal, state and local environmental laws. In most instances, the 3 applicable regulatory requirements relate to water and air pollution control and solid waste management measures or to restrictions of operations in environmentally sensitive areas. However, environmental assessments have not been performed on all of our properties. To date, expenditures for environmental control facilities and for remediation have not been significant in relation to our results of operations. However, it is reasonably likely that the trend in environmental legislation and regulations will continue towards stricter standards and may result in significant future costs to oil and gas producers. For instance, efforts have been made in Congress to amend the Resource Conservation and Recovery Act to reclassify oil and gas production wastes as "Hazardous Waste," the effect of which would be to further regulate the handling, transportation and disposal of such waste. If such legislation were to pass, it could have a significant adverse impact on our operating costs, as well as the oil and gas industry in general. We believe that our operations comply with all applicable legislation and regulations in all material respects, and that the existence of such regulations has had no more restrictive effect on our method of operations than other similar companies in the industry. Although we do not believe our business operations presently impair environmental quality, compliance with federal, state and local regulations which have been enacted or adopted regulating the discharge of materials into the environment could have an adverse effect upon our capital expenditures, earnings and competitive position, the extent of which we are presently unable to assess. We are not aware of any environmental degradation which exists, or the obligation for remediation of which would arise under applicable state or federal environmental laws. We do not maintain a fund for environmental or other similar costs. We would pay any such costs or expenses out of operating capital. OPERATIONAL HAZARDS AND INSURANCE Our operations are subject to the usual hazards incident to the drilling and production of oil and gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution, releases of toxic gas and other environmental hazards and risks. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operations. We maintain insurance of various types to cover 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 event could have a material adverse effect on our financial condition and results of operations. Moreover, no assurance can be given that we will be able to maintain adequate insurance in the future at reasonable rates. BUSINESS RISKS The Company is subject to a number of risks which should be considered by our stockholders and others who may read this report, including the following risk factors, as well as the other information we have included or referenced. The Company has historically suffered operating losses for most, if not all, of the years it has been in existence and it continues to have an accumulated deficit at December 31, 2000. 2000 was the first year ever that the Company had generated any significant net income or any significant operating cash flows. Prior to that, the Company had suffered recurring, and sometimes significant, operating losses. Operating losses for 1998 and 1999 are as follows: o $10.4 million for the year ended December 31, 1998; and o $151,000 for the year ended December 31, 1999. At December 31, 2000 we had an accumulated deficit of approximately $32 million. Although the Company generated an unprecedented operating profit in 2000, we are unable to give any assurances that we will continue to operate profitably in the future. 4 We may 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. Currently, the only known source of capital the Company has to fund its anticipated oil and gas exploration and development activities is through our existing working capital and our future operating cash flows. Historically, we have financed these expenditures primarily with proceeds from the sale of debt and equity securities and with cash from operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity, Capital Expenditures and Capital Resources" elsewhere in this report for a discussion of the Company's anticipated capital budget. We cannot assure you that we will be able to raise capital in the future. If we cannot obtain sufficient additional capital resources if and when it is needed, our operations and financial condition will be adversely affected. We will be subject to the risk of volatile oil and natural gas prices. Our success is highly dependent on prices for oil and gas, which are extremely volatile. Although the prices received in 2000, and those currently expected to be received in 2001 appear favorable, any decline in the price of oil or natural gas would have a material adverse affect on our business. It is important to recegnize that 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 value of our oil and gas properties; and o the profit or loss we incur in exploring for, developing and eploiting 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 o political instability or armed conflict in oil or natural gas producing regions; o the price and level of foreign imports; o the state of the national and international economy and the level of consumer demand; o the price, availability and acceptance of alternative fuels; o the availability of pipeline capacity; o weather conditions; and o domestic and foreign government regulations and taxes. We will not control our oil and gas properties; therefore, we will continue to be dependent upon the various operators of our properties. The Company is not presently the operator of any of its oil or natural gas properties and prospects and these arrangements are expected to continue, at least for the foreseeable future. Thus, we will be unable to control material aspects of commercialization of our principal assets and we will be dependent upon the expertise, diligence and financial condition of the operators of those properties. 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 5 as a result of numerous factors, many of which are beyond our control, including by way of illustration, the following circumstances: o economic conditions; o title problems; o compliance with governmental requirements; o weather conditions; and o shortages and delays in labor, equipment, services and/ or supplies. Some or all of our future drilling activities may not be successful and, if unsuccessful, failure of a single or a few wells 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 of 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; o power shortages; and o equipment failures. Any of these types of hazards and risks can result in the loss of hydrocarbons, environmental pollution, personal injury claims and other damages to property. As protection against such operating hazards, we intend to maintain insurance coverage against some, but not all of these potential risks. We also may elect to self insure in circumstances in which we believe that the cost of insurance, although available, is excessive relative to the risks presented. The occurrence of an event that is not covered, or not fully covered, by third party insurance could have a material adverse 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. This includes 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 environmental protection; o road and pipeline construction; o worker safety regulations; o reports concerning operations; o customs regulations; o spacing of wells; o taxation. o unitization and pooling of properties; o production rates; and 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. 6 We must comply with environmental regulations. Our producing properties and exploratory prospects are subject to the compliance of complex and ever 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 non-producing and undeveloped oil and natural gas reserves in the Gulf Coast area 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 our reserves and our production. Our strategic plan includes increasing our reserve base through exploratory drilling, development and exploitation of our existing properties and acquiring other exploratory or producing properties if we have sufficient capital resources and the acquisition meets certain projected financial guidelines. 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 report represent only estimates. In addition, the historical and projected estimates of future net revenue from proved reserves and the present value thereof are based upon certain assumptions about future production levels, 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 report 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 and natural gas prices at December 31, 2000, with respect to production attributable to our interests in our respective properties. In addition, you should not construe the estimated present value of future cash flow as the current market value of the estimated oil and natural gas reserves attributable to our properties. We have based the estimated discounted future net cash flows from proved reserves included in this report based on prices and costs as of December 31, 2000, in accordance with applicable regulations set forth by the SEC. It should be noted that the actual future prices and costs may be materially higher or lower and that many factors will affect actual future net cash flows, including: o the amount and timing of actual production, o supply and demand for oil and natural gas, o curtailments or increases in consumption by natural gas purchasers, and o changes in governmental regulations or taxation. The timing of the production of oil and natural gas from properties and of the related expenses, affect the timing of actual future net cash flows from proved reserves and thus, their actual present value. In addition, the 10% discount factor, which we are required to use to calculate present value for reporting purposes, is not necessarily the most appropriate discount factor, given actual interest rates at any given time and/or the risks to which the oil and natural gas industry in general are subject. 7 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. Accordingly, our competition could have a material adverse affect on our business. Acquiring interests in other properties involves substantial risks. We intend to evaluate and acquire interests in both proved oil and natural gas properties and exploratory acreage. To acquire producing properties or undeveloped exploratory acreage will require an assessment of a number of factors including: o the potential value of the proved oil or gas properties and the likelihood of future production; o potentially recoverable reserves; o estimated operating costs; o potential environmental and other liabilities; and o potential 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 and the assumptions used in any acquistion may ultimately prove to be inaccurate. Therefore, any unsuccessful acquisition could have a material adverse effect on the Company's financial condition. Our corporate charter includes anti-takeover provisions. Our Board of Directors may issue up to 505,497 shares of 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". Our corporate charter limits director liability. Our articles of incorporation 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 the Company against directors. In addition, the articles of incorporation and our bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Nevada law. It is unlikely we will pay dividends on common stock. The Company has never 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. 8 The market price for our common stock is likely to be volatile and the market for our common stock may not be liquid. If our operating results should be below the expectations of investors or analysts in one or more future periods, it is likely that the price of the common stock would be materially adversely effected. In addition, the stock market has experienced significant price and volume fluctuations that have affected 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. 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. 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. ADMINISTRATION Office Facilities - We currently rent approximately 3,400 square feet on a month-to-month basis in an office facility in Grand Junction, Colorado. The rental rate is $2,400 per month. Employees - As of December 31, 2000, we had three full-time and one part-time employees. None are covered by a collective bargaining agreement. We consider that our relations with our employees is satisfactory. 9 ITEM 2 - PROPERTIES PRINCIPAL OIL AND GAS INTERESTS Developed Acreage - Our producing properties as of December 31, 2000 are located in the following areas shown in the table below:
OIL GAS ---------------- --------------- Gross Net(2) Gross Net(2) Developed Acreage Fields State Wells(1) Wells Wells(1) Wells Gross Net(2) - ------------------ ------- -------- ----- ------- ----- ------- ------ East Bayou Sorrel Louisiana 3 .48 - - 368 59 South Lake Arthur Louisiana - - 1 .20 349 73 Maurice Louisiana - - 1 .08 196 16 Austin Bayou Texas - - 1 .02 88 2 Ganado Texas - - 3 .38 439 55 Texana Texas - - 1 .13 174 22 Formosa Texas - - 2 .26 295 37 ---- ----- -- ----- ------ ----- Grand Total 3 .48 9 1.07 1,909 264 ==== ===== == ===== ====== =====
Footnotes (1) Wells which produce both gas and oil in commercial quantities are classified as "oil" wells for disclosure purposes. (2) "Net" wells and "net" acres refer to our fractional working interests multiplied by the number of wells or number of acres. Substantially all of our producing oil and gas properties are located on leases held by us for as long as production is maintained. Undeveloped Acreage - Our gross and net working interests on undeveloped acreage as of December 31, 2000 is as follows:
Undeveloped Acreage Expiration of Net Acreage(1) -------------------------- ---------------------------- Prospect Description State Gross Net 2001 2002 2003 - -------------------- --------- ------ ----- ------- ------- ------ East Bayou Sorrel Louisiana 90 14 14 - - Maurice Louisiana 495 42 22 5 15 Formosa Texas 9,028 1,129 769 180 180 Texana Texas 7,970 996 - 218 778 ------ ----- ------ ------ ------ Totals 17,583 2,181 805 403 973 ====== ===== ====== ====== ======
(1) Substantially all of these leases had original terms of 2 or 3 years. The table illustrates the year the net acres will expire unless production has been obtained. GULF COAST PROPERTIES AND PROSPECTS Overview - The U.S. Gulf Coast, although it has been actively explored, remains a prolific area with excellent upside potential for exploration due to modern proprietary 3-D seismic surveys. We believe that utilizing the advanced technology of 3-D seismic modeling reduces the inherent risk associated with oil and gas exploration activities and therefore will enhance our ultimate success rate. The use of the 3-D seismic survey fundamentally changes the risk profile of oil and gas exploration by decreasing drilling risks, lowering finding costs and locating reserves not detectable by using traditional methods. The three significant areas where the Company currently participates as a non-operating, minority interest partner utilizing 3-D technology are described below. 10 East Bayou Sorrel - During 1997, the Company acquired a working interest and an after prospect payout ("APPO") leasehold interest in the 1996 discovery of a new oil and gas field, East Bayou Sorrel Field located in Iberville Parish, Louisiana. The production from the three producing wells in this field represented approximately 72% of the Company's production (on a BOE basis) in 2000. The production is being drawn from the CIB Haz 2 and CIB Haz 3 sand formations. The prospect "paid out" effective November 15, 1999 and our working interest increased from 8.9% to 15.6% as a result of owning the APPO. Maurice Field - In 1997, the Company joined Amerada Hess Corporation to drill a discovery well at Maurice Field, Vermilion Parish, Louisiana. Since then, two additional discovery wells have been drilled, however, one of these was lost in late 1999 due to downhole mechanical problems. Based on additional interpretation of a 3-D seismic survey, another well commenced drilling operations in October 2000. In February 2001, this exploratory well was completed in the Bol Mex III sand at a measured depth of 16,370'. However, the initial completion failed to procure a satisfactory cement job at the bottom hole location, and water located below the productive zone was entering the well bore. A workover rig was engaged in April 2001 and recompletion efforts to isolate the water from the production zone are underway as of the date of this report. Based on the results of this well, others may be drilled to fully develop the field. Production from this field represented approximately 13% of the Company's production (on a BOE basis ) in 2000 and is being drawn from the Bol Mex III, Marg Tex and Camerina sand formations. Our working interests in this field range from 6.9% to 9.5%. Formosa, Texana and Ganado Prospects - During 1997, the Company secured a 12.5% working interest in three on-shore upper Gulf Coast 3-D seismic survey projects located in and around Jackson County, Texas. The 3-D surveys cover over 200 square miles (approximately 130,000 acres). The subject lands for these prospect areas lie in close proximity to some prolific productive oil and gas fields which produce from the Frio/Yegua/Wilcox sand intervals. Parallel Petroleum Corporation, headquartered in Midland Texas, operates our interests in the Jackson County properties. Using the 3-D data set, Parallel has generated a multi-year prospect inventory ranging from lower risk/moderate impact prospects to higher risk/higher impact prospects. With the cost of seismic acquisition paid for, most of our future capital expenditure funds can be allocated to data interpretation, drilling and completion activities and leasehold acquisitions. Most of our exploration activities will be focused on this area, at least for the foreseeable future. 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. We also believe that any title exceptions are not so material as to detract substantially from the property economics. In addition, some prospects may be burdened by customary royalty interests, liens incident to oil and gas operations and liens for taxes and other governmental charges as well as encumbrances, easements and restrictions. We do not believe that any of these burdens will materially interfere with our use of the properties. ESTIMATED PROVED RESERVES Our oil and gas reserve and reserve value information is included in footnote 12 of the consolidated financial statements, titled "Oil and Gas Producing Activities." This information is prepared pursuant to Statement of Financial Accounting Standards No. 69, which includes the estimated net quantities of our "proved" oil and gas reserves and the standardized measure of discounted future net cash flows. The estimated proved reserves information is based upon an engineering evaluation by Netherland, Sewell & Associates, Inc. The estimated proved reserves represent forward-looking statements and should be read in connection with the disclosure on forward-looking statements set forth elsewhere in this report. 11 All of our oil and gas reserves are located in the Continental United States. The table below sets forth our estimated quantities of proved reserves, and the present value of estimated future net revenues discounted by 10% per year using prices we were receiving at the end of each of the two fiscal years ending 1999 and 2000 on a non-escalated basis.
Year Ended December 31, 2000 1999 ----------- ----------- Estimated Proved Oil Reserves (bbls) 377,000 334,000 Estimated Proved Gas Reserves (Mcf) 1,498,000 1,359,000 Estimated Future Net Revenues $20,429,000 $ 8,157,000 Present Value of Estimated Future Net Revenues $15,131,000 $ 6,270,000 Prices used to determined reserves: Oil (per Bbl) $ 25.81 $ 24.91 Gas (per Mcf) $ 10.15 $ 2.77
The Company believes that no major discovery or other favorable or adverse event has occurred since December 31, 2000, which would cause a significant change in the estimated proved reserves reported herein. The estimates above are based on year-end pricing in accordance with the SEC guidelines and do not reflect current prices. Since January 1, 2001, no oil or gas reserve information has been filed with or included in any report to any U.S. authority or agency other than the SEC and the Energy Information Administration (EIA). The basis of reporting reserves to the EIA for the company's reserves is identical to that set forth in the foregoing table. As of April 13, 2001, the Company was participating in the drilling of two exploratory wells (owning a 12.5% working interest) in Jackson County, Texas, and the recompletion of one exploratory well (owning a 9.5% working interest) in Vermillion Parish, Louisiana. NET QUANTITIES OF OIL AND GAS PRODUCED Our net oil and gas production for each of the last two years (all of which was from properties located in the United States) was as follows:
Year Ended December 31, 2000 1999 ------ ------ Oil (bbls) 80,000 74,000 Gas (Mcf) 274,000 337,000
The average sales price per barrel of oil and Mcf of gas, and average production costs per barrel of oil equivalent ("BOE") excluding depreciation, depletion and amortization were as follows:
Average Sales Productions Average Year Ended ------------------------------- Production December 31 Oil (Bbls) Gas (Mcf) Per BOE Cost Per BOE - ----------- ---------- --------- ------- ------------ 2000 $ 29.12 $ 4.59 $ 28.55 $ 4.50 1999 $ 17.80 $ 2.46 $ 16.48 $ 3.11
12 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:
2000 1999 ------------ ------------ Wells Drilled Gross Net Gross Net - ------------------- ----- ---- ----- --- Exploratory Oil - - - - Gas 5 .633 3 .27 Non-Productive 2 .254 4 .50 -- ---- -- --- Total 7 .887 7 .77 == ==== == === Development Oil - - - - Gas - - - - Non-Productive - - - - -- ---- -- --- Total - - - - == ==== == ===
ITEM 3 - LEGAL PROCEEDINGS We may from time to time be involved in various claims, lawsuits, disputes with third parties, actions involving allegations of discrimination, or breach of contract incidental to the operation of our business. At December 31, 2000 and as of the date of this report, we were not involved in any litigation which we believe could have a materially adverse effect on our financial condition or results of operations. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matters to a vote of our Security holders during the fourth quarter ended December 31, 2000. 13 Part II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the OTC Bulletin Board market under the symbol "WPOG." Until January 14, 1999, the Company common stock was traded in the Nasdaq Small Cap Market. The following table sets forth the high and low reported closing prices per share of the Company's common stock for the quarterly periods indicated, which correspond to the fiscal quarters for financial reporting purposes.
Common Stock ------------------- High Low 1999: ---- ---- First quarter 1.00 0.41 Second quarter 0.70 0.41 Third quarter 0.63 0.44 Fourth quarter 0.45 0.25 2000: First quarter 0.75 0.28 Second quarter 0.44 0.17 Third quarter 0.63 0.16 Fourth quarter 0.88 0.38
Stockholders - As of January 1, 2001, we had at least 1,274 round-lot registered holders of our common stock and 10 holders of our Series C Preferred stock. Dividends - We have not paid cash dividends on our common stock in the past and do not anticipate doing so in the foreseeable future. Under our Articles of Incorporation, as amended ("Articles"), the Board of Directors has the power, without further action by the holders of the Common Stock, to designate the relative rights and preferences of the Company's Preferred Stock, when and if issued. Such rights and preferences could include preferences as to liquidation, redemption and conversion rights, voting rights, dividends or other preferences, any of which may be dilutive of the interest of the holders of the Common Stock. The Board previously designated Series A Cumulative Convertible Preferred Stock and Series B 5% PIK Cumulative Preferred Stock, none of which is outstanding and all of which has been retired. Recent Sales of Unregistered Securities - The Company issued and sold the following securities without registration under the Securities Act of 1933, as amended ("Securities Act"), during the quarter ended December 31, 2000 and through the date of this report. 1. Effective November 8, 2000, we issued 99,503 shares of Series C Redeemable Cumulative Preferred Stock to six entities. Effective the same date, we also issued stock purchase warrants to 10 entities, including six to which we issued Series C Preferred stock. The warrants entitle the holders to purchase up to 1,763,800 shares of our common stock at $0.50 per share at any time through December 31, 2003. We issued the Series C Preferred, the warrants and $210,833 to the 10 entities in exchange for all outstanding 105,828 shares or our Series B 5% PIK Convertible Preferred Stock which was held by the 10 entities. We canceled the Series B preferred Stock after the exchange. We relied on exemptions from registration included in Sections 3(a)(9) and 4(2) of the Securities Act of 1933 in issuing the securities. Each entity took the securities for investment and the certificates representing the securities bear restrictive legends preventing their transfer except in compliance with the Securities Act. 2. On November 2, 2000, we issued a total of 150,000 shares to our President and CFO as additional compensation. For financial statement reporting purposes, the issuance was recorded at $60,938 (or $.40625 per share) representing the market value of our common stock on the date of grant. The 14 certificates representing the shares bear a restrictive legend prohibiting transfer except in compliance of the Securities Act. 3. Effective December 22, 2000, we issued a total of 34,500 shares to five of our directors as compensation in lieu of cash. The services were provided between September 1, 1999 and December 31, 2000. For financial statement reporting purposes, the issuance was recorded at $21,563 (or $.625 per share) representing the average market value of our common stock on the date the shares were issued. The Certificates representing the shares issued upon conversion bear a restrictive legend prohibiting transfer without registration under the Securities Act or the availability of an exemption from registration. 4. Also on December 22, 2000, we issued a total of 8,500 shares to our three employees for bonuses in lieu of cash. For financial statement reporting purposes, the issuance was recorded at $5,313 (or .625 per share) representing the market value of our common stock on the date of grant. The Certificates representing the shares issued upon conversion bear a restrictive legend prohibiting transfer without registration under the Securities Act or the availability of an exemption from registration. In connection with the issuance of the securities described in 2 through 4 above, we relied upon Section 4(2) of the Securities Act in claiming exemption for the registration requirement of the Securities Act. All of the persons to whom the securities were issued had full information concerning the business and affairs of the Company and acquired the shares for investment purposes. Certificates representing the securities issued bear restrictive legends and stop transfer instructions have been entered prohibiting transfer of the securities except in compliance with applicable securities law. In April 2001, we restructured $2.4 million of our outstanding convertible debentures, which among other things, reduced the conversion price from $30.00 to $1.75. Accordingly, the restructured debentures are convertible into approximately 1.4 million shares of our common stock. Our Articles of Incorporation authorized a total of up to 4.0 million shares of common stock, of which 1.9 million were issued and outstanding on March 30, 2001, and the remaining 2.1 million authorized shares have been reserved for warrants that were issued prior to the debenture restructuring. Accordingly, we are obligated to take appropriate action and seek stockholder approval to increase the number of authorized common stock at the next annual meeting of stockholders so the debenture holders will have the option to convert their securities into common stock sometime in the future. ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, our cash balance was $1,407,769 with a positive working capital position of $1,380,134, compared to a cash balance of $724,354 and a positive working capital position of $922,105 of December 31, 1999. The change in our cash balance is summarized as follows:
Cash balance at December 31, 1999 $ 724,354 Sources of Cash: Cash provided by operating activities 2,284,269 Proceeds from the redemption of certificate of deposit 15,000 ----------- Total sources of cash 2,299,269 ----------- Uses of Cash: Capital expenditures for oil and gas activities (1,398,485) Purchase and retirement of Series B Preferred Stock (210,833) Repayment of long term debt (6,122) Other capital expenditures (414) ----------- Total uses of cash (1,615,854) ----------- Cash balance at December 31, 2000 $ 1,407,769 ===========
The Company generated approximately $2.2 million in cash from operating activities during 2000 principally due to the increased oil and gas prices enjoyed during the year. As discussed more thoroughly later in the Results of Operations section under the caption "Oil and Gas", the average prices received by the Company in 2000 were $29.12 per bbl of oil and $4.59 per Mcf of gas. In addition, the overall financial condition of the Company was significantly improved with the following events: 15 1) the termination fees of $242,411 that have been received, or are anticipated to be received, as a result of the abandoned merger with Carpatsky (this is more thoroughly discussed later in the Results of Operations section under the caption "Abandoned Merger Settlement"); 2) the restructuring of the Series B Preferred Stock in November 2000 which, among other things, ultimately relieved the Company from paying $376,196 of dividends (this restructuring is discussed more detail in Footnote 6 of the financial statements); and 3) the Company recently restructured $2.4 million, or 86%, of its $2.8 million convertible debentures that were due on April 15, 2001. Essentially, the restructured debt has been extended for two years in exchange for a lower conversion price and a higher interest rate (this restructuring is discussed more thoroughly in Footnote 2 of the financial statements). The costs incurred in 2000 for oil and gas activities are summarized as follows (the difference between the total incurred, as illustrated in the following table, and the total amount cash used in 2000, relates to the net increase in the accounts payable for these activities between December 31, 1999 and December 31, 2000).
Program Operator ------------------------------- Internal Category: NEG Parallel AHC Costs Total % ------- -------- --------- -------- ---------- ----- Acquisition of Unproved Properties $ - $398,855 $ 32,248 $ - $ 431,103 27% Exploration costs - 523,055 172,018 15,927 711,000 45% Development and workovers 72,928 - 86,561 - 159,489 10% Capitalized interest - - - 278,250 278,250 18% ------- -------- -------- -------- --------- ----- Total $72,928 $921,910 $290,827 $294,177 $1,579,842 100% ======= ======== ======== ======== ========== ===== Percent 5% 58% 18% 19% 100%
Our current oil and gas assets and prospect areas are summarized as follows: 1. The East Bayou Sorrel Area in Iberville Parish, Louisiana, operated by National Energy Group, Inc. ("NEG"); 2. The Maurice Prospect in Fayetteville Parish, Louisiana, operated by Amerada Hess Corporation ("AHC"); and 3. The Formosa, Texas and Ganado 3-D prospects encompassing 130,000 acres in and around Jackson County, Texas, operated by Parallel Petroleum Corporation ("Parallel"). Although we are non-operator in all of these areas, and therefore do not control the timing of any development or exploration activities, we currently expect the expenditures that will be proposed for these areas by the respective operators through the first quarter of 2002 to be within the following ranges:
Estimated Investment ------------------------ Low End High End Area Operator - -------------------------- --------------------------- ---------- ---------- Formosa, Texana and Ganado Parallel Petroleum, Corp. ("Parallel") $1,649,000 $2,595,000 East Bayou Sorrel National Energy Group, Inc. ("NEG") 305,000 681,000 Maurice Prospect Amerada Hess Corporation ("AHC") 246,000 324,000 ---------- ------------ Total $2,200,000 $3,600,000 ========== ==========
Currently, the only source of capital the Company has to fund its anticipated oil and gas exploration and development activities, is through our existing working capital and our future operating cash flows. Accordingly, given the range of potential capital requirements that may be proposed through the first quarter of 2002, our capital resources may not be sufficient to fund all of the proposed activities. Should this be the case we may: a) seek additional financing, the source or terms which is currently unknown; or b) elect other alternatives including: the sale of existing assets, farming out of specific projects to another party, establishing a joint venture for a particular project, or opting out of a proposed operation or activity. RESULTS OF OPERATIONS Overview Our largest source of operating revenue is from the sale of produced oil, natural gas, and natural gas liquids. Therefore, the level of our revenues and earnings are effected by prices at which natural gas, oil and natural gas liquids are sold. Therefore, our operating results for any prior period are not necessarily indicative of future operating results because of the fluctuations in price and production levels. 16 Oil and Gas Operating statistics for oil and gas production for the periods presented are as follows:
For the Year Ended December 31, ------------------------------- 2000 1999 ----------- ----------- Production: Oil (bbls) 79,937 73,947 Gas (Mcf) 273,940 336,761 BOE (6:1) 125,594 130,074 Average Collected Price: Oil (per bbl) $ 29.12 $ 17.80 Gas (per mcf) $ 4.59 $ 2.46 Per BOE (6:1) $ 28.55 $ 16.48 Operating Margins: Revenue Oil $ 2,327,450 $ 1,316,142 Gas 1,257,795 827,915 ----------- ----------- Total Revenue 3,585,245 2,144,057 Costs Lifting Costs (299,434) (196,283) Production taxes (266,007) (208,614) ----------- ----------- Total Costs (565,441) (404,897) ----------- ----------- Operating Margin $ 3,019,804 $ 1,739,160 =========== =========== Operating Margin Percent 84% 81% Production Costs per BOE before DD&A $ 4.50 $ 3.11 Change in Revenue Attributable to: Production $ (48,181) Price 1,489,369 ----------- Total Increase in Revenue $ 1,441,188 ===========
Discoveries in 2000 During 2000, we participated in the drilling of six exploratory wells located in Jackson County, Texas, within the prospect areas operated by Parallel. Of these six wells, four were productive and two were dry. Three of the discovery wells commenced production in September 2000 and the fourth discovery well was not completed until November 2000. The production from these wells consists principally of natural gas and represented approximately 10% of the Company's total production in 2000 (on an equivalent units of production basis) and approximately 22% of the Company's total gas production in 2000. As previously stated, most of our exploration activities for the foreseeable future will focus on the Jackson County area. Comparison of Oil and Gas Production between 2000 and 1999: Oil - The 5,990 bbl increase in oil production for the year ended December 31, 2000, when compared to the same period in 1999, is primarily attributable to increased production realized by the Company from the wells located in the East Bayou Sorrel field, operated by NEG. The increase in production realized by the Company, is not attributable to an overall increase in the 8/8's production from the wells, but rather an increased interest in the respective wells. On November 15, 1999, the prospect "paid out" and pursuant to the terms of our after prospect payout agreement, our working interest in these wells increased from 8.9% to 15.6% giving us more of the overall 8/8's production subsequent to that date. 17 Gas - The 62,821 Mcf decrease in gas production for the year ended December 31, 2000 when compared to the same period in 1999, is primarily attributable to the Maurice field operations, where: a) we have experienced the natural decline of production inherent in oil and gas operations; and b) the loss of one well in August 1999 due to down-hole mechanical problems. Specifically, the total decrease in our Maurice field gas production in 2000, when compared to 1999, was over 115,740 Mcf. This decrease was partially offset from the new production from the discovery wells in Jackson County, Texas, which collectively, produced over 58,747 Mcf. Comparison of Oil and Gas Revenue between 2000 and 1999: Oil and gas revenue for the year ended December 31, 2000 increased over $1.4 million, when compared to the same period in 1999. This increase in revenue is substantially attributed to the significantly higher prices received for the oil and gas in 2000. We received an average $29.12 per bbl of oil during 2000 compared to $17.80 per bbl for the same period in 1999 - representing a $11.32 per bbl, or 64% increase, in 2000. We received an average price of $4.59 per Mcf of gas during 2000 compared to $2.46 for the same period in 1999 representing a $2.13, or 87% increase, in 2000. Comparison of Oil and Gas Costs between 2000 and 1999: Lifting Costs - The lifting costs increased $103,151 for the year ended December 31, 2000 when compared to the same period in 1999 primarily because of: a) increased water production from the three wells at East Bayou Sorrel. Water disposal fees on an 8/8's basis are charged at a rate of $0.57 per bbl. The average 8/8's water produced from these wells during 2000 was approximately 3,500 bbls per day compared to 2,100 bbls per day during 1999; and b) the increased lifting costs from five additional discovery wells located in Jackson County, Texas that were put on line in 2000. Production Taxes - The production taxes increased $57,393 for the year ended December 31, 2000 when compared to the same period in 1999 primarily because a substantial portion of the production taxes are based on the revenue generated and not on the volume produced. Accordingly, the higher prices received for oil and gas in 2000 have increased the production taxes. Exploration Outlook: An exploratory well in the Maurice prospect located in Vermillion Parish, Louisiana, operated by AHC, commenced drilling operations in October 2000. In February 2001, the well was completed in the Bol Mex III sand at a measured depth of 16,370'. However, the initial completion failed to procure a satisfactory cement job at the bottom hole location and water located below the productive zone was entering the well bore. A workover rig was engaged in April 2001 and recompletion efforts to isolate the water from the production zone were underway as of the date of this report. Based on the success we enjoyed in 2000, we fully expect to continue exploiting our assets within the Jackson County, Texas area for the foreseeable future. We expect as many as twelve (12) Frio and Yegua prospects may be drilled during 2001 within these prospect areas depending on, among other things, weather and rig availability. In addition, Parallel has also announced that a regional study of the Wilcox trend (examining depths between 14,000' and 18,000' below the surface), has recently been completed, where at least twelve (12) Wilcox prospects covering approximately 30,000 acres have been identified. Although the 8/8's costs to drill a Wilcox objective is between $3.0 and $5.0 million, and there is a higher degree of risk associated with depth and reservoir quality, Parallel believes the reserve potential is considerable. Within the regional Wilcox study, at least four (4) of the identified prospects are covered, either in whole or in part, within the Texana Area of Mutual Interest (the "Texana AMI")in which we have a 12.5% working interest. The total acreage within the Texana AMI for the identified Wilcox prospects is over 8,000 acres and we have recently acquired substantially all of our proportionate share of the corresponding leases (with terms of two or three years). This Regional Wilcox study, as it relates to the Texana AMI, appears extremely attractive based on the preliminary studies and may provide our Company with new opportunities in the future. 18 Cautionary Outlook: Approximately 72% of our production for 2000, on a BOE basis, was produced from the three wells located at East Bayou Sorrel. Of that, 54% of the production, on a BOE basis, was produced from the Schwing #1 which averaged, on an 8/8's basis, 1,260 bbls of oil per day and 1,270 Mcf per day for the first nine months of 2000 from the Cib Haz 3 formation. In September 2000, sand began showing up in the production fluids in the Schwing #1 and, in order to mitigate the sand, NEG (the operator of the well) immediately cut the production rate back to approximately 500 bbls per day and 550 Mcf per day. The well produced at this level until late December when the entire well bore sanded up and production ceased. Remedial efforts, utilizing coiled tubing, were attempted to clean out the well bore and restore production, however, those efforts failed. Accordingly, plans are being made to sidetrack the well to an updip location in the productive reservoir. This procedure, if successful, would accomplish two objectives: 1) it would place the new bottom hole location away from the apparently damaged producing interval; and 2) it would relocate the "take point" of this reservoir to an updip location to recover the "attic" oil that could not have been recovered from the present bottom hole location even if the well bore had not sanded up. Although neither the Company or its independent reservoir engineers, Netherland, Sewell and Associates, Inc., believe that the current circumstances impair the existing proved reserves attributable to this well in the Cib Haz 3 formation, the loss of the production will have an immediate and negative impact on the Company's future cash flows until such time remedial efforts can be successfully conducted. Even then, there can be no assurance that the sidetrack, or other potential operations, will ultimately be successful in restoring this interval to sustained production. Should the sidetrack operation, or other remedial procedure, ultimately be unsuccessful, it would have a negative impact on our estimated reserves, future production and future cash flows. The total net reserves attributable to the Cib Haz 3 in the Schwing # 1 as of December 31, 2000, are 58,848 BOE, representing approximately 9% of the Company's total proved reserves. Consulting Arrangement - Related Party In March 1996, the Company entered into a three-year consulting agreement with Beta Capital Group, Inc. ("BCG") located in Newport Beach, California. BCG's chairman, Steve Antry, has been a director of the Company since August 1996. The consulting agreement provided monthly cash payments of $17,500 plus reimbursement for out-of-pocket expenses. Stephen Fischer, an independent contractor for BCG, is also a member of the Company's Board of Directors. Messrs. Antry and Fischer are also principals of Beta Oil & Gas, Inc., a publicly held oil and gas company located in Tulsa, Oklahoma. We have not incurred any costs associated with this consulting agreement since its expiration in February 1999. General and Administrative Total general and administrative ("G&A") expenses decreased $91,258 in 2000 when compared to 1999 primarily as a result of reducing personnel, limiting travel, eliminating unnecessary administrative services and utilizing consultants on an as needed basis. Depreciation, Depletion and Amortization Depreciation, Depletion and Amortization ("DD&A") for the periods presented by cost center consisted of the following:
For the Year Ended December 31, ----------------------- 2000 1999 ---------- ---------- Oil and Gas Properties $ 998,249 $ 985,113 Furniture and Fixtures 19,495 22,402 ---------- ---------- Total $1,017,744 $1,007,515 ========== ========== DD&A for the oil and gas properties, per BOE: $ 7.95 $ 7.57
DD&A for the oil and gas properties is computed using the units-of-production method utilizing only proved reserves at the end of the respective period. 19 ABANDONED MERGER SETTLEMENT On November 8, 2000, the Company announced that its proposed merger with Carpatsky Petroleum, Inc. ("Carpatsky") had been terminated. Pursuant to the terms of the Termination Agreement, as amended, Carpatsky: a) paid the Company $82,411 in cash (in November 2000) for certain accounting and administrative services provided to Carpatsky by the Company between October 1, 1999 and the date of termination; and b) paid the Company an additional $70,000 (in April 2001) and issued a non-interest bearing note in the amount of $180,000 for compensation associated with the failed merger. The note is payable at the earlier of: i) eight equal quarterly installments of $22,500 beginning June 1, 2001; or ii) should Carpatsky raise any debt or equity capital of any kind, they would be obligated to pay the Company $90,000 for each one million raised on a pro-rata basis (up to the total obligation of $180,000). For financial statement reporting purposes, the Company recorded as income all of the cash due and 50% of the note. The Company provided an allowance for bad debt for the remaining 50% of the note based on Carpatsky's current financial condition. INTEREST EXPENSE Total interest incurred, and its allocation, for the periods presented is as follows:
For the Year Ended December 31, ---------------------- 2000 1999 --------- --------- Interest paid or accrued $ 280,156 $ 280,425 Amortization of debt discount 138,236 138,236 Amortization of debt issuance costs 219,337 219,337 --------- --------- Total interest incurred 637,729 637,998 Interest capitalized for exploration activities (278,250) (278,250) --------- --------- Interest expense $ 359,479 $ 359,748 ========= =========
There has been very little change in the total interest incurred when comparing the periods presented because the majority of our debt is represented by the $2.8 million in convertible debentures. The principle balance of the debenture did not change during the periods presented. The total interest capitalized for exploration activities has remained relatively constant when comparing the periods presented since we have, and will continue to, incur costs on our unevaluated oil and gas properties. Interest is being properly capitalized in accordance with FAS 34 and FASB Interpretation No. 33, on the unevaluated oil and gas costs. Interest capitalization on the unevaluated oil and gas costs ceases when the corresponding asset has become evaluated and is ready for its intended use. OTHER MATTERS Disclosure Regarding Forward-Looking Statements This report on Form 10-KSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this report, including, without limitation, statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our financial position, reserve quantities, plans and objectives of the Company's management for future operations and capital expenditures are forward-looking statements and the assumptions upon which such forward-looking statements are based are believed to be reasonable. We can give no assurance that such expectations and assumptions will prove to be correct. Reserve estimates of oil and gas properties are generally different from the quantities of oil and natural gas that are ultimately recovered or found. This is particularly true for estimates applied to exploratory prospects. Additionally, any statements contained in this report regarding forward-looking statements are subject to various known and unknown risks, uncertainties and contingencies, many of which are beyond our control. Such risks and uncertainties may cause actual results, performance, achievements or expectations to differ materially from the anticipated results, performance, achievements or expectations. Factors that may affect such forward-looking statements include, 20 but are not limited to: our ability to generate sufficient cash flow from operations to complete our planned drilling and exploration activities; risks inherent in oil and gas acquisitions, exploration, drilling, development and production; price volatility of oil and gas; competition; shortages of equipment, services and supplies; government regulation; environmental matters; financial condition of the other companies participating in the exploration, development and production of oil and gas programs; and other matters beyond our control. In addition, since all of the prospects in the Gulf Coast are currently operated by another party, we may not be in a position to control costs, safety and timeliness of work as well as other critical factors affecting a producing well or exploration and development activities. All written and oral forward-looking statements attributable to our Company or persons acting on our behalf subsequent to the date of this report are expressly qualified in their entirety by this disclosure. 20 ITEM 7 - FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Independent Auditor's Report.............................................. 23 Consolidated Balance Sheet - December 31, 2000............................ 24 Consolidated Statements of Operations - For the Years Ended December 31, 2000 and 1999............................................................. 25 Consolidated Statements of Stockholders' Equity - For the Years Ended December 31, 2000 and 1999.......................... 26 Consolidated Statements of Cash Flows - For the Years Ended December 31, 2000 and 1999............................................................. 27 Notes to Consolidated Financial Statements................................28-39
21 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, 2000, and the related consolidated statements of operations, redeemable preferred stock and other stockholders' equity and cash flows for the years ended December 31, 2000 and 1999. 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, 2000, and the results of their operations and their cash flows for the years ended December 31, 2000 and 1999 in conformity with generally accepted accounting principles. HEIN + ASSOCIATES LLP Denver, Colorado February 7, 2001, except for Note 2, which is dated April 13, 2001 22 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 2000 ASSETS
CURRENT ASSETS: Cash and equivalents $ 1,407,769 Trade receivables, net of allowance for bad debts of $15,621 634,107 Prepaid expenses and other 60,144 ------------ Total current assets 2,102,020 ------------ OIL AND GAS PROPERTIES, at cost (full cost method): Unevaluated properties 2,600,657 Costs being amortized 19,539,376 ------------ Total oil and gas properties 22,140,033 Less accumulated amortization (15,866,536) ------------ Net oil and gas properties 6,273,497 OTHER ASSETS: Office equipment and vehicle 230,624 Less accumulated depreciation (195,508) ------------ Net office equipment and vehicle 35,116 Note Receivable, net of allowance for bad debt of $90,000 90,000 Debt issuance costs, net of accumulated amortization of $603,082 46,079 Deposits and other 4,995 ------------ Total other assets 176,190 ------------ TOTAL ASSETS $ 8,551,707 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt: Convertible Debenture, net of unamortized discount of $73,113 $ 308,387 Other 6,873 Accounts payable, trade 328,744 Accrued expenses 77,882 ------------ Total current liabilities 721,886 LONG-TERM DEBT, less current maturities, net of unamortized discount of $63,089: 2,410,525 ------------ Total liabilities 3,132,411 CONTINGENCIES (See Notes 4 and 11) ------------ REDEEMABLE PREFERRED STOCK: Series C Preferred Stock, par value $0.01 per share, 99,503 shares authorized, issued and outstanding. (Redeemable for $3,316,767 and a Liquidation preference of $4,975,150 at December 31, 2000) 4,975,150 OTHER STOCKHOLDERS' EQUITY: Undesignated Preferred Stock, par value $0.01 per share, 2.0 million authorized, of which 1,395,000 have been retired, and 99,503 have been designated as Series C Common Stock, par value $0.10 per share, 4,000,000 shares authorized, 1,924,398 shares issued and outstanding. 192,440 Additional paid-in capital 32,519,779 Accumulated deficit (32,268,073) ------------ Total Other Stockholders' equity 444,146 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,551,707 ============
The accompanying notes are an integral part of these consolidated financial statements. 23 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2000 and 1999
2000 1999 ------------ ------------ REVENUE: Oil and gas sales $ 3,585,245 $ 2,144,057 OPERATING COSTS AND EXPENSES: Oil and gas production costs 565,441 404,897 Consulting arrangement-related party - 37,750 General and administrative 754,268 845,526 Depreciation, depletion and amortization 1,017,744 1,007,515 ------------ ------------ Total operating costs and expenses 2,337,453 2,295,688 ------------ ------------ INCOME (LOSS) FROM OPERATIONS 1,247,792 (151,631) OTHER INCOME (EXPENSES): Abandoned merger settlement 242,411 - Interest and other income 57,793 46,105 Interest expense (359,479) (359,748) ------------ ------------ NET INCOME (LOSS) $ 1,188,517 $ (465,274) Net charges associated with the preferred stock - (265,524) ------------ ------------ NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 1,188,517 $ (730,798) ============ ============ BASIC: Earnings (Loss) Per Share $ 0.68 $ (0.43) Weighted Average Shares Outstanding 1,755,000 1,684,000 DILUTED: Earnings (Loss) Per Share $ 0.66 $ (0.43) Weighted Average Shares Outstanding 1,813,000 1,684,000
The accompanying notes are an integral part of these consolidated financial statements. 24 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND OTHER STOCKHOLDERS' EQUITY For the Years Ended December 31, 2000 and 1999
Other Stockholders' Equity ------------------------------------------------------------------------------ Series C Series B Redeemable Convertible Additional Total Other Preferred Stock Preferred Stock Common Stock Paid-In Accumulated Stockholders' Shares Amount Shares Amount Shares Amount Capital Deficit Equity ------ --------- ------- ------ --------- -------- ----------- ------------ ----------- BALANCES, December 31, 1998 - $ - 107,336 $1,073 1,601,062 $160,106 $37,811,006 $(32,991,316) $ 4,980,869 Purchase and retirement of Series B Preferred Stock - - (825) (8) - - (51,305) - (51,313) Issuance of common stock for: Services of Directors in lieu of cash - - - - 42,700 4,270 63,063 - 67,333 Conversion of Series B preferred stock - - (683) (7) 87,636 8,764 (8,757) - - Series B preferred stock dividends - - - - - - (177,816) - (177,816) Net Loss - - - - - - - (465,274) (465,274) ------ --------- ------- ------ --------- -------- ----------- ------------- ----------- BALANCES, December 31, 1999 - - 105,828 1,058 1,731,398 173,140 37,636,191 (33,456,590) 4,353,799 Purchase and retirement of Series B Preferred Stock (6,325) (63) - - (210,770) - (210,833) Preferred Stock Exchange 99,503 4,975,150 (99,503) (995) - - (4,974,155) - (4,975,150) Issuance of common stock for: Bonuses to officer and employees in lieu of cash - - - - 158,500 15,850 50,400 - 66,250 Services of Directors in lieu of cash - - - - 34,500 3,450 18,113 - 21,563 Net Income - - - - - - - 1,188,517 1,188,517 ------ ---------- ------- ------ --------- -------- ----------- ------------ ----------- BALANCES, December 31, 2000 99,503 $4,975,150 - $ - 1,924,398 $192,440 $32,519,779 $(32,268,073) $ 444,146 ====== ========== ======= ====== ========= ======== =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 25 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2000 and 1999
2000 1999 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (loss) $1,188,517 $ (465,274) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 1,017,744 1,007,515 Amortization of debt discount and issuance costs 357,573 357,573 Bad debt expense - 23,710 Loss (Gain) on sale of assets - (968) Issuance of common stock for services 87,813 29,747 Changes in operating assets and liabilities: (Increase) decrease in: Note and other receivable for abandonment of merger (160,000) - Trade receivables (161,260) (6,097) Prepaid expenses and other 3,703 24,338 Increase (decrease) in: Accounts payable 6,836 (147,647) Accrued expenses (56,657) (83,607) ---------- ---------- Net cash provided by (used in) operating activities 2,284,269 739,290 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property, plant and equipment (1,398,899) (933,704) Redemption of certificate of deposit 15,000 70,000 Proceeds from sale of property, plant and equipment - 101,005 ---------- ---------- Net cash provided by (used in) investing activities (1,383,899) (762,699) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Series B preferred stock dividends - (244,653) Purchase and retirement of Series B Preferred Stock (210,833) (51,313) Repayment of long-term debt (6,122) (5,853) ---------- ---------- Net cash provided by (used in) financing activities (216,955) (301,819) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 683,415 (325,228) CASH AND EQUIVALENTS, beginning of year 724,354 1,049,582 ---------- ---------- CASH AND EQUIVALENTS, end of year $1,407,769 $ 724,354 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 280,156 $ 280,425 ========== ========== Cash paid for income taxes $ - $ - ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 26 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, 2000 the principal business of Pease Oil and Gas Company (the "Company") is to participate as a non-operating, minority interest owner in exploration, development, production and sale of oil, natural gas and natural gas liquids. The Company was previously engaged in the processing and marketing of natural gas at a gas processing plant, the sale of oil and gas production equipment and oilfield supplies, and oil and gas well completion and operational services. However, during 1998, the Company's gas processing plant and the oilfield service and supply businesses were sold. The Company 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. Principles of Consolidation - The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and accounts have been eliminated in consolidation. Cash and Equivalents - The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Oil and Gas Properties - The Company's oil and gas producing activities are accounted for using the full cost method of accounting. The Company has one cost center (full cost pool) since all of its oil and gas producing activities are conducted in the United States. Under the full cost method, all costs associated with the acquisition, development and exploration of oil and gas properties are capitalized, including payroll and other internal costs that are directly attributable to these activities. Any internal costs that are capitalized are limited to those costs that can be directly identified with the acquisition, exploration, and development activities undertaken by the Company for its own account, and do not include any costs related to production, general corporate overhead, or similar activities. The total amount of internal costs capitalized in unevaluated oil and gas properties as of December 31, 2000 is $556,450, consisting only of interest. The Company capitalizes interest on its unevaluated oil and gas properties in accordance with FASB Interpretation No. 33. Accordingly, interest is capitalized on oil and gas assets that have been excluded from the full cost amortization pool. The interest that is capitalized becomes part of the related projects or properties and will be subject to amortization when the costs of those corresponding assets are transferred to the amortization pool. For the years ended December 31, 2000 and 1999, capital expenditures include other internal costs of $15,927 and $23,804, 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 evaluated at least annually for impairment and transferred to properties being amortized when either proved reserves are established or the costs are determined to be impaired. When evaluating unproved properties for impaiment, the Company considers, among other factors, historical experience, primary lease terms, the terms of the exploration agreement(s) within an area of mutual interest and the quality of a particular 3-D data set. At December 31, 2000, the Company owned approximately 2,181 net (17,583 gross) undeveloped acres. All of these leases were acquired with either two or three year terms. Unless production has been obtained through exploratory drilling, 805 of the net aces will expire in 2001, 403 net acres will expire in 2002, and 973 net acres will expire in 2003. Substantially all of the undeveloped acreage contain identified exploratory prospects or leads. Should the leases expire prior to an exploratory well being drilled, the value of these properties may be negatively affected. This in turn may have a negative material impact on the Company's future results of operations and/or its financial condition. The carrying value of the undeveloped acreage at 27 December 31, 2000 was $393,393. At December 31, 2000, the Company owns approximately 238 net (1,909 gross) developed acres. Substantially all of the developed acres have terms that allow the Company to hold the lease as long as production is maintained. The capitalized costs related to all evaluated oil and gas properties are amortized using the units of production method based upon production and estimates of proved reserve quantities. Future costs to develop proved reserves, as well as site restoration, dismantlement and abandonment costs, are estimated based on current costs and are also amortized to expense using the units of production method. The capitalized costs of evaluated oil and gas properties (net of accumulated amortization and related deferred income taxes) are not permitted to exceed the full cost ceiling. The full cost ceiling involves a quarterly calculation of the estimated future net cash flows from proved oil and gas properties, using current prices and costs and an annual discount factor of 10%. Accordingly, the full cost ceiling may be particularly sensitive in the near term due to changes in oil and gas prices or production rates. Impairment of Long-Lived Assets - The Company performs an assessment for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If the net carrying value exceeds estimated undiscounted future net cash flows, then impairment is recognized to reduce the carrying value to the estimated fair value. Office Equipment and Vehicle -The office equipment and vehicle are stated at cost. Depreciation for these assets is calculated using the straight-line method over 4 to 7 years which represents the estimated useful lives of the corresponding assets. Depreciation expense related to the office equipment and the one vehicle amounted to $19,495 and $22,402 for the years ended December 31, 2000 and 1999, 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 assets 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 2. 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 effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The actual results could differ from those estimates. The Company's financial statements are based on a number of significant estimates including the allowance for doubtful accounts, assumptions effecting the fair value of stock options and warrants, and oil and gas reserve quantities which are the basis for the calculation of amortization and impairment of oil and gas properties. Management emphasizes that reserve estimates are inherently imprecise and that estimates of more recent discoveries are more imprecise than those for properties with long production histories. Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on previously recorded deferred tax assets and liabilities resulting from a change in tax rates is recognized in earnings in the period in which the change is enacted. Revenue Recognition - The Company recognizes revenues for oil and gas sales upon delivery to the purchaser. Gas imbalances, if they occur, are accounted for using the "sales" method. However, gas imbalances have not been significant in the past and are not expected to be in the foreseeable future. 28 Net Income (Loss) Per Common Share -Net income (loss) per common share is presented in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, which requires disclosure of basic and diluted earnings per share ("EPS"). Basic EPS excludes dilution for potential common shares and is computed by dividing the net (loss) applicable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Basic and diluted EPS are the same in 1999 as all potential common shares were antidilutive. Stock-Based Compensation - For employees, the Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of the Company's common stock at the measurement date (generally, the date of grant) over the amount an employee must pay to acquire the stock. For non-employees, the Company accounts for stock-based compensation as prescribed by SFAS No. 123 titled Accounting for Stock-Based Compensation. This pronouncement requires that all options, warrants and similar instruments which are granted to non-employees for goods and services be recorded at fair value on the measurement 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. The measurement date is generally the earlier of: a) the date in which the performance of the goods or services is fully committed; or b) the date in which the performance is substantially complete. Hedging Activities- In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts), as defined, be recorded in the balance sheet as either an asset or liability measured at fair value, and requires that changes in fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows unrealized gains and losses to be deferred in other comprehensive income for the effective portion of the hedge) until such time as the hedged transaction occurs, and requires that a company formally document, designate, and assess the effectiveness of derivative instruments that receive hedge accounting treatment. The Company currently does not engage in any activities that would be covered by SFAS 133. 2. DEBT FINANCING ARRANGEMENTS: Long-Term Debt - Long-term debt at December 31, 2000 consists of the following:
Convertible debentures, interest at 10%, Original maturity April 2001, senior and unsecured $ 2,782,500 Less unamortized discount (73,113) ----------- Net carrying value 2,709,387 Note payable to bank, interest at 8.5%, monthly payments of $669, due March 2003, collateralized by a vehicle 16,398 ----------- Total long-term debt 2,725,785 Less current maturities, net of unamortized discount (315,260) ----------- Long-term debt, less current maturities $ 2,410,525 ===========
In April 2001, the Company successfully restructured 86%, or $2,401,000, of the outstanding debentures. These debenture holders agreed to extend their maturity date for two years, from April 15, 2001 to April 15, 2003, in exchange for: a) lowering the conversion rate from $30.00 to $1.75; and b) increasing the interest rate from 10% to 11% per annum. Interest will continue to be due and payable on a quarterly basis. The new conversion rate of $1.75 represented the current market rate of the Company's common stock on the date the restructuring plan was accepted by the majority of the debenture holders and formally committed to by the Board of Directors. In addition, the Company agreed that, subject to certain exceptions, it is prohibited from incurring indebtedness that is senior to the Debentures so long as they are outstanding. 29 The Company intends to continue negotiating with the holders of the remaining $381,500 of outstanding debentures that did not elect to participate in the restructuring proposal. However, these amounts have been reflected as a current liability in the Company's balance sheet at December 31, 2000. The $2,401,000 of debentures that were restructured have been classified as long-term debt on the December 31, 2000 balance sheet in accordance with SFAS No. 6 titled "Classification of Short-Term Obligations Expected to be Refinanced". Aggregate maturities of long-term debt, as restructured and excluding the unamortized non-cash discount, are as follows:
Year Ending December 31: 2001 $ 388,373 2002 7,499 2003 2,403,026 ------------- Total $ 2,798,898 ============
In connection with the original issuance of the convertible debentures, the Company issued warrants to purchase 100,000 shares of the Company's common stock. The exercise price of the warrants is $7.50 per share and they expire in March 2001. 3. INCOME TAXES: Deferred tax assets (there are no deferred tax liabilities) as of December 31, 2000 are comprised of the following:
2000 Long-term Assets: ----------- Tax effect of net operating loss carryforwards 9,720,000 Property, plant and equipment 980,000 Tax credit carryforwards 550,000 ----------- Total 11,250,000 Less valuation allowance (11,250,000) Net long-term asset - ===========
During the years ended December 31, 2000, the Company increased the valuation allowance by approximately $174,000, primarily due to an increase in the net operating loss carryforwards which are not considered to be realizable. The Company has provided a valuation allowance for the net operating loss and credit carryforwards based upon the various expiration dates and the limitations which exist under IRS Sections 382 and 384. At December 31, 2000, the Company had net operating loss carryforwards for income tax purposes of approximately $26.0 million, which expire primarily in 2008 through 2020. Some of these net operating losses are subject to limitations under IRS Sections 382 and 384, particularly should a significant number of debenture holders convert into common stock in the future. Additionally, the Company has tax credit carryforwards at December 31, 2000, of approximately $290,000 and percentage depletion carryforwards of approximately $650,000. 4. COMMITMENTS AND CONTINGENCIES: Employment Agreement - During 1994, the Board of Directors approved an employment agreement with the Company's current President/CFO. As more thoroughly discussed in Note 6, Mr. Duncan's employment agreement was amended in November 2000. The agreement , as amended, may be terminated by the officer upon 90 days notice or by the Company without cause upon 30 days notice. In the event of a termination by the Company without cause, the Company would be required to pay the officer one year's salary. If the termination occurs following a change in control, which includes a merger, the Company would be required to make a lump sum payment equivalent to $150,000. 30 Profit Sharing Plan - The Company has established a 401(k) profit sharing plan (the "Plan") that covers all employees with six months of service who elect to participate in the Plan. The Plan provides that the employees may elect to contribute up to 15% of their salary to the Plan. All of the Company's contributions are discretionary and amounted to $962 and $1,351 for the years ended December 31, 2000 and 1999, respectively. Environmental - The Company is subject to extensive Federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Contingencies - The Company may from time to time be involved in various claims, lawsuits, disputes with third parties, actions involving allegations of discrimination, or breach of contract incidental to the operations of its business. The Company is not currently involved in any such incidental litigation which it believes could have a materially adverse effect on its financial conditions or results of operations. 5. ABANDONED MERGER: On November 8, 2000 the Company announced that its proposed merger with Carpatsky Petroleum, Inc. ("Carpatsky") had been terminated. Concurrently, the Company also exchanged its outstanding Series B Convertible Preferred Stock for a new series of Preferred to eliminate the Series B's hyper-dilutive "death spiral" conversion feature. The preferred stock restructuring is more thoroughly discussed in Note 6. Under terms of the original Termination Agreement, Carpatsky paid the Company $82,411 in cash for certain accounting and administrative services provided to Carpatsky by the Company from October 1, 1999 through November 2000; was obligated to issue 1.5 million shares of Carpatsky restricted common stock on or before January 31, 2001; and both companies exchanged broad general releases. The Carpatsky shares were never delivered and the Companies amended the Termination Agreement in April 2001 to eliminate the obligation of Carpatsky to issue the shares and instead provide for an additional cash payment of $70,000 and the delivery of a convertible promissary note in the amount of $180,000. The note is non-interest bearing and is to be repaid in eight equal quarterly installments of $22,500 beginning June 1, 2001. Earlier payment will be required by Carpatsky should they raise additional debt or equity capital. Subject to certain approvals of the Canadian Venture Exchange, the note is convertible into Carpatsky common stock at $.075 Canadian (which is approximately $.05 USD). For financial statement reporting purposes the Company has recorded as a receivable the $70,000 (which was paid in April 2001) and 50% of the non-interest bearing note at December 31, 2000. The other 50% of the note has been reserved for as an allowance for bad debt based on Carpatsky's current financial condition. 6. PREFERRED STOCK AND RESTRUCTURING: The Company has the authority to issue up to 2,000,000 shares of Preferred Stock of which 1,395,000 shares have been retired. The preferred stock may be issued in such series and with such preferences as determined by the Board of Directors. In December 1997, the Board of Directors "designated" 145,300 shares as the Series B 5% PIK Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") and on December 31, 1997, the Company issued 113,333 shares of Series B Preferred Stock for $5,666,650. The Series B Preferred Stock was convertible into common stock at a 25% discount to the market price. This discount feature became hyper-dilutive when the common stock price decreased beginning shortly after its issuance in December 1997. Based on the price of the common stock on September 30, 2000 ($.48 per share) the outstanding Series B could have been converted into approximately 15.5 million shares of common, or over 95% of the common equity after a conversion. Under the proposed terms for the Carpatsky merger, the Series 31 B Preferred Stockholders would have received approximately 10% of the merged entity. In either case, the Company common stockholders would have been left with very little ownership. In addition, it was difficult to value the common stock because the capital structure was so uncertain. Given these circumstances, the Board of Directors determined that the Series B Preferred stock should be replaced or restructured in conjunction with terminating the merger. Following extensive negotiations, six institutional holders, holding approximately 94% of the Series B Preferred stock with a stated value of over $4.97 million, exchanged their Series B for a new class of non-voting, non-convertible, preferred stock designated as the "Series C" Preferred stock. The Series C Preferred must be redeemed, at its stated value, on December 31, 2005. However, the Company may, at its election, redeem the Series C at a 331/3% discount (or approximately $3.13 million if all of it is redeemed), either in whole or in part, through December 31, 2003. The Company redeemed the remaining 6% of the Series B Preferred at a 331/3% discount, or $210,833. Therefore, as of December 31, 2000, there is no outstanding hyper-dilutive Series B Preferred Stock. The Series C Preferred will receive dividends at a rate of 5% per annum starting in the second quarter of 2001. The Company did not pay any dividends on the Series B Preferred stock since September 1, 1999 (when the Plan of Merger was signed with Carpatsky). In connection with this restructuring, all the holders of the Series B Preferred stock have waived all unpaid dividends in arrears. As an inducement for the Series B Preferred stockholders to restructure their investment and grant a discounted redemption feature, the Company issued warrants to acquire up to 1,763,800 shares of common stock exercisable at $0.50 per share. These warrants will expire on December 31, 2003. In conjunction with the restructuring of the outstanding preferred stock and the termination of the merger with Carpatsky, the Board of Directors approved an amended employment agreement for Patrick J. Duncan, the Company's President and CFO. The amended terms of the agreement, which became effective November 2, 2000, include provisions for: 1) a $50,000 cash bonus; 2) the issuance of 150,000 shares of restricted common stock; and a warrant to purchase up to 600,000 shares of the Company's common stock at $0.50 per share, exercisable at the earlier of: (a) December 31, 2004; or (b)(i) as to 300,000 shares, if the Company's reported closing sales price for its common stock is at least $1.50 for at least 80% of the trading days in a one month period (these warrants vested on March 5, 2000), and (ii) as to other 300,000 shares, if the Company's reported closing sales price for its common stock is at least $2.00 for at least 80% of the trading days in a three month period or if the Company entered into a reorganization or merger transaction in which the deemed or actual value received by the Company was equal to or greater than $2.00 per share (these warrants have not yet vested as of the date of this report). In consideration for the cash bonus, Mr. Duncan agreed to reduce his total severance due upon change of control from $197,500 to $150,000. For financial statement reporting purposes, in addition to the cash bonus, the Company recognized a non-cash charge of $60,900 in the fourth quarter of 2000 which represents the fair value of the 150,000 common shares on the date of grant (or $.41 per share). There will be no financial statement impact for the warrants issued since the exercise price was 18.75% higher than the market price on the date of grant. 7. NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS' A reconciliation of net income to net income available to common stockholders is as follows:
2000 1999 ----------- ----------- Net Income (Loss) $ 1,188,517 $ (465,274) Fair value of warrants issued to preferred stockholders (481,612) - Dividends waived by preferred stockholders 376,196 - Gain on redemption of Series B Preferred Stock 105,416 - Dividends declared and paid for the Series B Preferred Stock - (177,817) Dividends in Arrears for the Series B Preferred Stock - (87,707) ----------- ----------- Net Income (Loss) available to common stockholders $ 1,188,517 $ (730,798) =========== ===========
32 8. EARNINGS PER COMMON SHARE The Company follows SFAS No. 128 "Earnings Per Share". Accordingly, "basic" earnings per common share is computed by dividing income available to common stockholders (the "numerator") by the weighted-average number of common shares outstanding (the "denominator") during the periods presented. "Diluted" earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. A reconciliation of the components of basic and diluted net income per common share for the periods presented is as follows:
2000 1999 ---------------------------- ---------------------------- Per Per BASIC Income Shares Share Income Shares Share ---------- --------- ----- --------- --------- ------ Income (Loss) available to common stockholders $1,188,517 1,755,000 $0.68 $(730,798) 1,684,000 $(0.43) EFFECT OF DILUTIVE SECURITIES Warrants and stock options - 58,000 (0.02) - - - ---------- --------- ----- --------- --------- ------ DILUTED Income (Loss) available to common stock including assumed conversions $1,188,517 1,813,000 $0.66 $(730,798) 1,684,000 $(0.43) ========== ========= ===== ========= ========= ======
As of December 31, 2000, there were 2,594,995 options and warrants outstanding. Of that total, 2,388,800 had a dilutive effect on the 2000 earnings per share calculation and resulted in 58,000 incremental weighted average shares outstanding under the method for the year ended December 31, 2000. The remaining 230,525 options were excluded from the calculation of diluted earnings per share in 2000 because they would have been antidilutive. "Diluted" earnings per share in 1999 is identical to the "basic" earnings per share for the same period since the affects of including any potential common shares would have been antidilutive. 9. STOCK BASED COMPENSATION: Stock Option Plans - The Company's shareholders have approved the following stock option plans that authorize an aggregate of 185,732 shares that may be granted to officers, directors, employees, and consultants: 9,000 shares in June 1991; 27,732 shares in June 1993; 15,000 shares in June 1994; 34,000 shares in August 1996; and 100,000 shares in May 1997. The plans permit the issuance of incentive and nonstatutory options and provide for a minimum exercise price equal to 100% of the fair market value of the Company's common stock on the date of grant. The maximum term of options granted under the plan is 10 years and options granted to employees expire three months after the termination of employment. No 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, 2000 and 1999:
2000 1999 ------------------- ------------------- Weighted Weighted Average Average Number Exercise Number Exercise Of Shares Price Of Shares Price --------- -------- --------- -------- Outstanding, beginning of year 64,780 $ 13.86 71,030 $ 13.85 Canceled - - (6,250) 13.75 Expired (22,265) 7.77 - - Granted 25,000 0.50 - - Exercised - - - - --------- -------- --------- -------- Outstanding, end of year 67,515 $ 10.92 64,780 $ 13.86 ========= ======== ========= ========
33 All the options granted in 2000 were issued with exercise prices greater than the market price of the Company's common stock on the date of grant. All options are currently exercisable and if not previously exercised, will expire as follows:
Weighted Year Ended Range of Average December 31, Exercise Prices Exercise Number Low High Price Of Shares ----- ------ ------- --------- 2001 10.00 18.10 $ 12.80 10,015 2002 5.00 29.70 18.35 32,500 2003 0.50 0.50 0.50 25,000 --------- $ 10.92 67,515 =========
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, 2000 and 1999:
2000 1999 ------------------ ------------------- Weighted Weighted Average Average Number Exercise Number Exercise Of Shares Price Of Shares Price --------- -------- --------- -------- Outstanding, beginning of year 230,525 $ 16.21 570,071 $ 40.87 Granted to the Preferred Stockholders' 1,763,800 0.50 - - Granted to Company's President/CFO 600,000 0.50 - - Expired (66,845) 16.30 (339,546) Exercised - - - - --------- --------- Outstanding, end of year 2,527,480 $ 1.45 230,525 $ 16.21 ========= =========
All the warrants and non-qualified options have been issued with exercise prices that were either equal to or greater than the market price on the date of grant. The warrants were valued as follows: a) the warrants granted to the preferred stockholders were valued at their estimated fair value of $481,612 in accordance with SFAS 123 (accordingly this amount is included as a component in the reconciliation between net income and the net income available to common stockholders); and b) the warrants granted to the Company's President/CFO were valued using the intrinsic method (accordingly there was no impact on the Company's statement of operations for 2000 however, the pro forma effect is illustrated below under the caption "Pro Forma Stock-Based Compensation Disclosures"). If not previously exercised, the warrants and non-qualified options will expire as follows:
Weighted Year Ended Range of Average December 31, Exercise Prices Exercise Number Low High Price Of Shares ----- ------ ------- --------- 2001 $7.50 $ 37.10 $ 10.79 98,900 2002 17.50 30.30 22.05 64,780 2003 0.50 0.50 0.50 1,763,800 2005 0.50 0.50 0.50 600,000 --------- $ 1.45 2,527,480 =========
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB Opinion 25 and related interpretations in accounting for stock options and warrants which are granted to employees. Accordingly, no compensation cost has been recognized for grants of options and warrants to employees since the exercise prices were not less than the fair value of the Company's common stock on the grant dates. Had compensation cost been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FAS 123, the Company's net loss and loss per share would have been changed to the pro forma amounts indicated below. 34
Year Ended December 31, ----------------------- 2000 1999 ---------- ----------- Net Income (Loss) applicable to common stockholders: As reported $1,188,517 $ (730,798) Pro forma 1,140,232 (730,798) Net Income (Loss) per common share: As reported $ 0.68 $ (0.43) Pro forma 0.68 (0.43)
The weighted average fair value of options and warrants granted to employees for the year ended December 31, 2000 was $0.33 per share. No options or warrants were granted in 1999. The fair value of each employee option and warrant granted in 1999 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
For the Year Ended December 31, ------------------------------- 2000 1999 ------------ ------------- Expected volatility 152.2% N/A Risk-free interest rate 6.5% N/A Expected dividends - N/A Expected terms (in years) 3.1 N/A
10. 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, 2000, 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. 11. SIGNIFICANT CONCENTRATIONS: Substantially all of the Company's accounts receivable at December 31, 2000, 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, the Company analyzes the entity's net worth, cash flows, earnings, and/or credit ratings. Receivables are generally not collateralized; however, receivables from joint interest owners are subject to collection under operating agreements which generally provide lien rights. Historical credit losses incurred on trade receivables by the Company have been insignificant. For the years ended December 31, 2000 and 1999, the Company had oil sales to a single customer which accounted for 62% and 46% of total revenues, respectively. At December 31, 2000, substantially all of the Company's cash and temporary cash investments were held at a single financial institution. The Company does not maintain insurance to cover the risk that cash and temporary investments with a single financial institution may be in excess of amounts insured by federal deposit insurance. 12. OIL AND GAS PRODUCING ACTIVITIES: Property Acquisitions - In January 1997, the Company completed the acquisition of a 7.8125% after prospect payout working interest in a producing oil and gas prospect in Louisiana. The prospect is operated by National Energy Group, Inc. (NEGX), an independent oil and gas producer. The purchase price was $1,750,000 which consisted of $875,000 in cash and the issuance of 31,500 shares of the Company's common stock with a fair value of $875,000. In February 1997, the Company entered into agreements with unaffiliated parties for the 35 purchase of a 10% working interest in this prospect for $2.5 million. The assets acquired from this acquisition account for 67% of the Company's proved reserves at December 31, 2000. Capitalized Costs Incurred - The following table sets forth the capitalized costs incurred in our oil and gas activities during the last three years:
Description 2000 1999 1998 - ---------------------------------- ---------- --------- ---------- Acquisition of proved properties $ - $ - $ - Acquisition of unproved properties 431,103 76,912 507,307 Exploration 711,000 314,997 5,439,095 Development and workovers 159,489 239,276 13,468 Capitalized interest 278,250 278,250 852,980 ---------- --------- ---------- Total $1,579,842 $ 909,435 $6,812,850 ========== ========= ==========
Unevaluated Oil and Gas Properties - The following table sets forth a summary of oil and gas property costs not being amortized at December 31, 2000, by the year in which such costs were incurred:
Total 2000 1999 1998 1997 ---------- --------- --------- ---------- --------- Property acquisition costs $ 393,393 $ 360,393 $ 33,000 $ - $ - Exploration costs 1,650,814 49,282 53,186 1,008,001 540,345 Capitalized interest 556,450 278,250 278,200 - - ---------- --------- --------- ---------- --------- Total $2,600,657 $ 687,925 $ 364,386 $1,008,001 $ 540,345 ========== ========= ========= ========== =========
All of the Company's unevaluated costs at December 31, 2000 relate to seismic, geological and leasehold costs incurred for the Formosa, Texana and Ganado prospect areas located in Jackson County, Texas. The total prospect area encompasses approximately 130,000 acres. The current status of these prospects is that seismic has been acquired, processed, re-processed, and is being interpreted on an on-going basis. Drilling commenced on these prospects in 1999 and will continue into the foreseeable future. As a result of the original efforts and the reprocessing, six (6) wells were drilled in these prospect areas in 2000 and as of December 31, 2000 an additional twelve (12) "drill ready" prospects and several dozen leads in the Frio and Yegua formations have been identified. As these prospects are drilled sometime in the future, the Company expects that additional prospects and leads will be generated as the information obtained from the new well bores is integrated into the 3-D data set. In addition, Parallel Petroleum, the operator of the prospect areas, initiated a Regional Survey during 2000 of the Wilcox formations (examining depths between 14,000' and 17,500' below the earth's surface) and has identified at least twelve (12) prospects where the reserve potential may be considerable. Five (5) of those Wilcox prospects are located within the Texana and Ganado areas of mutual interest where the Company holds a 12.5% working interest. During 2000 the Company acquired or extended the leases on substantially all of the identified leads and prospects in the Wilcox Play. Most of these leases have a term of two to three years. It is expected additional leases will be acquired in the future as other prospects are identified and leads are evaluated. As a result of the additional leads and prospects generated from the reprocessed seismic and the preliminary results of the Wilcox study, the Company believes that the time needed to fully evaluate these costs will be extended at least to the end of 2002. However, the Company does not expect the delay in the evaluation will have any material negative impact on the valuation of the unevaluated costs. Capitalization of Interest - For the years ended December 31, 2000 and 1999, the Company capitalized interest costs of $278,250, and $278,250, respectively, related to unevaluated oil and gas properties and other exploration activities. Full Cost Ceiling - At December 31, 2000 the Company's full cost ceiling was substantially higher than net value of the evaluated oil and gas properties. Full Cost Amortization Expense - Amortization expense amounted to $998,249 and $985,113 for the years ended December 31, 2000 and 1999, respectively. Amortization expense per equivalent units of oil and gas produced amounted to $7.95 and $7.57 for the years ended December 31, 2000 and 1999 respectively. Natural gas is converted to equivalent units of oil on the basis of six Mcf of gas is equivalent to one barrel of oil. 36 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, 2000 and 1999 are presented below.
2000 1999 ----------- ----------- Oil and gas sales $ 3,585,245 $ 2,144,057 Production costs (565,441) (404,897) Amortization expense (998,249) (985,113) ----------- ----------- Results of operations from oil/gas producing activities $ 2,021,555 $ 754,047 =========== ===========
No provision for income taxes was provided in determining the Results of Operations from Oil and Gas Producing Activities because: a) no income tax expense was incurred during the periods presented; and b) the Company's substantial net operating loss carry-forwards and the tax deductions and tax credits and allowances relating to the Company's proved oil and gas reserves would have eliminated any corresponding tax liability. Oil and Gas Reserve Quantities (Unaudited) - Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those reserves expected to be recovered through existing wells with existing equipment and operating methods. The reserve data is based on studies prepared by the Company's consulting petroleum engineers, 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, 2000 and 1999.
2000 1999 ------------------ ------------------ Oil Gas Oil Gas (Bbls) (Mcf) (Bbls) (Mcf) ------- --------- ------- --------- Proved reserves, beginning of year 334,000 1,359,000 275,000 1,368,000 Purchase of minerals in place - - - - Sale of minerals in place - - - - Extensions, discoveries, and other additions 130,000 534,000 130,000 330,000 Revisions of previous estimates (7,000) (121,000) 3,000 (2,000) Production (80,000) (274,000) (74,000) (337,000) ------- --------- ------- --------- Proved reserves, end of year 377,000 1,498,000 334,000 1,359,000 ======= ========= ======= ========= Proved developed reserves, beginning of year 310,000 648,000 261,000 920,000 ======= ========= ======= ========= Proved developed reserves, end of year 352,000 695,000 310,000 648,000 ======= ========= ======= =========
The downward revisions of "previous estimates" in 2000 were primarily attributable to previously recorded "behind pipe" reserves in two wells in the Maurice field were removed after attempts to recomplete those sand intervals in one of those wells failed in 2000 due to poor porosity and other rock quality factors. The upward revisions of "extensions, discoveries and other additions" in both 2000 and 1999 were primarily attributable to significant extensions of the estimated ultimate recoveries of oil and gas at the East Bayou Sorrel Field. Standardized Measure of Discounted Future Net Cash Flows (Unaudited) - SFAS 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. 37 The assumptions used to compute the standardized measure are those prescribed by the FASB 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, 2000 and 1999 based on the standardized measure prescribed in SFAS No. 69.
2000 1999 ----------- ----------- Future cash inflows $24,936,000 $12,080,000 Future production costs (3,343,000) (3,089,000) Future development costs (1,164,000) (834,000) Future income tax expense - - ----------- ----------- Future net cash flows 20,429,000 8,157,000 10% annual discount for estimated timing of cash flow (5,298,000) (1,887,000) ----------- ----------- Standardized Measure of Discounted Future Net Cash Flows $15,131,000 $ 6,270,000 =========== =========== Average prices used to estimate the reserves: Oil (per bbl) $ 25.81 $ 24.91 Gas (per mcf) $ 10.15 $ 2.77
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, 2000 and 1999:
2000 1999 ----------- ----------- Standardized measure, beginning of year $ 6,270,000 $ 2,951,000 Sale of oil and gas produced, net of production costs (3,020,000) (1,739,000) Sale of minerals in place - - Net changes in prices and production costs 8,023,000 2,504,000 Net changes in estimated development costs (221,000) (245,000) Revisions of previous quantity estimates (235,000) (267,000) Discoveries, extensions and other additions 4,256,000 2,771,000 Accretion of discount 58,000 295,000 ----------- ----------- Standardized Measure, end of year $15,131,000 $ 6,270,000 =========== ===========
38 PART II (Continued) ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE This item is not applicable to the Registrant. PART III ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Directors and Executive Officers The following table sets forth the names and ages of the current directors and executive officers of the Company, the principal offices and positions with the Company held by each person and the date such person became a director or executive officer of the Company. The executive officers of the Company are elected annually by the Board of Directors. The Board of Directors is divided into three approximately equal classes. The directors serve three year terms and until their successors are elected. Each year the stockholders elect one class of directors. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. There are no family relationships between any of the directors and executive officers. In addition, there was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer. The directors and executive officers of the Company are as follows:
Served as Name Age Position Director Since - ------------------ --- -------------------------- -------------- Patrick J. Duncan 38 President, Chief Financial 1995 Officer, and Director Steve A. Antry 45 Director 1996 Stephen L. Fischer 42 Director 1997 Homer C. Osborne 71 Director 1994 James C. Ruane 66 Director 1980 Clemons F. Walker 61 Director 1996
The Company's Board of Directors held 3 meetings during 2000. Two of these were actual meetings at which all directors attended except for James C. Ruane who missed one meeting. The other meeting was held by unanimous written consent. The Company does not have an audit committee. However, the entire board reviews the Company's quarterly and annual financial statements and meets with the Company's independent auditors to review the results of the annual audit and address any accounting matters or questions raised by the auditors. The Company does not have a compensation committee. The entire board will periodically review the compensation of the Company's officers and administer and award options under all the Company's stock option plans. Patrick J. Duncan has been the Company's President since November 1998, the Company's Chief Financial Officer since September 1994, and the Company's Treasurer since March 1996. In addition to managing the day- do-day activities of the Company, Mr. Duncan is responsible for all the financial, accounting and administrative reporting and compliance required by his individual job titles. Mr. Duncan was an Audit Manager with HEIN + ASSOCIATES LLP, Certified Public Accountants, from 1991 until joining the Company as our Controller in April 1994. From 1988 until 1991, Mr. Duncan was an Audit Supervisor with Coopers & Lybrand, Certified Public Accountants. Mr. Duncan received a B.S. degree from the University of Wyoming in 1985. 39 Steve A. Antry is a founder, the President and Chairman of the Board of Directors of Beta Oil and Gas, Inc., a publicly held entity headquartered in Tulsa, Oklahoma. In addition, Mr. Antry founded Beta Capital Group, Inc., a financial consulting firm in November 1992, and was its President through June 1997. Beta Capital Group, Inc. specializes in selecting and working with emerging oil and gas exploration companies which have production and drilling prospects strategic for rapid growth yet also need capital and market support to achieve that growth. Mr. Antry remains Chairman of the Board of Directors of Beta Capital Group, Inc. but resigned as its President to devote his full attention to Beta Oil and Gas. Before forming Beta Capital Group, Inc., Mr. Antry was an officer of Benton Oil & Gas company, from 1989 through 1992, ultimately becoming President of a wholly owned subsidiary. Mr. Antry was a Marketing Director for Swift Energy from 1987 through 1989. Mr. Antry began working in the oil fields in Oklahoma in 1974. He has served in various exploration management capacities with different companies, including Warren Drilling Company, as Vice President of Exploration and Nerco Oil and Gas, a division of Pacific Power and Light, where he served as Western Regional Land Manager. Mr. Antry is a member of the International Petroleum Association of America "IPAA", serving on the Capital Markets Committee and has B.B.A. and M.B.A. degrees from Texas Christian University. Stephen L. Fischer has been the Vice President of Capital Markets of Beta Oil and Gas, Inc. since 1998, and has been Vice President of Beta Capital Group, Inc. since March 1996. From April 1996 through March 1998 he was also a registered representative of Signal Securities, Inc., a registered broker-dealer. Between 1991 and before joining Beta Capital Group, Inc. in 1996, Mr. Fischer was a Registered Representative of Peacock, Hislop, Staley & Given, an Arizona based investment banking firm. Since 1983, Mr. Fischer has held various positions in the financial services industry in investment banking, retail, and institutional sales, with a special emphasis on the oil and gas exploration sector. Homer C. Osborne was an officer and director of Garrett Computing System, Inc., a petroleum engineering and computing firm, from 1967 until 1976, at which time he organized Osborne Oil Company as a wholly-owned subsidiary of Garrett Computing Systems, Inc. Mr. Osborne operated Osborne Oil Company as a separate entity from 1976 until 1998, when he sold the company. Mr. Osborne is currently enjoying retirement. James C. Ruane formerly owned and operated Goodall's Charter Bus Service, Inc., a bus chartering business representing Grey Line in the San Diego area, from 1958 to 2000 when he sold the company. Mr. Ruane has been an oil and gas investor for over 20 years and is currently enjoying retirement. Clemons F. Walker has been an independent financial consultant since August of 1996. Prior to that he was employed as an investment banker and stockbroker. Between 1978 and August 1995, Mr. Walker worked for Wilson Davis in Las Vegas, Nevada when Presidential Brokerage purchased the Wilson Davis office in Las Vegas and he continued to work for the surviving entity until August of 1996. Since 1978, Mr. Walker has focused his efforts in investment banking by supporting small-cap companies through assistance in private placements, public offerings and other capital raising efforts. During his career, Mr. Walker has organized, advised, facilitated, sold and participated in numerous debt and equity transactions (both public and private) in a variety of industries, including the oil and gas industry. Mr. Walker has a bachelor of arts degree in Business Administration from Brigham Young University with a concentration in Finance. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. The following disclosure is based solely upon a review of the Forms 3 and 4 and any amendments thereto furnished to the Company during our fiscal year ended December 31, 2000, and Forms 5 and amendments thereto furnished to us with respect to such fiscal year, or written representations that no Forms 5 were required to be filed by such persons. Based on this review no person who was a director, officer or beneficial owner of more than 10% of the Company's outstanding common stock during such fiscal year filed late reports on Forms 3 and 4. 40 ITEM 10 - EXECUTIVE COMPENSATION Summary Compensation Table The Summary Compensation Table shows certain compensation information for services rendered in all capacities during each of the last three fiscal years by the Chief Executive Officer and those executive officers who received salary, bonus or other compensation in excess of $100,000 (these individuals are collectively referred to herein as the "Named Executive Officers"). The following information for the Named Executive Officers includes the dollar value of base salaries, bonus awards, the number of stock options granted and certain other compensation, if any, whether paid or deferred. SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation Awards(2) ------------------------------- ---------------------------- Other Restricted Securities Name and Principle Annual Stock Underlying Position Year Salary Bonus Compensation Awards Options/SARs(#) - --------------------- ---- -------- ------- ------------ ---------- --------------- Patrick J. Duncan 2000 $ 97,500 $50,000 None 150,000 600,000 President and CFO(1) 1999 $ 97,957 None None None None 1998 $104,370 None None None None Willard H. Pease, Jr. Former President and CEO(3) 1998 $108,303 $25,000 $ 150,000 None None
(1) Mr. Duncan was appointed by the Board of Directors as the Company's President to succeed Mr. Pease. No additional amounts have been shown as Other Annual Compensation because the aggregate incremental cost to us for personal benefits provided to Mr. Duncan did not exceed the lesser of $50,000 or 10% of his annual salary in any given year. (2) At the time of the restructuring of the outstanding preferred stock and the termination of the merger with Carpatsky, the Board of Directors approved and amended employment agreement for Patrick J. Duncan, the Company's President and CFO. The amended terms of the agreement, which became effective November 2, 2000, include provisions for: 1) a $50,000 cash bonus; 2) the issuance of 150,000 shares of restricted common stock, and a warrant to purchase up into 600,000 shares of the Company's common stock at $0.50 per share, exercisable at the earlier of: (a) December 31, 2004; or (b)(i) as to 300,000 shares, if the Company's reported closing sales price for its common stock is at least $1.50 for at least 80% of the trading days in a one month period (these warrants vested on March 5, 2001), and (ii) as to other 300,000 shares, if the Company's reported closing sales price for its common stock is at least $2.00 for at least 80% of the trading days in a three month period or should the Company enter into a reorganization or merger transaction in which the deemed or actual value received by the Company is equal to or greater than $2.00 per share (these warrants had not yet vested as of the date of this report). In consideration for the cash bonus, Mr. Duncan agreed to reduce his total severance due upon change of control from $197,500 to $150,000. (3) Mr. Pease's employment with the Company was terminated in December 1998 . In accordance with his amended employment agreement, Mr. Pease received a cash payment of $150,000 for severance. Option Grants in the Last Fiscal Year The following table provides supplemental information relating to the Company's grants of warrants during 2000 to the executive officers named in the Summary Compensation Table above, including the relative size of each grant, and each grant's exercise price and expiration date. There were no stock options or stock appreciation rights ("SARs") granted during the last fiscal year. 41 Option/SARs Grants in Last Fiscal Year
Individual Grants --------------------------------------------------------- Percent of Total Numbers of Securities Options/SARs Underlying Granted to Employees Exercise or Base Expiration Name Options/SARs(2) Granted (=) in Fiscal Year Price ($/Sh) Date - ----------------- --------------------------- -------------------- ---------------- ---------- Patrick J. Duncan 600,000 96% $0.50 12/31/05
Aggregated Option Exercises in the Last Fiscal Year and the Fiscal Year-End Option Values The table below provides information with respect to the unexercised options to purchase the Company's common stock held by the named executive officers at December 31, 2000. No options were exercised during fiscal 2000. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs Options/SARs at FY-End (#) at FY-End ($) Shares Acquired Exercisable/ Exercisable/ Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable - -------------------------- --------------- ------------------ ------------- ------------- Patrick J. Duncan None None 0/600,000 $ 0/225,000(1) President and CFO
(1) The value of the unexercised In-the-Money Options was determined by multiplying the number of unexercised warrants or options (that were in other money on December 31, 2000) by the closing sales of the Company's common stock on December 31, 2000 (as reported by OTCBB) and from that total, subtracting the total exercise price. Employment Contract As discussed in detail in Note 6 of the financial statements, the Board of Directors amended the Employment Agreement of Patrick J. Duncan on November 2, 2000. The Employment Agreement, among other things, appoints Mr. Duncan as the Company's President and Chief Financial Officer, provides for an annual salary of $97,500 and provides for a severance payment of $150,000 should he be terminated without cause or for a change of control of the Company. Compensation of Directors Directors who are employees or otherwise receive compensation from us do not receive additional compensation for service as directors. Outside directors each receive a $2,500 annual retainer fee, $750 per meeting attended and $100 per meeting conducted via telephone conference. Historically, all fees are paid in the form of the Company restricted common stock but future fees may be paid in cash and/or common stock. In December 2000, the Company issued 34,500 shares of restricted common stock valued at $21,563 to our five non-employee directors as compensation for services from September 1, 1999 though December 31, 2000 in lieu of cash fees. ITEM 11 - SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS The following table sets forth certain information regarding the beneficial ownership of the Company's common stock, its only class of outstanding voting securities as of January 1, 2001, by (i) each of the Company's directors and officers, and (ii) each person or entity who is known to the Company to own beneficially more than 5% of the outstanding common stock with the address of each such person or entity. Beneficial owners listed have sole voting and investment power with respect to the shares unless otherwise indicated. 42 SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
Amount and Nature of Percent of Name of Officer or Director Beneficial Ownership(1) Class (12) - --------------------------- ----------------------- ---------- Steve A. Antry 20,750 Shares (2) 1.08% Patrick J. Duncan 476,064 Shares (3) 21.17% Stephen L. Fischer 20,995 Shares (4) 1.09% Homer C. Osborne 24,759 Shares (5) 1.28% James C. Ruane 41,892 Shares (6) 2.17% Clemons F. Walker 28,985 Shares (7) 1.50% ----------------- ------ All Officers and Directors as a group (six persons) 613,445 Shares (8) 26.90% Kayne Anderson, et al. 1800 Avenue of the Stars Second Floor Loss Angeles, CA 90067 991,717 Shares (9)(10) 34.01% State Street, et al Chase/Chemical Bank A/C State Street Bank & Trust Co. 4 New York Plaza Ground Floor/Receive Window New York, NY 10004 666,667 Shares (9)(11) 25.73% Security Ownership of Series C Preferred Stockholders as a Group (6 entities) 1,658,384 Shares (9)(12) 46.29%(13)
(1) Shares are owned directly and beneficially unless stated otherwise. (2) Includes 15,000 shares that are owned directly by Mr. Antry, and 5,750 shares underlying presently exercisable options. (3) Includes 151,564 shares owned directly by Mr. Duncan, 24,500 shares underlying presently exercisable options, and 300,000 shares underlying presently exercisable warrants. Does not include 300,000 shares underlying warrants which are not presently exercisable. (4) Includes 15,595 shares owned directly by Mr. Fischer, 400 shares owned by his wife and 5,000 shares underlying presently exercisable options. (5) Includes 17,276 shares owned directly by Mr. Osborne and 7,483 shares underlying presently exercisable options. (6) Includes 33,953 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 and 7,483 shares underlying presently exercisable options. (7) Includes 23,235 shares owned directly by Mr. Walker and 5,750 shares underlying presently exercisable options. (8) Includes 262,929 shares owned, directly or indirectly, 55,966 shares underlying presently exercisable options, and 300,000 shares underlying presently exercisable warrants. 43 (9) Percentages and shares shown for the 6 beneficial owners underlying the warrants they received in connection with the surrender of the Series B Preferred Stock in November 2000. (10) The warrants held by four entities which are effectively controlled by Kayne Anderson Investment Management, Inc., a Nevada corporation, a registered investment advisor. The entities which directly own the warrants are Kayne Anderson Diversified Capital Partners, L.P., Arbco Associates, L.P., Kayne Anderson Non-Tradition Investments, and Kayne Anderson Capital Partners, L.P. (11) The warrants are 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. ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Transactions with Beta Capital Group, Inc.- In March 1996, the Company entered into a three-year consulting agreement with Beta Capital Group, Inc. ("BCG"). BCG's president, Steve Antry, has been a director of the Company since August 1996. The consulting agreement with BCG provided for, among other things, minimum monthly cash payments of $17,500 plus reimbursement for out-of-pocket expenses. During 1999, the last year of the agreement, BCG received $35,000 for consulting fees plus $2,750 for reimbursement out-of-pocket expenses pursuant to the terms of consulting agreement. Transactions with Other Directors- In July 1998 our Board of Directors established an Executive Committee designed to manage the significant aspects of our business on a committee basis. Mr. William F. Warnick, a director, was elected as Chairman of the Committee. In exchange for his services in 1998, Mr. Warnick received cash compensation of $44,010 plus $17,966 for reimbursement of out-of-pocket expenses. In 1999, Mr. Warnick received cash compensation of $17,550 plus $6,307 for reimbursement of out-of-pocket expenses. The Executive Committee was dissolved by unanimous vote of the Board of Directors on April 26, 1999 at the request of Mr. Duncan and Mr. Antry because they did not feel the Executive Committee was being utilized and any significant transactions were already being addressed by the full Board. Mr. Warnick resigned as director and Chairman of the Board on September 10, 1999. 44 PART IV ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
Exhibit No. Description and Method of Filing - --- ------------------------------------------------------------------- 3.1 Articles of Incorporation. Incorporated by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. 3.2 Certificate of Amendment to the Articles of Incorporation filed on June 23, 1993. Incorporated by reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1999. 3.3 Certificate of Amendment to the Articles of Incorporation filed on June 29, 1993. Incorporated by reference to Exhibit 3.3 of the Registrant's Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1999. 3.4 Plan of Recapitalization. Incorporated by reference to Exhibit 3.4 of the Registrant's Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1999. 3.5 Certificate of Amendment to the Articles of Incorporation filed on July 5, 1994. Incorporated by reference to Exhibit 3.5 of the Registrant's Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1999. 3.6 Certificate of Amendment to the Articles of Incorporation filed on December 19, 1994. Incorporated by reference to Exhibit 3.4 of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. 3.7 Certificate of Amendment to Article IV of the Articles of Incorporation as filed with the Nevada Secretary of State, increasing the authorized shares of common stock of Registrant to 40,000,000 shares, $0.10 par value. Incorporated by reference to Exhibit 3 of the Registrant's Current Report on Form 8-K dated June 11, 1997. 3.8 Certificate of Change in Number of Authorized Shares of Common Stock dated November 18, 1998. Incorporated by reference to Exhibit 3.8 of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. 3.9 Bylaws as amended and restated. Incorporated by reference to Exhibit 3.9 of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. 4.1 Certificate of Designation of Series C Redeemable 5% Cumulative Preferred Stock. Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated November 8, 2000. 10.1 1993 Stock Option Plan. Incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1999. 10.2 1994 Employee Stock Option Plan. Incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. 45 10.3 Employment Agreement effective December 27, 1994 between Pease Oil and Gas Company and Patrick J. Duncan. Incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. 10.6 1996 Stock Option Plan. Incorporated by reference to 10.6 of the Registrant's Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1999. 10.7 1997 Long Term Incentive Option Plan. Incorporated by reference to Exhibit 10.7 of the Registrant's Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1999. 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. Incorporated by reference to Exhibit 10.9 of the Registrant's Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1999. 10.14 Termination Agreement with Carpatsky Petroleum, Inc. dated November 7, 2000. Incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K dated November 8, 2000. 10.15 Certificate of Designation of Series C Redeemable 5% Cumulative Preferred Stock of Pease Oil and Gas Company, as filed November 8,2000. Incorporated by reference to Exhibit 10.2 of Registrant's Current Report on Form 8-K dated November 8, 2000. 10.16 Preferred Stock Exchange Agreement, dated effective November 1, 2000. Incorporated by reference to Exhibit 10.3 of Registrant's Current Report on Form 8-K dated November 8, 2000. 10.17 Preferred Stock Surrender Agreement, dated effective November 1, 2000. Incorporated by reference to Exhibit 10.4 of Registrant's Current Report on Form 8-K dated November 8, 2000. 10.18 Form of Warrant issued in connection with surrender of Series B Preferred Stock. Incorporated by reference to Exhibit 10.5 of Registrant's Current Report on Form 8-K dated November 8, 2000. 10.19 Amended and Restated Termination Agreement with Carpatsky Petroleum, Inc. dated April 3, 2001. 10.20 Employment Agreement with Patrick J. Duncan dated November 2, 2000. 10.21 Form of Warrant issued to Patrick J. Duncan. 10.22 Promissory Note of Carpatsky Petroleum, Inc. dated April 3, 2001.
(b) Reports on Form 8-K: The Company filed the following reports on Form 8-K for the period October 1, 2000 through march 30, 2001: Item Reported Date Financial Statements ------------- ---------------- -------------------- (1) 5.7 November 8, 2000 None- Not Applicable (2) 5 April 9, 2001 None- Not Applicable 46 SIGNATURES In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PEASE OIL AND GAS COMPANY Date: April 16, 2001 By: /s/ Patrick J. Duncan ----------------------------------------- Patrick J. Duncan Principal Executive Officer and Principal Accounting Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: April 16, 2000 By: /s/ Patrick J. Duncan ----------------------------------- Patrick J. Duncan President, Chief Financial Officer, Director Date: April 16, 2000 By: /s/ Steve A. Antry ----------------------------------- Steve A. Antry, Director Date: April 16, 2000 By: /s/ Stephen L. Fischer ----------------------------------- Stephen L. Fischer, Director Date: April 16, 2000 By: /s/ Homer C. Osborne ----------------------------------- Homer C. Osborne, Director Date: April 16, 2000 By: /s/ James C. Ruane ----------------------------------- James C. Ruane, Director Date: April 16, 2000 By: /s/ Clemons F. Walker ----------------------------------- Clemons F. Walker, Director 47 EX-10.19 2 0002.txt AMENDED TERMINATION AGREEMENT WITH CARPATSKY AMENDED AND RESTATED TERMINATION AGREEMENT THIS AMENDED AND RESTATED TERMINATION AGREEMENT is effective as of the 3rd day of April, 2001, and is by and among PEASE OIL AND GAS COMPANY, a Nevada corporation ("Pease"), its to-be-formed wholly-owned Delaware subsidiary CPI ACQUISITION CORP. ("Acquisition Corp."), CARPATSKY PETROLEUM INC., a corporation organized under the laws of the Province of Alberta, Canada ("Carpatsky") and BELLWETHER EXPLORATION COMPANY, a Delaware corporation ("Bellwether"), and is made with reference to the following agreed facts: 1. Pease, Acquisition Corp. and Carpatsky entered into an Agreement and Plan of Merger, dated August 31, 1999 ("Merger Agreement"); 2. Pease, Acquisition Corp. and Carpatsky entered into the First Amendment to Merger Agreement, dated January 3, 2000 ("First Amendment"); 3. Pease, Acquisition Corp. and Carpatsky negotiated but did not finalize an Amended and Restated Agreement and Plan of Merger, to be dated as of August 11, 2000 ("Amended Merger Agreement"); 4. Pease, Acquisition Corp., Carpatsky and Bellwether then agreed to terminate the Merger Agreement and the First Amendment and to abandon and not finalize the Amended Merger Agreement, to terminate and release the obligations of the parties under the Merger Agreement, the First Amendment and the Amended Merger Agreement (all of which are collectively referred to as the "Merger Agreements"), including any obligations or liabilities of any party hereto which may have been deemed to have arisen under the Merger Agreements, in accordance with the terms and agreements of that certain document entitled Termination Agreement dated the 7th day of November, 2000, between Pease, Acquisition Corp., Carpatsky and Bellwether ("Original Termination Agreement"); 5. Pursuant to the Original Termination Agreement, Carpatsky paid $80,000 to Pease in full satisfaction of the obligations of Carpatsky to Pease for bookkeeping and accounting services provided by Pease for Carpatsky through November 7, 2000. By payment of such amount, that certain Agreement, dated October 1, 1999 terminated and Carpatsky and Pease have each released the other from and against any and all obligations thereunder; and 6. Because certain of the agreements set forth in the Original Termination Agreement could not be timely performed, Pease, Acquisition Corp., Carpatsky and Bellwether hereby agree to amend and restate the Termination Agreement in accordance with the terms and agreements set forth hereinbelow. NOW, THEREFORE, in consideration of the foregoing and the respective covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confirmed, the parties hereto agree as follows: 1. Termination of Agreements. The Merger Agreement, the First Amendment and the Amended Merger Agreement shall each be terminated, and such terminations shall be deemed to be terminations by mutual consent of the parties. Subject to the signature and completion of this agreement, no party shall have any right against any of the other parties to the Merger Agreements or Bellwether as a result of the termination of the Merger Agreements, including any obligations or liabilities of any party which may be deemed to have arisen under the Merger Agreements. Each party shall bear its own costs incurred through the date hereof. 2. Release. Pease and Acquisition Corp., on the one hand, and Carpatsky and Bellwether, on the other hand, hereby release, acquit and forever discharge each other, including their officers, directors, employees, agents, successors, predecessors, assigns, parents, subsidiaries, affiliates, servants, shareholders, partners, attorneys, insurers, past or present, and all persons or entities, natural or corporate, in privity with them or any of them, from any and all obligations, liabilities, claims or causes of action of any kind whatsoever, at common law, statutory or otherwise, known or unknown, past or present, that Pease and Acquisition Corp., on the one hand, and Carpatsky and Bellwether, on the other hand, have or might have against each other arising from or relating to the Merger Agreements, including but not limited to, claims for misrepresentation, whether negligent or intentional, failure to disclose any material fact, and breach of any representation, warranty, or covenant. Pease, Acquisition Corp., Carpatsky and Bellwether hereby acknowledge and agree that (a) Bellwether is a party to and included in this release, notwithstanding the fact that Bellwether is not a party of any of the Merger Agreements, and (b) Carpatsky and Bellwether are releasing Pease and Acquisition Corp., as provided above, but are not releasing each other. 3. Promissory Note from Carpatsky to Pease. Upon acceptance and signature of this agreement by the parties, and as additional consideration to Pease for the matters described in this agreement, effective on the date that this agreement is signed by the parties, Carpatsky shall pay and deliver to Pease the following: On or before April 3, 2001 Carpatsky shall deliver to Pease a convertible promissory note in the form attached hereto as Schedule I, made by Carpatsky in the amount of $180,000 payable to Pease as set forth therein. The principal balance thereof remaining unpaid shall not bear interest. 4. Payments by Bellwether to Pease. Upon acceptance and signature of this agreement by the parties, and as additional consideration to Pease for the matters described in this agreement, effective on the date that this agreement is signed by the parties, Bellwether shall deliver to Pease the following: Bellwether shall pay $70,000 in cash to Pease in full satisfaction of the obligations of Bellwether to Pease. Such payment shall be made to Pease on or before April 3, 2001 by wire transfer of immediately available funds pursuant to written instructions provided to Bellwether by Pease upon execution hereof. Upon receipt of such amount, Bellwether and Pease shall be deemed to have each released the other from and against any and all obligations of whatsoever nature under the Merger Agreements. 5. Authority. This agreement has been duly authorized and approved by each of Pease, Carpatsky and Bellwether. Pease confirms that Acquisition Corp. has never been formed as a corporation. 6. Acknowledgement. Pease, Acquisition Corp., Carpatsky and Bellwether acknowledge that this agreement has been carefully read, understood and considered prior to execution. Each party hereto acknowledges that it has had opportunity to discuss this agreement with counsel of its own choosing prior to execution. Each party further acknowledges that this agreement constitutes the full and complete agreement between the parties, and that in executing this agreement, no party is relying on any representation, statement or warranty not specifically set forth herein. Pease, Acquisition Corp., Carpatsky and Bellwether further agree that the terms of this agreement bind the parties hereto, their successors and assigns. This agreement sets forth the entire agreement and understanding of the parties in respect of the transactions contemplated hereby and supersedes all prior agreements, prior arrangements and prior understandings relating to the subject matter hereof. EX-10.20 3 0003.txt EMPLOYMENT AGREEMENT OF PATRICK J. DUNCAN EMPLOYMENT AGREEMENT THIS AGREEMENT, is effective as of November 2, 2000, by and between Pease Oil and Gas Company, a Nevada corporation ("Corporation"), and Patrick J. Duncan ("Employee"). This Agreement is intended to replace the Employment Agreement dated effective December 27, 1994 as confirmed and modified by a letter agreement dated January 11, 1999, which shall be deemed to be canceled upon the effective date of this Agreement. The Corporation desires to employ the Employee and the Employee desires to be employed by the Corporation upon the terms and conditions set forth in this Agreement. The Parties hereby enter into this Agreement (i) setting forth their mutual promises and understandings and (ii) Mutually acknowledging the receipt and sufficiency of consideration to enter into this Agreement and the mutual promises, conditions and understandings set forth below. I ARTICLE EMPLOYMENT DUTIES AND RESPONSIBILITIES Section 1.1. Employment. The Corporation hereby employs the Employee as the President and Treasurer of the Corporation. The Employee accepts the employment and shall be subject to the Corporation~s Articles of Incorporation, Bylaws and direction from the Board of Directors of the Corporation. Section 1.2. Duties and Responsibilities. The Employee shall be the principal executive officer of the Corporation responsible for the business and affairs of the Corporation and for implementing decisions of the Board of Directors. Section 1.3. Working Facilities. The Employee shall be based in the Grand Junction, Colorado metropolitan area where the Corporation shall provide reasonable office facilities. The Employee agrees to travel to the extent necessary to perform his duties hereunder, including travel to the various properties and field offices of the Corporation. The Corporation shall provide reasonable transportation to perform these duties. Section 1.4. Vacations. The Employee shall be entitled to vacations totaling at least three weeks per year. Any vacation for longer than 10 consecutive business days shall approved by the Board of Directors or an appropriate committee thereof. If the business of the Corporation precludes the Employee from taking all vacation earned during a year, then, with the consent of the Board of Directors, the vacation shall be accrued and available to be taken by the Employee in subsequent years. If the Board of Directors does not consent to such accrual of vacation time, the Corporation shall pay the Employee an amount equal to the number of days of unused vacation times the Employee's equivalent daily compensation. Employee may accrue a maximum of 20 unused vacation days per year. Section 1.5. Expenses. A. Employee Reimbursed for Expenses. During the period of employment pursuant to this Agreement, the Employee will be reimbursed for reasonable expenses incurred for the benefit of the Corporation in accordance with the general policy of the Corporation as adopted from time to time by the Corporation's Board of Directors, and any other expenses specifically approved beforehand by the Board of Directors. Those reimbursable expenses shall include, but shall not be limited to, entertainment and promotional expenses, transportation expenses, and the expenses of membership in certain civic groups and business organizations. Any other reimbursable expenses shall be as set forth on Exhibit A. B. Employee Shall Account for Expenses to Corporation. With respect to any expenses which are to be reimbursed by the Corporation to the Employee, the Employee agrees to make an itemized accounting to the Corporation (i) for proper accounting by the Corporation and (ii) in detail sufficient to entitle the Corporation to an income tax deduction for paid items if deductible. II ARTICLE COMPENSATION Section 2.1. Salary. The Corporation shall pay an initial base salary to the Employee at an annual rate of Ninety-Seven Thousand Five Hundred Dollars ($97,500), payable bi-weekly, in arrears. The Board of Directors shall review the salary of Employee at least annually and may increase the salary if the Board of Directors determines that an increase would be appropriate. In addition, on the later of the date (i) that this Agreement is signed by the Corporation, or (ii) the date on which all shareholders of the Corporation~s Series B 5% PIK Convertible Preferred Stock have formally agreed to exchanged for other securities of the Corporation or surrendered for cancellation, the Corporation shall pay to the Employee a cash bonus of $50,000. Section 2.2. Death During Employment. In the event of the Employee's death during the term of this Agreement the Corporation shall pay to the Employee's surviving souse or, if there is no surviving spouse, to Employee's children on a pro-rata basis to each child, bi-weekly, the compensation which otherwise would be payable to the Employee for a six month period following the Employee's death at the rate of compensation then being paid to Employee. Section 2.3. Benefits. In addition to all other compensation, the Employee shall be entitled to participate in any pension plans, profit sharing plans, medical or dental reimbursement plans, group term or other life insurance plans, medical or hospitalization insurance plans and any other group employee benefit plan which may be established by the Corporation. Such participation shall be in accordance with the terms of any such plan. The Corporation shall pay premiums for and shall include the Employee, his spouse, and dependents in any major medical or hospitalization insurance program established or utilized by the Corporation on behalf of its executive officers if requested to do so by Employee. Section 2.4. Life and Disability Insurance. The Corporation may obtain for its own benefit such amounts of key executive term life insurance on the life of the Employee as it may deem necessary or advisable. The proceeds of this may be used to pay Corporation obligations under Sections 2.2 and 3.6 of this contract; but the Corporation's obligations thereunder shall be absolute. Section 2.5. Automobile Allowance. The Corporation shall pay, or reimburse Employee for, an automobile allowance equal to $1,000 per month. Alternatively, with the approval of the Board of Directors, the Corporation may purchase or lease an automobile for the exclusive use of the Employee at a cost not to exceed $12,000 annually. Section 2.6. Stock Based Compensation. On the later of the date by which (i) that this Agreement is signed by the Corporation, or (ii) the date on which all shareholders of the Corporation~s Series B 5% PIK Convertible Preferred Stock have formally agreed to exchanged for other securities of the Corporation or surrendered for cancellation, the Corporation shall issue and deliver to the Employee the following securities. A. 150,000 shares of the Corporation~s common stock, par value $0.10 per share. The shares shall, at the election of the Corporation, be subject to forfeiture and shall be returned to the Corporation for cancellation if the Employee terminates the employment for reasons other than set forth in Sections 3.2, 3.5, 3.6 or 3.7 below before one year from the date of this Agreement. B. The Corporation~s common stock purchase warrants entitling the Employee to purchase up to a total of 600,000 shares of the Corporation~s common stock, par value $0.10 per share at a purchase price of $0.50 per share, having the terms, conditions, rights and preferences set forth on the warrants which are attached hereto as Exhibits SP-1 and SP-2. In the event that at the time the Warrants become exercisable in accordance with their terms (and the Warrants are surrendered for exercise), the Corporation then has insufficient authorized but unissued common stock to permit the Warrant(s) to be exercised in full, the Corporation shall pay to the Employee, upon surrender of the Warrant(s), an amount of cash equal to the difference between (a) the exercise price of the Warrants and (b) the average closing sales price of the Corporation~s common stock in the public market for the five trading days before the date of surrender, multiplied by (c) the number of shares represented by the Warrant(s) surrendered less the number of authorized but unissued shares of common stock of the Corporation on the date of surrender. III ARTICLE TERM OF EMPLOYMENT AND TERMINATION Section 3.1. Term. This Agreement shall be in effect for a three year term subject to termination in accordance with this Article III (the "Term"). Section 3.2. Termination by the Corporation Without Cause. The Board of Directors, without cause, may terminate this Agreement at any time upon 30 days written notice to the Employee. In such event, the Employee, if requested by the Board of Directors, shall continue to render the services required under this Agreement for 30 days. Within five business days after the last day of Employment, the Corporation shall pay to Employee, a severance payment of $150,000. Section 3.3. Termination by the Employee Without Cause. The Employee, without cause, may terminate this Agreement upon 90 days written notice to the Corporation. In such event, the Employee shall, if requested by the Corporation, continue to render the services required under this Agreement to the date identified in the Employee's written notice. The Employee shall continue to be paid compensation at the rate set forth in Exhibit B of this Agreement for at least 30 days and thereafter through the earlier of (i) the date identified in the Employee's written notice or (ii) the date through which the Employee furnishes services at the request of the Corporation, and no further payments shall be made by the Corporation unless agreed to by the Board of Directors. Section 3.4. Termination by the Corporation With Cause. The Corporation may terminate the Employee's employment for cause, which shall be limited to the following: (a) the Employee's knowing and willful or reckless commission of an act of gross misconduct which the Employee knows or reasonably should have known at the time would be injurious to the Corporation, and did in fact materially injure the Corporation; or (b) the Employee's refusal to devote substantially all his time and efforts to his duties under this Agreement after the Board of Directors has notified the Employee in writing of his noncompliance; or (c) the Employee's continued refusal, after written notice from the Board of Directors to follow the specific instructions of the Board of Directors, unless the instructions would cause the Employee or the Corporation to be in violation of the law or applicable regulations or would not be in the best interests of the Corporation or its stockholders. Termination pursuant to this subsection shall result in no further compensation being due or payable to the Employee hereunder from and as of the date of such termination. Section 3.5. Termination Upon Death of Employee. Subject to Section 2.2 of this Agreement, this Agreement shall be terminated in the event of the Employee's death. Section 3.6. Termination Upon Disability of Employee. The Corporation may terminate the Employee's employment if, during the Term, the Employee becomes physically or mentally disabled, whether totally or partially, so that the Employee is unable substantially to perform his services under this Agreement (i) for a period of three consecutive months or (ii) for shorter periods aggregating four months during any twelve month period, by written notice to the Employee. Notwithstanding any such disability, the Corporation shall continue to pay the Employee the greater of (a) his full salary up to and including the date of such termination and for six months thereafter, or (b) any amounts payable to Employee under any disability or similar insurance. Section 3.7. Termination Upon Change of Control. Notwithstanding the provisions of Section 3.2, if the Employee is terminated as a direct or indirect result of either (i) actions taken by the Board of Directors following the replacement of more than 50% of the members of the Board of Directors in any 15 month period which were opposed by a majority of the directors before the replacement or (ii) a shareholder or group of shareholders or a person acting on behalf of shareholders increasing his, hers, their or its ownership of the Corporation's outstanding stock by more than 20% within a 12 month period, or if Employee voluntarily terminates his employment within six months following the time when either (i) or (ii) above occur, then the Employee shall be paid a lump sum of $150,000 as a severance payment as of the date of the termination. Upon such a change of control, as defined in this Section 3.7, at Employee's option, the Corporation shall immediately repurchase any outstanding shares of the Corporation's stock which are held by Employee at the per share price equal to the greater of (a) the price paid per share by Employee when Employee acquired the shares, or (b) the fair market value of the stock repurchased at the date of termination. If the Corporation does not pay the amount specified by this Section 3.7 on a timely basis, the unpaid amount shall bear interest at the greater of 10% per annum or the prime rate at Wells Fargo Bank in Denver, Colorado, on the date of such termination until paid and the Corporation shall pay all costs and expenses, including attorney's fees, incurred by the Employee in collecting all amounts owed under this Section 3.7. Any cash payment to Employee under this Section 3.7 shall not be paid if the Corporation has made a severance payment to Employee under Section 3.2 above. IV ARTICLE DISCLOSURE OF INFORMATION Section 4.1. Definitions. As used herein, the term "proprietary information" shall mean technical information and know-how concerning the Corporation's oil and gas exploration, development, production and servicing business and its related equipment, books, maps and records developed by or otherwise owned or controlled by the Corporation. 4.0.2. As used herein, the term "trade secrets" shall mean any proprietary information and any other non-public information used by the Corporation, including such matters as geologic records, maps, surveys, documents evidencing interests in real property, patented or unpatented technology, supplier information, books, processes, concepts, methods, formulae or technique know-how, customer or vendor lists or information or development plans or strategy, owned or controlled by the Corporation or otherwise subject to an obligation or intent of the Corporation to maintain the confidentiality thereof which is of a proprietary or secret nature and which is or may be applicable to, or related to the business, equipment or services, present or future, of the Corporation or the oil and gas exploration and development business of the Corporation, or the contractual relationships of the Corporation with customers or clients. 4.0.3. As used herein, the term "document" shall mean any data, notes, drafts, manuals, blueprints, maps, notebooks, reports, photographs, drawings, sketches or other records, in any tangible form whatsoever, whether originals, copies, reproductions, or excerpts, produced or obtained from the Corporation by the Employee or any other representative of the Corporation which relates to trade secrets of the Corporation. 4.0.4. As used herein, the term "Corporation invention" shall mean any invention, discovery, improvement, or trade secret, whether patentable or not and whether or not reduced to practice, conceived or learned by the Employee either alone or Jointly with others, while employed by the Corporation, which relates to or results from the actual or anticipated investigation, research, development, or production of the Corporation, or which results to any extent from use of the Corporation's facilities. 4.0.5. As used herein, the term "Corporation" shall mean not only the Corporation as first defined above, but also the Corporation's subsidiaries and all affiliates of the Corporation. Section 4.2. Employee Shall Not Disclose Proprietary Information or Trade Secrets. The Employee recognizes that the trade secrets of the Corporation, as they may exist from time to time, are a valuable, special and unique asset of the Corporation. The Employee will not, during or for a period of 24 months after termination of the Employee's employment relationship under this Agreement, disclose or confirm the Corporation's trade secrets or any part thereof to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, without the prior written authorization to do so from the Corporation. Further, all documents shall be property of the Corporation and the Employee shall not remove these documents upon termination of employment with the Corporation except pursuant to a specific authorization in writing from the Board of Directors of the Corporation. The Employee agrees that any document produced or obtained by the Employee while employed by the Corporation shall be the sole and exclusive property of the Corporation. The Employee agrees to return any such document to the Corporation immediately upon termination of employment with the Corporation, or upon request of the Corporation. In no event shall the Employee copy or remove any documents of any person, company or association with whom the Employee did not directly work while an Employee of the Corporation. The Employee recognizes and acknowledges that much of the information and knowledge which he has received or will receive by virtue of his employment with the Corporation is or will be proprietary information and trade secrets which have unique, special value to the successful operation of the Corporation's business. The Employee agrees not to disclose any proprietary information or trade secrets to any other person for any purpose, for his own direct or indirect benefit or the benefit of any other employer or affiliate during the term of this Agreement or for a period of 24 months thereafter without the prior written consent of the Corporation. The aforesaid noncompetition covenant shall remain in any effect at all times while the Employee is in the employ of the Corporation and for a period of 24 months after termination of the Employee's relationship with the Corporation in any capacity whatsoever, regardless of the reason for termination or cessation of the Employee's relationship. The aforesaid covenant is intended to be a reasonable restriction on the Employee. If all, or any portion of the covenant is held unreasonable or unenforceable by a court or agency having valid Jurisdiction, the Employee expressly agrees to be bound by any lesser covenant subsumed within the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately stated in and made apart of this Article IV. Section 4.3. Duty of Loyalty; Conflicts of Interest. The Employee agrees that he will not, while employed by the Corporation and for a period of 12 months thereafter, unless employment is terminated under any of Sections 3.2, 3.3 or 3.7 above, be an employee or consultant, or assist in any way, or work directly or indirectly on behalf of, any person, corporation, firm or other entity engaged in, or proposing to engage in, a line of business which would directly compete or conflict with the Corporation's business, without the prior express written consent of the Corporation. Notwithstanding the foregoing, however, the Corporation and the Employee acknowledge that where the Board of Directors is fully informed about and approves of the Employee's individual interest in a business or an opportunity of the Corporation, it shall not be considered a violation of this Section 4.3. The Employee agrees that he will not use any assets of the Corporation for his own individual projects and that he will not use any proprietary information to the disadvantage of the Corporation. The Employee agrees that he will not interfere with the right of the Corporation to do business with any person, corporation, firm or other entity. Section 4.4. Enforcement. The Employee acknowledges that monetary damages would not adequately or fairly compensate the Corporation for breach of any of the obligations of the Employee under Article IV of this Agreement and agrees that in the event of any breach or threatened breach the Corporation shall be entitled to seek appropriate injunctive relief from a court of competent jurisdiction, in addition to any other relief or damages which may be available. V ARTICLE MISCELLANEOUS Section 5.1. Governing Law and Jurisdictions. It is the intention of the parties hereto that this Agreement and its performance hereunder be construed in accordance with and pursuant to the laws of the state of Colorado and that, in any action, special proceedings, or other proceeding that may be brought arising out of, in connection with, or by reason of this Agreement, the law of the state of Colorado shall be applicable and shall govern to the exclusion of any forum, without regard to the Jurisdiction in which any action or special proceeding may be instituted. The courts and authorities of the state of Colorado shall have sole jurisdiction and venue over all controversies which may arise with respect to this Agreement. Section 5.2. No Waiver. No provision of this Agreement may be waived except by an agreement in writing signed by the waiving party. A waiver of any term or provision shall not be construed as a waiver of any other term or provision. Section 5.3. Amendment. This Agreement may be amended, altered or revoked at any time, in whole or in part, by filing with this Agreement a written instrument setting forth such changes, signed by all of the parties. Section 5.4. Successors. This Agreement shall be binding upon and inure to the benefit of the Corporation, its successors and assigns (including, without limitation, any company into or with which the Corporation may merge or consolidate). The Corporation agrees that it will not effect the sale or other disposition of all or substantially all of its assets unless either (i) the person or entity acquiring the assets or a substantial portion of the assets shall expressly assumes by an instrument in writing all duties and obligations of the Corporation under this Agreement or (ii) the Corporation shall provide, through the establishment of a separate reserve for the payment in full of all amounts which are or may reasonably be expected to become payable to Employee under this Agreement. Section 5.5. Construction. Throughout this Agreement the singular shall include the plural, the plural shall include the singular, and the masculine and neuter shall include the feminine, wherever the context so requires. Section 5.6. Text to Control. The headings of articles and sections are included solely for convenience or reference. If any conflicts between any headings and the text of this Agreement exists, the text shall control. Section 5.7. Severability. If any provision of this Agreement is declared by any court of competent jurisdiction to be invalid for any reason, such invalidity shall not affect the remaining provisions. On the contrary, such remaining provisions shall be fully severable, and this Agreement shall be construed and enforced as if such invalid provisions never had been inserted in the Agreement. Section 5.8. Entire Agreement. This instrument contains the entire agreement concerning the employment arrangement between the parties and shall, as of the effective date hereof, supersedes all other employment agreements between the parties; provided, however, that nothing in this Agreement shall prevent the Corporation from granting additional or special compensation or benefits to Employee after the date of execution of this Agreement. This Agreement may not be amended except by an agreement in writing signed by both parties. This Agreement is effective as of the date first above written. EMPLOYEE APPROVED ON BEHALF OF PEASE OIL AND GAS COMPANY, a Nevada corporation By: /s/ Patrick J. Duncan By the following Directors: - ------------------------- Patrick J. Duncan By: /s/ Steve A. Antry ------------------------------------- Steve A. Antry By: /s/ Stephen L. Fischer ------------------------------------- Stephen L. Fischer By: /s/ Homer C. Osborne ------------------------------------- Homer C. Osborne By: /s/ James C. Ruane ------------------------------------- James C. Ruane By: /s/ Clemons F. Walker ------------------------------------- Clemons F. Walker EXHIBIT A ADDITIONAL REIMBURSABLE EXPENSES 1. 40 hours of continuing professional education per year 2. Professional Association dues (AICPA and CSCPA) 3. Bookcliff Country Club Monthly Dues 4. Other expenses as determined from time to time by the Board of Directors EX-10.21 4 0004.txt FORM OF WARRANT ISSUED TO PATRICK J. DUNCAN SP-1 300,000 - ---------- ---------------- WARRANT NO. Number of Shares THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS AN EXEMPTION FROM THE REQUIREMENT OF SUCH REGISTRATION IS AVAILABLE UNDER THE CIRCUMSTANCES AT THE TIME OBTAINING. Void After 5:00 P.M. December 31, 2005 PEASE OIL AND GAS COMPANY Common Stock Purchase Warrant PEASE OIL AND GAS COMPANY, a NEVADA corporation ("Pease" or the "Company"), hereby certifies that, Patrick J. Duncan, with an address of P. O. Box 60219, Grand Junction, Colorado 81506-8758, or his permitted assigns, for valuable consideration received, is entitled, subject to the terms and conditions herein set forth, to purchase from the Company up to 300,000 fully paid and non-assessable shares of Common Stock, $0.10 par value per share, of the Company, at the per share purchase price of $0.50 per share (the "Purchase Price"), from time to time after the earlier of: (a) December 31, 2004 or (b) either of: (i) the Company's reported closing sales price for its common stock in the public market is at least $1.50 for at least 80% of trading days in any consecutive 30 day period before the Expiration Date described below, or (ii) the Company completes a reorganization or merger transaction, or a sale of substantially all of its assets, and the reasonable or deemed value received by common stockholders is at least $1.50 per share in which event this Warrant may be exercised immediately before the effective date of the event, and up to 5:00 p.m. December 31, 2005 (the "Expiration Date") . The number and character of such shares of Common Stock are subject to adjustment as provided herein. 1. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: (a) "Act" shall mean the Securities Act of 1933, as amended. (b) "Additional Shares of Common Stock" shall mean all shares (including treasury shares) of Common Stock issued or sold (or, pursuant to Section 3.7 hereof, deemed to be issued) by the Company after the date hereof, whether or not subsequently reacquired or retired by the Company, other than shares of Common Stock issuable pursuant to this Warrant. (c) "Adjusted Exercise Price" shall have the meaning specified in Section 3.2 hereof. ----------------------- (d) "Company" means Pease Oil and Gas Company or any corporation which shall succeed to or assume the obligations of Pease Oil and Gas Company hereunder. (e) "Common Stock" shall mean the Common Stock, par value $0.10 per share, of the Company and any stock into which such common stock shall have been changed or any stock resulting from any reclassification of such common stock, and shall include all other stock of any class (however designated) of the Company the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions of any shares entitled to preference. (f) "Convertible Securities" shall mean any evidences of indebtedness, shares of stock (other than Common Stock) or other securities directly or indirectly convertible into or exchangeable for Common Stock, other than any securities issuable pursuant to this Warrant. (g) "Market Price", as used with reference to any share of stock on any specified date, shall mean: ------------ (i) if such stock is listed and registered on any national securities exchange or traded on The Nasdaq Stock Market ("Nasdaq") or the OTC Bulletin Board ("OTCBB"), (A) the last reported sale price on such exchange or Nasdaq or OTCBB of such stock on the business day immediately preceding the specified date, or (B) if there shall have been no such reported sale price of such stock on the business day immediately preceding the specified date, the average of the last reported sale price on such exchange or on Nasdaq or the OTCBB on (x) the day next preceding the specified date for which there was a reported sale price and (y) the day next succeeding the specified date for which there was a reported sale price; or (ii) if such stock is not at the time listed on any such exchange or traded on Nasdaq or the OTCBB but is traded on the over-the-counter market as reported by the National Quotation Bureau or other comparable service, (A) the average of the closing bid and asked prices for such stock on the business day immediately preceding the specified date, or (B) if there shall have been no such reported bid and asked prices for such stock on the business day immediately preceding the specified date, the average of the last bid and asked prices on (x) the day next preceding the specified date for which such information is available and (y) the day next succeeding the specified date for which such information is available; or (iii)if clauses (i) and (ii) above are not applicable, the fair value per share of such stock as determined in good faith and on a reasonable basis by the Board of Directors of the Company and, if requested, set forth in a certificate delivered to the holder of this Warrant upon the exercise hereof. (h) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (i) "Other Securities" shall mean any stock and other securities of the Company or any other person (corporate or otherwise) which the holders of this Warrant at any time shall be entitled to receive, or shall have received, upon the exercise of this Warrant, in lieu of or in addition to the Common Stock, or which at any time shall be issuable or shall have been issued to holders of the Common Stock in exchange for, in addition to or in replacement of the Common Stock or Other Securities pursuant to Section 3.5 or otherwise. (j) "Purchase Price" shall mean $0.50 per share, subject to adjustment as provided herein. -------------- 2. Exercise of Warrant. 2.1. Manner of Exercise. (a) This Warrant may be exercised by the holder hereof, in whole or in part (but not as to fewer than 10,000 shares of the Common Stock unless, at the time of exercise, this Warrant entitles the holder to purchase fewer than 10,000 shares of the Common Stock), on any business day on or after the date hereof and before the Expiration Date, by surrender of this Warrant, with the form of subscription at the end hereof (or a reasonable facsimile thereof) duly executed by such holder, to the Company at its office in Grand Junction, Colorado, and, except as otherwise provided in Section 2.1(b), accompanied by payment, by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying (x) the number of shares of the Common Stock (without giving effect to any adjustment therein) -- designated in such form of subscription (or such reasonable facsimile) by (y) the Purchase - Price, and such holder shall thereupon be entitled to receive the number of shares of the Common Stock determined as provided hereunder. (b) The exercise price of this warrant may be paid, at the election of the holder in accordance with Section 2.1(a) by delivering to the Company fully paid shares of the Company's common stock, which shall be valued at the Market Price on the day preceding the delivery and the value of the shares delivered may be used for the exercise of this Warrant at the Purchase Price. 2.2. When Exercise Effective. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the business day on which this Warrant shall have been surrendered to the Company as provided in Section 2.1, and the person(s) in whose name(s) the certificate(s) for shares of the Common Stock (or Other Securities) that are to be issued upon such exercise in accordance with Section 2.3 shall be deemed the holder(s) of record thereof at such time. 2.3. Delivery of Stock Certificates, etc. As soon as practicable after the exercise of this Warrant in full or in part in accordance herewith the Company, at its expense (including the payment by it of any applicable issue taxes), will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, (a) a certificate or certificates, marked with an appropriate legend referring to the terms of this Warrant and any applicable restrictions on such shares imposed by the Federal or any state securities laws, for the number of full shares of the Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash in an amount equal to the same fraction of the Market Price of one full share of the Common Preferred Stock on the business day next preceding the date of such exercise, and (b) in case such exercise is in part only, a new Warrant or Warrants of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of the Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of shares designated by the holder upon such exercise as provided in Section 2.1. 3. Common Stock Issuable Upon Exercise. 3.1. General. The number of shares of the Common Stock which the holder of this Warrant shall be entitled to receive upon the exercise hereof or, if securities or other property in addition to or in lieu of the Common Stock shall by reason of the operation of the provisions of this Section be issuable upon such exercise, the amount and kind of such securities or other property, shall be adjusted or determined as provided in this Section 3. 3.2. Adjusted Exercise Price. The number of shares of the Common Stock which the holder of this Warrant shall be entitled to receive upon the exercise hereof shall be determined by multiplying the number of shares of the Common Stock which, but for the provisions of this Section 3, would otherwise be issuable upon such exercise, as designated by the holder hereof pursuant to Section 2.1, by the fraction of which the numerator is the per share Purchase Price and the denominator is the per share Adjusted Exercise Price (as herein defined) in effect on the date of such exercise. The per share Adjusted Exercise Price of the Common Stock shall initially be the Purchase Price (as defined in Section 1) and shall be adjusted and readjusted from time to time as provided in this Section 3 (and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by this Section 3). 3.3. Stock Dividends, Stock Splits, etc. In case the Company at any time or from time to time after the date hereof shall declare or pay any dividend on the Common Stock payable in Common Stock, or effect a subdivision of the outstanding shares of the Common Stock into a greater number of shares of the Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock), then, in any such event, the per share Adjusted Exercise Price per share shall be adjusted effective as of the close of business on (i) the record date for the determination of shareholders entitled to receive such dividend if such dividend is in fact paid, or (ii) the day immediately preceding the day upon which such subdivision shall become effective (any such day, as the case may be, shall be referred to herein as the "Subdivision Effective Date"), by multiplying the per share Adjusted Exercise Price in effect immediately prior to the Subdivision Effective Date by the fraction of which (x) the numerator shall be the number of shares of the Common Stock outstanding immediately prior to the Subdivision Effective Date and (y) the denominator shall be the number of shares of the Common Stock outstanding immediately prior to the Subdivision Effective Date plus the number of shares of the Common Stock issuable upon the payment of such dividend or the consummation of such subdivision, as the case may be. 3.4. Adjustments for Combinations, etc. In case the outstanding shares of the Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Adjusted Exercise Price shall be adjusted, effective as of the close of business on the day immediately preceding the day upon which such combination or consolidation is effective (the "Combination Effective Date"), by multiplying the per share Adjusted Exercise Price in effect immediately prior to the Combination Effective Date by the fraction of which (x) the numerator shall be the number of shares of the Common Stock outstanding immediately prior to the Combination Effective Date and (y) the denominator shall be the number of shares of the Common Stock outstanding immediately after the Combination Effective Date. 3.5. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc. In case the Company, after the date hereof, (a) shall consolidate with or merge into any other person and shall not be the continuing or surviving corporation of such consolidation or merger, or (b) shall permit any other person to consolidate with or merge into the Company and the Company shall be the continuing or surviving person but, in connection with such consolidation or merger, the Common Stock shall be changed into or exchanged for stock or other securities or property of any other person, or (c) shall effect a capital reorganization or reclassification of the Common Stock (other than a reclassification subject to Sections 3.3 or 3.4), then, and in each such case, proper provision shall be made so that the holder of this Warrant, upon the exercise hereof at any time after the consummation of such consolidation, merger, reorganization or reclassification, shall be entitled to receive, in lieu of the Common Stock (or Other Securities) issuable upon such exercise prior to such consummation, the stock and other securities and property to which such holder would have been entitled upon such consummation if such holder had so exercised this Warrant immediately prior thereto, subject to adjustments (subsequent to such corporate action) as nearly equivalent as possible to the adjustments provided for in this Section 3. 4. No Dilution or Impairment. The Company will not, by amendment of its articles of organization or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against dilution or other impairment. 5. Notices of Record Date, etc. In the event of (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to any other person or any consolidation or merger involving the Company and any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company will give to the holder of this Warrant a notice specifying (i) the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of the Common Stock (or Other Securities) shall be entitled to exchange their shares of the Common Stock (or Other Securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Unless otherwise required by law to be given sooner, such notice shall be mailed within a reasonable time prior to the date therein specified. 6. Reservation of Stock, etc. The Company will at all times reserve and keep available out of its authorized but unissued Common Stock, solely for issuance and delivery upon the exercise of this Warrant, the full number of shares of Common Stock (or Other Securities) then issuable upon the exercise of this Warrant. All shares of the Common Stock issuable upon the exercise of this Warrant shall be duly authorized, and when issued and paid for in full, validly issued, fully paid and non-assessable with no liability on the part of the holders thereof. 7. Registration Rights. (a) Definitions. For purposes of this Section 7, the following terms shall have the following respective meanings: (i) "Commission" shall mean the United States Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holders of Common Stock or Other Securities issued pursuant to this Warrant. (iii) The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registration Period" shall mean the period commencing on the date hereof and ending (a) if this Warrant shall expire without having been exercised in whole or in part, the Expiration Date or (b) if this Warrant shall have been exercised in whole or in part, at such time as all shares of Registrable Stock have been sold by the initial holder or can be sold publicly without registration under the Act. (v) The term "Registrable Stock" means (a) the shares of Common Stock issued or issuable upon the exercise of this Warrant, and (b) any Other Securities issued or issuable pursuant to this Warrant; provided, however, that shares of Registrable Stock shall cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the transfer by virtue of Federal or state securities laws; and provided further that Registrable Stock shall cease to be Registrable Stock if the holder could sell or transfer such securities held by him in one or more transactions pursuant to Rule 144 promulgated under the Act. (b) Registration. (i) The Company shall use its best commercial efforts to file, by April 15, 2000, and shall use its best commercial efforts to cause to become effective as soon as practicable, a registration statement on Form S-3, or if Form S-3 is not then available, another appropriate form, covering all the Registrable Stock (the "Initial Registration"). In the event such registration is not so declared effective or does not include all Registrable Stock, a holder of Registrable Stock shall have the right to require by notice in writing that the Company register all or any part of the Registrable Stock held by such holder (a Demand Registration") and the Company shall thereupon effect such registration in accordance herewith (which may include adding such shares to an existing shelf registration). The parties agree that if the holder of Registrable Stock demands registration of less than all of the Registrable Stock, the Company, at its option, may nevertheless file a registration statement covering all of the Registrable Stock. If such registration statement is declared effective with respect to all Registrable Stock and the Company is in compliance with its obligations under Subsection (c) hereof, the demand registration rights granted pursuant to this Subsection (b) shall cease. If such registration statement is not declared effective with respect to all Registrable Stock the demand registration rights described herein shall remain in effect until all Registrable Stock have been registered under the Act. The Company shall provide holders of Registrable Stock reasonable opportunity to review any such registration statement or amendment or supplement thereto prior to the filing thereof, but in no event shall such period exceed seven (7) days. If the Registrable Stock is registered initially on a form other than Form S-3, the Company shall register the Registrable Stock on Form S-3 as soon as use of such form is permissible. (ii) The Company shall not be obligated to effect Demand Registration under Subsection (b)(i) if all of the Registrable Stock held by the holder of Registrable Stock which are demanded to be covered by the Demand Registration are, at the time of such demand, included in an effective registration statement and the Company is in compliance with its obligations under Subsection (c) hereof. (iii) The Company may suspend the effectiveness of any such registration effected pursuant to this Subsection (b) in the event, and for such period of time as, such a suspension is required by the rules and regulations of the Securities and Exchange Commission ("SEC'). The Company will use its best efforts to cause such suspension to terminate at the earliest possible date. (c) Covenants of the Company with Respect to Registration. In connection with any registration under this Section 7, the Company shall, as expeditiously as is reasonably possible: (i) Prepare and file with the Commission a registration statement with respect to the Participating Holders' Registrable Stock and use its best reasonable efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (vii) Furnish to the Participating Holders, on the date that shares of Registrable Stock are delivered to the underwriters for sale in connection with a registration pursuant to this Section 7, if such securities are being sold by underwriters, or, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion as to matters of law only, dated such date, of counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Participating Holders and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, and to the Participating Holders. (d) Costs and Expenses. The Company shall pay all costs, fees and expenses in connection with all registration statements filed under this Section 7 including, without limitation, the Company's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including the fees and expenses of counsel for the Participating Holders in connection with such registration. However, the Company shall not pay for underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. (e) Indemnification. (i) The Company shall indemnify each Participating Holder under this Agreement, its officers and directors and any person controlling it within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any loss, claim, damage, expense or liability (including without limitation all expenses reasonably incurred in investigating, preparing, or defending against any claim whatsoever, such expenses to be reimbursed by the Company as they are incurred) to which it may become subject under the Act, the Exchange Act or otherwise, arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus or any amendments or supplements thereto in which Registrable Stock is included or in any application, statement or other document filed by the Company with the Commission or any securities exchange or in any jurisdiction in connection with qualifying such shares under the securities laws thereof, or (ii) the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Participating Holder or an underwriter expressly for use in any such registration statement or other document. (ii) Each Participating Holder shall, as a condition to such registration of Registrable Stock, agree to indemnify the Company, its officers and directors and any person controlling the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any loss, claim, damage or expense or liability (including without limitation all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever, such expenses to be reimbursed by the undersigned as they are incurred) to which they may become subject under the Act, the Exchange Act or otherwise, arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus or any amendments or supplements thereto in which Registrable Stock is included or in any application, statement or other document filed by the Company with the Commission or any securities exchange or in any jurisdiction in connection with qualifying such shares under the securities laws thereof, or (ii) the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, provided in each case that such statement or omission is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Participating Holder expressly for use in any such registration statement or other document, or (iii) any misuse by the Participating Holder of any prospectus included in the registration statement or any violation of the Act by the Participating Holder in connection with the sale or distribution of his or her Registrable Stock under the registration statement. (iii) Promptly upon receipt by a party claiming indemnification hereunder of notice of the commencement of any action involving a claim referred to above, such indemnified party will, if a claim in respect thereof is to be made against a party which may be required to indemnify such party hereunder, give written notice to the latter of the commencement of such action. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense of such action, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party. Except as set forth herein, the indemnified party and any party cooperating in the defense of such claim shall not settle or compromise any such claim or admit liability without the express written consent of the indemnifying party. The indemnified party shall have the right to be represented by an advisory counsel and accountants, at its own expense, and the indemnified party shall be kept fully informed of such action, suit or proceeding at all stages thereof whether or not the indemnified party is so represented. After a period of thirty days following the date the written notice of such claim was given to the indemnifying party the indemnified party may settle any such claim (and the amount of any such settlement shall be subject to indemnification hereunder) unless within such thirty-day period the indemnifying party shall have provided the indemnified party with notice and evidence to the indemnified party's satisfaction that the indemnifying party reasonably disputes such claim and has the financial ability to meet its indemnification obligations hereunder. Notwithstanding the foregoing, the indemnified party may immediately cause to be paid or discharged any asserted claim the nonpayment of which would have an immediate substantial adverse impact on the indemnified party and any claim which the indemnifying party has not disputed within thirty days of notice as provided above. (iv) If the indemnification provided for in this Section 7(e) is unavailable or insufficient to hold harmless an indemnified party under such subsection in respect of any losses, claims, damages or liabilities or action in respect thereof or referred to therein, then each indemnifying party shall in lieu of indemnifying such indemnified party contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or actions in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and the Participating Holders, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or actions as well as any other relevant equitable considerations, including the failure to give the notice required under such subsections. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company on the one hand, or the Participating Holders, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Participating Holders agree that it would not be just and equitable if contribution pursuant to this Section 7(e)(iv) were determined by pro rata allocation or by any other method of allocation which did not take account of the equitable considerations referred to above in this subsection. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act), shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentations. (v) The obligations of the Company and the Participating Holders under this Section 7(e) shall survive the completion of any offering of Registrable Stock in a registration statement under this Section 7. (vi) The rights of indemnification contained in this Section 7 shall not be deemed to be the exclusive remedy of the parties hereto and such rights shall be in addition to any other rights or remedies which any party hereto may have at law or equity. (f) Assignment of Registration Rights. The undersigned's rights set forth in this Section 7 shall automatically be deemed assigned to any transferee or assignee of this Warrant or shares of Common Stock or Other Securities issuable hereunder, provided that immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act; provided however, that, the termination of registration rights in respect of any shares of Registrable Stock shall be binding upon any transferee of such shares. Upon the request of any such holder, the Company will confirm in writing to any transferee of such holder's Registrable Stock the Company's continuing obligation to afford such transferee the benefits of the Company's agreements contained in this Section 7, but no failure of the Company to confirm such obligations shall in any way impair such transferee's rights under this Section 7. 8. Substitution of Warrants. 8.1. Exchange of Warrants. Subject to the provisions appearing at the top of the first page of this Warrant concerning, inter alia, the sale, transfer, encumbrance or other disposition of this Warrant, upon surrender or exchange of this Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or upon the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 8.2. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. Ownership of Warrant. Until this Warrant is transferred on the books of the Company, the Company may treat the person in whose name this Warrant is issued as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary, except that, if and when this Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. A Warrant, if properly assigned, may be exercised to the extent provided herein by a new holder without first having a new Warrant issued. 10. Notices, etc. All notices and other communications from the Company to the holder of this Warrant or from the holder of this Warrant shall be delivered personally, by facsimile (if confirmed and followed by delivery by first class mail), reputable overnight courier service, or mailed by first class registered or certified mail, postage prepaid, to the Company at 751 Horizon Court, Suite 203, P. O. Box 60219, Grand Junction, Colorado 81506-8758, Attn: President, or to the holder at such address as may have been furnished to the Company in writing by such holder, or, until an address is so furnished, to and at the address of the last holder of this Warrant who has so furnished an address to the Company. Any such notice shall be deemed to have been given on the date of personal delivery, facsimile, delivery to a reputable overnight courier service or deposit in the mail. 11. Warrant Holder Not a Shareholder. Holder shall not, by virtue of anything contained in this Agreement or otherwise, prior to exercise of this Warrant, be entitled to any right whatsoever, either in law or equity, of a shareholder of the Company, including without limitation, the right to receive dividends or to vote or to consent or to receive notice as a shareholder in respect of the meetings of shareholders or the election of directors of the Company or any other matter; provided however that all holders of Warrants will be entitled to notice if: (a) the Company grants holders of its Common Stock rights to purchase any shares of capital stock or any other rights, or (b) the Company authorizes a reclassification, capital reorganization, consolidation, merger or sale of substantially all of its assets. 12. Nontransferable. This Warrant is nontransferable without the prior consent of the Company. Any such transfer shall be made in accordance with Section 8.1 above. 13. Miscellaneous. The Company may from time to time supplement or amend this Warrant without the approval of the holder in order to cure any ambiguity or to be correct or supplement any provision contained herein which may be defective or inconsistent with any other provision, or to make any other provisions in regard to matters or questions herein arising hereunder which the Company may deem necessary or desirable and which shall not materially adversely affect the interest of the holder. This Warrant and any term hereof may be amended, changed, waived, discharged or terminated only by an instrument in writing signed by the Company and consented to in writing by the holder of this Warrant. If for any reason any provision, paragraph or term of this Warrant is held to be invalid or unenforceable, all other valid provisions herein shall remain in full force and effect and all terms, provisions and paragraphs of this Warrant shall be deemed to be severable. This Warrant shall be construed and enforced in accordance with and governed by the laws of the state of Colorado applicable to contracts made and to be performed entirely therein. The headings in this Warrant are for reference purposes only and shall not limit or otherwise affect the meaning hereof. Dated as of: November 2, 2000. PEASE OIL AND GAS COMPANY By: _________________________________ Patrick J. Duncan, President ATTEST: - --------------------------- Marilyn L. Adams, Secretary FORM OF SUBSCRIPTION [To be signed only upon exercise of the Warrant] To: PEASE OIL AND GAS COMPANY The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, ___________* shares of the Common Stock of PEASE OIL AND GAS COMPANY and herewith makes payment of $ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to, _________________, whose address is ------------------------ --------------. Dated: (Signature must conform in all respects to the name of the holder as specified on the face of the Warrant) (Address) * Insert the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. FORM OF ASSIGNMENT [To be signed only upon transfer of the Warrant] For value received, the undersigned hereby sells, assigns and transfers unto the right represented by the within Warrant to purchase shares of the Common Stock of PEASE OIL AND GAS COMPANY to which the within Warrant relates, and appoints Attorney to transfer such right on the books of PEASE OIL AND GAS COMPANY, with full power of substitution in the premises. Dated: (Signature must conform in all respects to the name of the holder as specified on the face of the Warrant) (Address) Signed in the presence of: EX-10.22 5 0005.txt PROMISSORY NOTE OF CARPATSKY PETROLEUM, INC. #703190 v4 Page 4 of 4 Pages #703190 v4 THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE BEEN REGISTERED UNDER APPLICABLE CANADIAN OR U.S. FEDERAL OR APPLICABLE STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN COMPLIANCE WITH APPLICABLE RULES OF THE CANADIAN VENTURE EXCHANGE, THE ALBERTA SECURITIES COMMISSION AND U.S. FEDERAL AND APPLICABLE STATE SECURITIES LAWS. CONVERTIBLE PROMISSORY NOTE April 3, 2001 Houston, Texas $180,000.00 FOR VALUE RECEIVED, the undersigned, Carpatsky Petroleum, Inc., a corporation organized under the laws of the Province of Alberta, Canada (herein called "Maker"), promises to pay to the order of Pease Oil and Gas Company, a corporation organized under the laws of the State of Nevada (herein called "Payee", which term herein in every instance shall refer to any owner or holder of this Note) the sum of One Hundred Eighty Thousand and no/100 dollars ($180,000.00), without interest, such principal being payable in lawful money of the United States of America at the office of Payee in Grand Junction, Mesa County, Colorado, or at such other place as Payee may designate hereafter in writing. The principal balance hereof remaining unpaid shall not bear interest. All past due principal of this Note shall bear interest at the lesser of (1) 2% above the annual rate which equals the floating commercial loan rate publicly announced from time to time by Wells Fargo Bank West N.A. as its "prime rate," or (2) the maximum lawful rate of interest permitted by the applicable usury laws, now or hereafter enacted, which interest rate (herein called the "Maximum Rate") shall change when and as said laws shall change to the extent permitted by said laws, effective on the day such change in said laws become effective, from the date the payment thereof shall have become due until the same have been fully discharged by payment, and all such past due principal shall be immediately due and payable. The principal amount outstanding under this Note shall be repaid to Payee in eight equal quarterly installments of $22,500 each (a "Quarterly Payment"), on the first day of June, September, December and March, commencing June 1, 2001, with all remaining principal due on or before March 1, 2003. Notwithstanding the immediately preceding sentence, if at any time prior to the payment in full of this Note, Maker receives capital from the closing of any debt or equity funding transaction of any kind, then within five days after the closing of such funding transaction Maker shall make a principal payment (a "Funding Payment") to Payee equal to the gross amount of capital raised by Maker times a fraction, the numerator of which is $90,000 and the denominator of which is $1,000,000, but in no event shall any such Funding Payment exceed the outstanding principal amount due on this Note as of the date of closing the funding transaction. The amount of any Funding Payment shall be applied against the Quarterly Payments due hereunder, in the inverse order of approaching maturities. So long as any principal amount is outstanding under this Note, Maker shall furnish Payee with (1) notice 15 days prior to the closing of any funding transaction as described in the immediately preceding paragraph and (2) unaudited quarterly statements of income or loss, cash flow and financial position (in each case within 45 days after the end of the first three fiscal quarters of each fiscal year of Maker) and an annual audited statement of profit or loss, cash flow, and financial position (within 90 days after the end of each fiscal year of Maker). Maker may prepay this Note in whole or in part at any time without being required to pay any penalty herein for such privilege. If Maker shall file a voluntary petition in bankruptcy, or shall be adjudicated a bankrupt or insolvent, or shall file any petition or answer seeking for Maker any arrangement, composition, readjustment, or similar relief under any present or future statute, law or regulation, or shall file any answer admitting the material allegations of a petition filed against Maker in any such proceeding, or shall seek or consent to or acquiesce in the appointment of any trustee or receiver, on all or any substantial part of the properties of Maker, or if a decree or order by a court having jurisdiction in the premises shall have been entered adjudging Maker to be bankrupt or insolvent under the bankruptcy laws or any applicable law of the Province of Alberta, Canada, or appointing a receiver or trustee or assignee in bankruptcy or insolvency of Maker or any of Maker's properties, and such decree or order shall have continued undischarged or unstayed for a period of 30 days, or if Maker shall make an assignment for the benefit of creditors, or if Maker shall fail to pay this Note or any installment hereof, whether principal or interest, when due, then Payee shall have the option, to the extent permitted by applicable law, to declare this Note due and payable, whereupon the entire unpaid principal balance of this Note and all accrued unpaid interest hereon thereupon at once shall mature and become due and payable without presentment, demand, protest or notice of any kind (including, but not limited to, notice of intention to accelerate or notice of acceleration), all of which hereby are expressly waived by Maker. Maker hereby waives grace, demand, presentment for payment, notice of any kind (including, but not limited to, notice of dishonor, notice of protest, notice of intention to accelerate and notice of acceleration) and diligence in collecting and bringing suit against Maker, and agrees (i) to all extensions and partial payments, with or without notice, before or after maturity, and (ii) that it will not be necessary for Payee, in order to enforce payment of this Note, to first institute or exhaust Payee's remedies against Maker. In the event of default hereunder and this Note is placed in the hands of an attorney for collection (whether or not suit is filed), or if this Note is collected by suit or legal proceedings or through the probate court or bankruptcy proceedings, Maker agrees to pay all reasonable attorneys' fees and all expenses of collection and costs of court. If any provision in this Note shall be held invalid, illegal or unenforceable in any jurisdiction, the validity, legality or enforceability of any defective provisions shall not be in any way affected or impaired in any other jurisdiction, nor shall the invalid, illegal or unenforceable provision affect or impair any other provision of this Note. No delay or failure of the holder of this Note in the exercise of any right or remedy provided for hereunder shall be deemed a waiver of such right or remedy by the holder hereof, and no exercise of any right or remedy shall be deemed a waiver of any other right or remedy that the holder may have. It is the intention of the parties hereto to comply strictly with applicable usury laws, if any, accordingly, notwithstanding any provision to the contrary in this Note, in no event shall this Note or such documents require or permit the payment, taking, reserving, receiving, collection or charging of any sums constituting interest under applicable laws which exceed the maximum amount permitted by such laws. If any such excess interest is called for, contracted for, charged, taken, reserved, or received in connection with the loan evidenced by this note, or in any communication by Payee or any other person to Maker, or in the event all or part of the principal or interest hereof shall be prepaid or accelerated, so that under any of such circumstances or under any other circumstance whatsoever the amount of interest contracted for, charged, taken, reserved, or received on the amount of principal actually outstanding from time to time under this note shall exceed the maximum amount of interest permitted by applicable usury laws, then in any such event it is agreed as follows: (i) the provisions of this paragraph shall govern and control, (ii) the Maker shall not be obligated to pay the amount of such interest to the extent such interest is in excess of the maximum amount of interest permitted by applicable usury laws, (iii) any such excess which is or has been received notwithstanding this paragraph shall be credited against the then unpaid principal balance hereof or, if this note has been or would be paid in full by such credit, refunded to Maker, and (iv) the provisions of this note and any communication to Maker shall immediately be deemed reformed and such excess interest reduced, without the necessity of executing any other document, to the maximum lawful rate allowed under applicable laws as now or hereafter construed by courts having jurisdiction hereof or thereof. Without limiting the foregoing, all calculations of the rate of interest contracted for, charged, collected, taken, reserved, or received in connection herewith which are made for the purpose of determining whether such rate exceeds the maximum lawful rate shall be made to the extent permitted by applicable laws by amortizing, prorating, allocating and spreading during the period of the full term of the loan, including all prior and subsequent renewals and extensions, all interest at any time contracted for, charged, taken, collected, reserved, or received. The terms of this paragraph shall be deemed to be incorporated in every loan document and communication relating to this Note. Subject to the approval of the Canadian Venture Exchange, at any time prior to the payment in full of this Note, Payee by delivery of this Note and written notice to the Maker may convert all, but not less than all, of the remaining outstanding principal due hereunder as of the date of delivery and receipt by Maker of such notice (the "Outstanding Amount") into the number of fully paid, and non-assessable shares (the "Shares") of common stock, no par value, of the Maker (the "Common Stock") equal to 100% of the Outstanding Amount divided by the Conversion Price . The Conversion Price shall be the lesser of (1) $.075 Canadian per share or (2) the price at which Maker may sell the Common Stock or any other securities convertible into its Common Stock at any time prior to payment in full of this Note; provided that if a price other than that set forth in clause (1) or (2) is prescribed by the Canadian Venture Exchange as part of its approval, then the Conversion Price shall be the price so prescribed by the Canadian Venture Exchange. Payee acknowledges that the Shares have not been registered under the applicable Canadian or U.S. federal or applicable state securities laws, and may not be issued upon conversion of this Note or exercise of the option contained herein unless in compliance with applicable rules of the Canadian Venture Exchange, the Alberta Securities Commission and U.S. federal and applicable state securities laws. Any shares of Common Stock issued to Payee under this Note shall have the same registration rights granted to Bellwether Exploration Company by Maker under the Registration Rights Agreement dated October 7, 1999 as amended December 10, 1999. In the event of a stock split or reverse split, such Conversion Price shall be automatically reduced or increased to reflect such stock split or reverse split. In the event of any capital reorganization or reclassification of the capital stock of the Maker, any consolidation or merger of the Maker with or into another corporation, or any sale, lease or other disposition of all or substantially all of the assets of the Maker, that is effected in such a manner that holders of shares of the Common Stock are entitled to receive securities and/or property (including cash) with respect to or in exchange for shares of the Common Stock, the Maker shall, as a condition precedent to such transaction, cause effective provision to be made so that Payee shall have the right thereafter to convert this Note for the kind and amount of securities and/or other property receivable upon such event by a holder of the number of shares of the Common Stock for which this Note could have been converted immediately prior to such event. Except to the extent required by federal law, this Note shall be governed by and construed under the laws of the State of Colorado. Any check, draft, money order or other instrument given in payment of all or any portion hereof may be accepted by Payee and handled in collection in the customary manner, but the same shall not constitute payment hereunder or diminish any rights of Payee except to the extent that actual cash proceeds of such instrument are unconditionally received by Payee. CARPATSKY PETROLEUM, INC. By: /s/ Robert Bensh ------------------------ Robert Bensh, President -----END PRIVACY-ENHANCED MESSAGE-----