-----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, Hgg8Yo7IRBUjyuAs1q0YLpzfurIGP7uBpqHIh0X8mQqR7QVjs1lOZG9DDjBMkvpM SW4y2iwZz53RQQuTfmeDeQ== 0000076878-98-000011.txt : 19980520 0000076878-98-000011.hdr.sgml : 19980520 ACCESSION NUMBER: 0000076878-98-000011 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980519 SROS: NASD 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-06580 FILM NUMBER: 98627834 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 10QSB 1 FIRST QUARTER REPORT 1998 - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 Commission File Number 0-6580 [GRAPHIC OMITTED] PEASE OIL AND GAS COMPANY (Exact name of small business issuer as specified in its charter) Nevada 87-0285520 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 751 Horizon Court, Suite 203 Grand Junction, Colorado 81506 (Address of principal executive offices) (970) 245-5917 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ As of May 14, 1998 the registrant had 15,791,205 shares of its $0.10 par value Common Stock issued and outstanding. Transitional Small Business Issuer Disclosure Format (check one):Yes ____ No X - -------------------------------------------------------------------------------- -1- TABLE OF CONTENTS PAGE NUMBER
PART I - Financial Information Item 1. Financial Statements Consolidated Balance Sheets.. . . . . . . . . . .. . . . . . . . . . . . . 3 March 31, 1998 (unaudited) and December 31, 1997 Consolidated Statements of Operations . . . . . . . . . . . . . . . . . For the Three Months Ended March 31, 1998 (unaudited) and 1997 4 (unaudited) Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . For the Three Months Ended March 31, 1998 (unaudited) and 1997 5-6 (unaudited) Notes to Consolidated Financial Statements . . . . . . . . . . . . . .. . 7 Item 2. Management's Discussion and Analysis . . . . . . . . . . . . . . . 8 Liquidity, Capital Expenditures and Capital Resources . . . .. . 8 Results of Operations . . . . . . . . . . . . . . . . . . . . . . . .. . 9 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Change in Accounting Principle . . . . . . . . . . . . . . . . . .9 Assets Held For Sale. . . . . . . . . . . . . . . . . . . . . .. . 9 Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .. .10 Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .10 Gas Plant Processing . . . . . . . . . . . . . . . . . . . . . . .. .11 Oil Field Services and Oil Field Supply . . . . . . . . . . . . . .. .12 Well Administration and Other Income . . . . . . . . . . . . . . .. . 12 Depreciation, Depletion and Amortization . . . . . . . . . . . . .. .13 Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . 14 Impairment Expense - Oil and Gas Properties. . . . . . . . . . . 14 Dividends and Net Loss Per Common Share. . . . . . . . . . . . . 14 Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Recently Issued Financial Accounting Standards. . . . . . . . .. .15 Disclosure Regarding Forward-Looking Statements. . . . . . . . 15 Year 2000 Issue . . . . . . . . . . . . . . . . . . . . . . . .. .15 PART II - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . ... .16 Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 16 Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . 16 Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . 16. Item 4. Submission of Matters to a Vote of Security Holders . . . . . 17 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 17 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .. .17 PART III - Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
-2- PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PEASE OIL AND GAS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1998 1997 ---------------- ------------ (unaudited) ASSETS CURRENT ASSETS: Cash and equivalents $ 3,472,158 $ 6,547,804 Trade receivables 345,366 757,434 Prepaid expenses and other 74,187 43,979 -------------- --------------- Total current assets 3,891,711 7,349,217 ------------ ------------- ASSETS HELD FOR SALE 3,832,376 4,048,000 ------------ ------------- OIL AND GAS PROPERTIES, at cost (full cost method): Unevaluated properties 6,724,538 4,522,917 Costs being amortized 10,707,341 9,424,932 ----------- ------------- Total oil and gas properties 17,431,879 13,947,849 Less accumulated amortization and impairment (5,577,442) (4,965,232) ------------- -------------- Net oil and gas properties 11,854,437 8,982,617 ----------- ------------- OTHER ASSETS: Debt issuance costs, net 613,217 664,318 Deposits and other 174,528 167,493 Office equipment and vehicles, net 96,122 82,498 -------------- -------------- Total other assets 883,867 914,309 ------------- ------------- TOTAL ASSETS 20,462,391 21,294,143 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: 1,321,321 1,500,239 Accrued production taxes 204,108 204,108 Other accrued expenses 389,178 349,396 ------------ ------------- LONG-TERM LIABILITIES: Convertible debentures, net 3,003,649 2,922,703 Accrued production taxes 297,180 226,019 ------------- -------------- Total long-term liabilities 3,300,829 3,148,722 ------------ ------------- STOCKHOLDERS' EQUITY: Preferred Stock, par value $0.01 per share, 2,000,000 shares authorized, 113,333 shares of Series B 5% PIK Cumulative Convertible Preferred Stock issued and outstanding (liquidation preference of $5,666,650) 1,133 1,133 Common Stock, par value $0.10 per share, 40,000,000 shares authorized, 15,791,205 and 15,789,955 shares issued and outstanding, respectively. 1,579,121 1,578,996 Additional paid-in capital 36,805,373 36,875,394 Accumulated deficit (23,138,672) (22,363,845) ------------ ------------- Total stockholders' equity 15,246,955 16,091,678 ----------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,462,391 $ 21,294,143 =========== ============
-3- PEASE OIL AND GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
For The Three Months Ended March 31, 1998 1997 (Note 2) REVENUE: Oil and gas sales $ 591,608 $ 789,206 Gas plant processing 91,119 209,510 Oil field services and supply 154,149 198,319 Well administration and other income 15,654 21,805 ------------ ---------------- Total revenue 852,530 1,218,840 ----------- ------------- OPERATING COSTS AND EXPENSES: Oil and gas production costs 320,640 328,819 Gas plant 81,813 104,838 Oilfield services and supply 139,926 153,658 Consulting arrangement-related party 62,912 83,383 General and administrative 257,655 325,449 Depreciation, depletion and amortization 353,137 466,606 Impairment expense - oil and gas properties 478,043 1,621,532 ---------- --------------- Total operating costs and expenses 1,694,126 3,084,285 --------- -------------- LOSS FROM OPERATIONS (841,596) (1,865,445) OTHER INCOME (EXPENSES): Interest income 67,014 18,059 Interest expense (246) (215,473) Gain or (Loss) on sale of assets - 2,356 ---------------- ----------------- NET LOSS $ (774,828) $ (2,060,503) ============ =------------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (1,628,167) $ (2,105,487) =========== ============== NET LOSS PER COMMON SHARE (Note 3) $ (.10) $ (.24) ================ =================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 15,791,000 8,923,000 ========== ===============
-4- PEASE OIL AND GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For The Three Months Ended March 31, 1998 1997 (Note 2) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss (774,828) (2,060,503) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 353,137 466,606 Amortization of debt discount and issuance costs - 120,633 Impairment expense 478,043 1,621,532 Loss on sale of assets - (2,356) Issuance of common stock for services - 8,000 Other - - Changes in operating assets and liabilities: (Increase) decrease in: Trade receivables 412,068 8,313 Inventory 25,050 (50,517) Prepaid expenses and other assets (37,243) (29,972) Increase (decrease) in: Accounts payable (27,299) 108,769 Accrued expenses 9,098 (12,362) ------------- -------------- Net cash provided by (used in) operating activities 438,026 178,143 ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property, plant and equipment (3,373,669) (4,589,521) Proceeds from sale of property and equipment 7,420 56,559 ------------- -------------- Net cash provided by (used in) investing activities (3,366,249) (4,532,962) ----------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of warrants 939 2,264,650 Repayment of long-term debt (1,597) (318,901) Proceeds from sale of common stock - 3,880,000 Offering costs (146,765) (564,882) ------------- --------------- Net cash provided by (used in) financing activities (147,423) 5,260,867 ------------- ------------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS (3,075,646) 906,048 CASH AND EQUIVALENTS, beginning of period 6,547,804 1,995,860 ----------- ------------- CASH AND EQUIVALENTS, end of period 3,472,158 2,901,908 =========== -------------
-5- PEASE OIL AND GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)
For The Three Months Ended March 31, 1998 1997 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 100,772 $ 161,014 ========== ============ Cash paid for income taxes $ - $ - ============ ------------ SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Conversion of long-term debt, net of discount, to common stock $ - $ 156,007 Debt incurred for purchase of vehicles 32,609 29,582 Payables for oil and gas exploration activities 1,072,413 229,103 Issuance of common stock for oil and gas properties - 875,000 Capitalized portion of amortized debt discount and issuance costs 132,046 39,494
-6- PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 - Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to consolidated financial statements included in the Annual Report on Form 10-KSB of Pease Oil and Gas Company (the Company) for the year ended December 31, 1997. In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. The accounting policies followed by the Company are set forth in Note 1 to the Company's financial statements in Form 10-KSB for the year ended December 31, 1997. It is suggested that these financial statements be read in conjunction with the financial statements and notes included in the Form 10-KSB. Note 2 - Change In Accounting Principle: As more thoroughly discussed in the Company's 1997 Annual Report on Form 10-KSB, the Company changed its method of accounting for oil and gas producing activities from the successful efforts method to the full cost method during the fourth quarter of 1997. The 1997 financial statements presented herein have been restated to reflect the change. As a result of the change in accounting method, the net loss applicable to common shareholders increased by $1,450,103 ($.16 per share) for the first quarter of 1997. Note 3 - Dividends and Net Loss Per Common Share: Net loss per common share is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding during the year. All common stock equivalents have been excluded from the computations because their effect would be antidilutive. The net loss applicable to common stockholders is determined by adding any dividends accruing to the benefit of the preferred stockholders to the net loss. The dividends included for this calculation include both accrued but unpaid dividends and any imputed dividends attributable to the beneficial conversion feature. During the first quarter of 1997, the net loss applicable to common stockholders includes $44,984 of accrued but unpaid dividends related to the Series A Preferred Stock that automatically converted into common on June 11, 1997. During the first quarter of 1998, the net loss applicable to common stockholders includes $70,833 of accrued dividends plus an additional imputed non-cash dividend charge of $782,506 related to the beneficial conversion feature attached to the Series B Preferred Stock that was issued on December 31, 1997. The Series B Preferred Stock became convertible into common stock on March 31, 1998 at a conversion price equal to a 12% discount to the average trading price of the common stock prior to conversion. This discount increases monthly through March 1999 when the discount tops out at 25% (this discount is considered a "beneficial conversion feature"). The additional non-cash imputed dividend charge of $782,506 included in the net loss applicable to common stockholders during the first quarter of 1998 represents the intrinsic value of the 12% discount applicable at March 31, 1998. As long as any Series B Preferred Stock is outstanding, additional non-cash imputed dividend charges will be incurred in future periods as the conversion discount increases. -7- ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS Liquidity, Capital Expenditures and Capital Resources At March 31, 1998, the Company's cash balance was $3,472,158 with a positive working capital position of $1,977,104, compared to a cash balance of $6,547,804 and a positive working capital position of $5,295,474 at December 31, 1997. The change in the Company's cash balance is summarized as follows: Cash balance at December 31, 1997 $ 6,547,804 Sources of Cash: Cash provided by operating activities 438,026 Proceeds from the sale of property and equipment 7,420 Proceeds from the exercise of common warrants 939 ----------------- Total Sources of Cash 446,385 Uses of Cash: Exploration Activities - Gulf Coast (3,351,991) Offering Costs associated with Series B Preferred Stock (146,765) Other Capital Expenditures (21,678) Payments on long term debt (1,597) --------------- Total uses of cash (3,543,709) Cash balance at March 31, 1998 $ 3,472,158
As noted, most of the Company's uses of cash were deployed in exploration activities in the Gulf Coast which are summarized as follows:
PROGRAM OPERATOR NEGX Parallel AHC Other Total % Category: Discovery and Wells in Process 362,517 - 207,414 11,549 581,480 17% Exploratory Dry Holes 490,125 148,826 - - 638,951 19% Land, G&G Costs on Seismic Programs 1,228,510 768,789 - 75,262 2,072,561 62% Other Exploration Costs - - - 58,999 58,999 2% --------- ---------- ---------- ------------- ----------- ------- Total Exploration Costs 2,081,152 917,615 207,414 145,810 3,351,991 100% ========= ========= ========== ========== ========= ====== Percent 62% 27% 6% 5% 100%
The anticipated capital requirements for 1998 related to the Company's Gulf Coast exploration program are more thoroughly discussed in the Company's 1997 Annual Report on Form 10-KSB. There have been no significant changes in the expected capital requirements as of the date of this report and under the existing commitments, will be at least $4.0 million for the remainder of 1998. The Company's current and anticipated cash position will be insufficient to cover the future working capital and exploration obligations and the Company will need to seek additional financing. The Company is exploring various alternatives and future sources of capital may include additional debt or equity financings, the sale of certain existing assets, or a combination thereof. However, it cannot be determined at this time, what alternatives may be available, nor to what extent the potential dilution to the existing shareholders may be. In addition, if additional sources of financing are not ultimately available, the Company may have to consider other alternatives, including cancellation of existing exploration agreements, farmouts, joint ventures, a merger, and/or liquidation. The Company is currently attempting to sell or otherwise monitize its Rocky Mountain assets. Although no formal agreements have been reached as of the date of this report, the Company has been conducting on-going negotiations with several parties interested in the assets. The depressed and volatile commodity prices experienced since November 1997 (and continuing through the date of this report) have hindered the negotiations. However, the Company is committed to selling the Rocky Mountain Assets and anticipates most, if not all, of the related assets -8- will be sold sometime in 1998 assuming that acceptable terms can be negotiated with a willing purchaser. The Company's obligations under its outstanding 10% Collateralized Convertible Debentures (the "Convertible Debentures") in the principal amount of $3.975 million, together with interest thereon, is secured by a first priority security interest in substantially all of the oil and gas reserves in Larimer and Weld Counties, Colorado, which constituted approximately 60% of all of the Company's Rocky Mountain proved reserves of oil and gas at December 31, 1997. A portion of any proceeds received from the Company upon the sale of its Rocky Mountain oil and gas properties attributable to the properties which secure the Convertible Debentures will not be available to the Company, as such proceeds must be set aside and reserved as security for the Company's obligations under the Convertible Debentures. The Company intends to substitute other oil and gas assets as collateral for the Convertible Debentures, but such substitution requires the written approval of the holders of at least two-thirds of the oustanding Convertible Debentures. The Company intends to seek such approval for substitution at such time, if ever, as an acceptable sale of its Rocky Mountain oil and gas properties is negotiated and placed under contract. However, it cannot be determined at this time the amount of capital, if any, that would be available for future exploration and development activities should the Rocky Mountain assets be sold. RESULTS OF OPERATIONS Overview The Company's largest source of operating revenue is from the sale of produced oil, natural gas, and natural gas liquids. Therefore, the level of the Company's revenues and earnings are affected by prices at which natural gas, oil and natural gas liquids are sold. Therefore, the Company's operating results for any prior period are not necessarily indicative of future operating results because of the fluctuations in natural gas, oil and natural gas liquid prices and the lack of predictability of those fluctuations as well as changes in production levels. Change In Accounting Principle As more thoroughly discussed in the Company's Annual Report on Form 10-KSB, the Company changed its method of accounting for oil and gas producing activities from the successful efforts method to the full cost method. The 1997 financial statements presented herein have been restated to reflect the change. As a result of the change in accounting method, the net loss applicable to common stockholders increased by $1,450,103 ($0.16 per share) during the first quarter of 1997. The majority of the increased loss in 1997 is recognized in the financial statements under the caption "Impairment Expense" which is discussed later in this section. Management believes the full cost method of accounting is preferable because it will most accurately reflect the results of the Company's future operations. In connection with the Company's change in strategy from primarily an acquisition and production company to an exploration and production company, it is now focusing its efforts in the Gulf Coast region of the United States. The Company seeks to allocate its capital resources over a diversified portfolio of exploration and development projects within that area. It seeks to achieve a balance between the risks of exploratory drilling and the return on investment by investing in projects with large potential. Dry holes, abandoned properties and seismic projects are an inherent part of the exploration process. However, management believes that it is through disciplined, consistent application of this balanced portfolio strategy that the desired return on its entire investment will be achieved. Management believes that the full cost method of accounting is the method used by many independent oil and gas companies of comparable size to the Company and allows investors to better measure the performance of the Company. Management further believes that advanced three dimensional seismic and computer-aided exploration technology has become a much more significant factor in the success of an exploration program than in the past. Management believes that expensing these costs when incurred, as is required under successful efforts, is inconsistent with the value they add to the exploration process. Assets Held For Sale During the fourth quarter of 1997, the Company's Board of Directors determined that the Company's long-term strategy has shifted to exploration and development activities in the Gulf Coast region and that the Rocky Mountain assets should ultimately be divested. If and when these assets are sold, the revenue, costs, operating margins and cash flows currently generated and discussed under the captions "Gas Plant Processing", "Oil Field Services and Supply", "Well Administration and Other Income" would no longer be part of the Company's operations. Since these -9- assets include a significant portion of the Company's current operations, the sale of these assets, when and if it occurs, will have an immediate and material negative impact on the Company's future cash flows and results of operations. Total Revenue Total Revenue from all operations was as follows:
For the Three Months Ended March 31, 1998 1997 -------------------- ------------------ Amount % Amount % Oil and gas sales $ 591,608 69% $ 789,206 65% Gas plant processing 91,119 11% 209,510 17% Oil field services and supply 154,149 18% 198,319 16% Well administration and other income 15,654 2% 21,805 2% ----------- ------ ----------- ------ Total revenue $ 852,530 100% $1,218,840 100% ========== ---- ========= ====
The decrease in total revenue, along with any known trends or changes that effect revenue on a line-by-line basis, are discussed in the following paragraphs under their respective captions. Oil and Gas Operating statistics for oil and gas production for the periods presented are as follows: For the Three Months Ended March 31, 1998 1997 --------------- ---------- Production: Oil (Bbls) Rocky Mtns. 18,795 19,969 Gulf Coast 9,896 7,829 --------- --------- Combined Total 28,691 27,798 ======== ======== Gas (Mcf) Rocky Mtns. 84,967 95,443 Gulf Coast 30,955 6,864 -------- --------- Combined Total 115,922 102,307 ======= ======= BOE (6:1) Rocky Mtns. 32,956 35,876 Gulf Coast 15,055 8,973 -------- --------- Combined Total 48,011 44,849 ======== ======== Average Collected Price: Oil (per Bbl) Rocky Mtns. $ 13.43 $ 21.35 Gulf Coast 14.79 20.87 --------- --------- Combined Average $ 13.90 $ 21.22 -======= ======== Gas (per Mcf) Rocky Mtns. $ 1.44 $ 1.86 Gulf Coast 2.27 3.17 ---------- ---------- Combined Average $ 1.66 $ 1.95 ========= ========= Per BOE (6:1) Rocky Mtns. $ 11.38 $ 16.84 Gulf Coast 14.38 20.63 --------- --------- Combined Average $ 12.32 $ 17.60 ======== ======== -10- For the Three Months Ended March 31, 1998 1997 ------------- ----------- Operating Margins: Rocky Mtns: Revenue - Rocky Mtns. - Oil $ 252,420 $ 426,339 Rocky Mtns. - Gas 122,639 177,717 ------------ ------------ 375,059 604,056 Costs (292,705) (300,356) ------------- ------------- Operating Margin $ 82,354 $ 303,700 ============= =========== Operating Margin Percent 19% 50% Gulf Coast: Revenue - Gulf Coast - Oil $ 146,317 $ 163,418 Gulf Coast - Gas 70,232 21,732 ------------- ------------- 216,549 185,150 Costs (27,935) (28,463) -------------- -------------- Operating Margin $ 188,614 $ 156,687 ============ =========== Operating Margin Percent 87% 85% Combined Totals: Revenue $ 591,608 $ 789,206 Costs (320,640) (328,819) ------------- ------------- Operating Margin $ 270,968 $ 460,387 =========== =========== Operating Margin Percent 46% 58% Production Costs per BOE before DD&A: Rocky Mtn Region $ 8.89 $ 8.37 Gulf Coast Region 1.86 3.17 --------------- --------------- Combined Average $ 6.68 $ 7.33 ============== ============== Change in Revenue Attributable to: Production $ 38,638 Price (236,236) ------------ Total Decrease in Revenue $ (197,598) ========== As noted, the 25% decrease in oil and gas revenue during the first quarter of 1998 when compared to the first quarter of 1997 can be attributed to a substantial decrease in commodity prices between the two periods. Most of the decrease in oil and gas production for the Rocky Mountain region can be attributed to the natural decline in production that is inherent in oil and gas wells. The increase in oil and gas production for the Gulf Coast region can be attributed to the 1997 discoveries. The operating costs per BOE for the Gulf Coast properties decreased in 1998 when compared to the same period in 1997, primarily as a result of the higher volumes produced. Since a portion of the lifting costs are fixed, the cost per unit (or BOE) decreases as more oil and gas are produced. Gas Plant Processing This category accounts for the natural gas processed and the natural gas liquids extracted and sold by the Gas Plant facility. -11- Operating statistics for the periods presented are as follows:
For the Three Months Ended March 31, 1998 1997 --------------- --------- Production: Natural Gas Processed (Inlet Mcf) 72,600 78,900 Liquids Produced - B-G Mix (gallons) 154,100 192,100 Propane (gallons) 134,000 159,100 ---------- ------------- Total liquids produced 288,100 351,200 ========== ============= Total Liquids produced per Inlet Mcf ("GPM") 3.97 4.45 Average Sales Price of Liquids (per gallon) $ 0.31 $ 0.48 ============ =============== Gross Margin: Amount Amount ----------- ---------- Revenue $ 91,119 $ 209,510 Costs (81,813) (104,838) ------------ -------------- Gross Margin $ 9,306 $ 104,672 ========== ============ Gross Margin Percent 10% 50%
The decrease in natural gas processing volumes (per Mcf) during 1998 when compared to 1997, can be substantially attributed to the normal decline in production from the two fields owned and operated by the Company that supply the gas plant with natural gas. The decrease in revenue in 1998 when compared to 1997 is a direct result of: 1.) the volume of natural gas processed; 2.) the substantial decrease in liquid prices; and 3.) the gas plant encountered several operational problems during the first quarter that forced the plant to flare unprocessed gas (thus lowering the GPM). Costs associated with the Gas Plant operations consist of both semi-fixed and variable costs. The semi-fixed costs consist of direct payroll, utilities, operating supplies, general and administrative costs, and other items necessary in the day-to-day operations. The semi-fixed costs are not expected to change significantly regardless of the volume processed by the Gas Plant. The variable costs consist primarily of purchased gas, plant fuel and shrink, lubricants, repair and maintenance. These costs are generally a direct function of the volume processed by the Gas Plant and are expected to either increase or decrease proportionately with the corresponding plant production. Oil Field Services and Oil Field Supply Operating statistics for the Company's oil field service and supply operations for the periods presented are as follows: For the Three Months Ended March 31, 1998 1997 ------------- --------- Revenue $ 154,149 $ 198,319 Costs (139,926) (153,658) ----------- ------------ Net Operating Income $ 14,223 $ 44,661 ========== ========= Total revenue, and the net operating margin decreased in 1998, when compared to 1997 as a result of less work generated from the Company's hot oil services. This is a result of the Company's truck pusher resigning in light of the anticipated sale of the Rocky Mountain assets and taking a portion of the Company's business with him. Well Administration and Other Income As expected, there has been no material change in the well administration and other income during the periods presented. -12- Consulting Arrangement - Related Party In March 1996 the Company entered into a three-year consulting agreement with Beta Capital Group, Inc. ("Beta"). Beta, located in Newport Beach, California, specializes in emerging companies with both capital needs and market support requirements. Beta's chairman, Steve Antry, has been a director of the Company since August 1996. The consulting agreement with Beta provides for minimum monthly cash payments of $17,500 plus reimbursement for out-of-pocket expenses. General and Administrative The decrease in general and administrative ("G&A") expenses of approximately $68,000 during the first quarter of 1998 when compared to the same period in 1997 is summarized as follows: $ 28,000 - Net reduction of payroll costs substantially attributed to the elimination of two administrative positions (these positions eliminated as a result of the anticipated sale of the Rocky Mountain assets). 19,000 - Consulting services. 13,000 - Travel and entertainment costs. 8,000 - All other, net. $ 68,000 Although the Company has and will take steps to reduce and monitor G&A costs, there can be no assurance future G&A costs will not be at those levels experienced in 1997. Even if the Rocky Mountain assets are ultimately sold, the Company does not expect any other significant reductions in future G&A expenses, at least in the near term. This is primarily due to any reductions that may be made due to the divestment will likely be offset by additional administrative costs associated with the Gulf Coast exploration activities. Depreciation, Depletion and Amortization Depreciation, Depletion and Amortization ("DD&A") for the periods presented by cost center consisted of the following: For the Three Months Ended March 31 1998 1997 Oil and Gas Properties - Rocky Mountains $ 102,919 295,020 Oil and Gas Properties - Gulf Coast 134,167 50,225 Gas Plant Operations 58,630 60,929 Service and Supply Operations 45,329 36,562 Furniture and Fixtures 12,092 12,370 Non-Compete Agreements - 11,500 ----------- ----------- Total $ 353,137 $ 466,606 ========= ========= DD&A for the oil and gas properties, per BOE, for the periods presented is as follows: Rocky Mountains $ 3.1 $ 8.22 Gulf Coast 8.92 5.59 Combined Total 4.94 7.69 DD&A for the oil and gas properties is computed based on one full cost pool using the total estimated reserves at the end of each period presented and prior to applying the ceiling test discussed later in this section under "Impairment Expense". The estimated portion of DD&A for the Rocky Mountains and the Gulf Coast are illustrated here for analysis purposes only. Therefore, the variances in the DD&A rates for oil and gas properties (per BOE) for the periods presented are a function of the estimated reserves and the net costs being amortized at the end of the respective reporting periods. -13- Interest Expense Total interest incurred, and its allocation, for the periods presented is as follows: For the Three Months Ended March 31, 1998 1997 -------------- --------- Interest paid or accrued $ 98,261 $125,889 Amortization of debt discount 80,946 98,186 Amortization of debt issuance costs 51,101 61,941 ---------- --------- Total interest incurred 230,308 286,016 Interest capitalized (230,061) (70,543) --------- --------- Interest expense $ 247 $215,473 ========== ======= The lower interest incurred in 1998 is attributed to the face value of the convertible debentures issued in 1996 decreased from an average balance of $4.85 million during the first quarter of 1997 to an average balance of $3.98 million during the first quarter of 1998. The decrease in the average balance during the periods presented is attributed to a portion of the convertible debentures converted into common stock. More interest was capitalized in 1998 when compared to 1997 since the average amounts invested in unevaluated oil and gas properties was substantially higher in 1998. Impairment Expense - Oil and Gas Properties As previously discussed, the Company changed its accounting method for oil and gas activities from successful efforts to full cost during the fourth quarter of 1997. The full cost method regards all costs of acquisition, exploration, and development activities as being necessary for the ultimate production of reserves. All of those costs are incurred with the knowledge that many of them relate to activities that do not result directly in finding and developing reserves. However, the Company expects that the benefits obtained from the prospects that do prove successful, together with benefits from past discoveries, will ultimately recover the costs of all activities, both successful and unsuccessful. Thus, all costs incurred in those activities are regarded as integral to the acquisition, discovery, and development of reserves that ultimately result from the efforts as a whole and are thereby associated with the Company's proved reserves. Establishing a direct cause-and-effect relationship between costs incurred and specific reserves discovered, which is the premise under successful efforts, is not relevant to the full cost concept. In light of the transformation from Rocky Mountain acquisition and development to Gulf Coast exploration, the Company believes this method will be a preferable method of accounting. However, the costs accumulated in the Company's full cost pool are subject to a "ceiling", as defined by Regulation SX Rule 4-10(e)(4). As prescribed by the corresponding accounting standards for full cost, all the accumulated costs in excess of the ceiling, are to be expensed by a charge to impairment. Accordingly, the impairment recognized in 1998 can be substantially attributed to the costs incurred in connection with dry holes during the first quarter. The impairment recognized in the first quarter of 1997 can be attributed to approximately $307,000 in dry holes and $1.3 million associated with the cumulative effect of the change in accounting methods from successful efforts to full cost. As thoroughly discussed in the Company's 1997 10-KSB, the cumulative effect of the accounting change increased the carrying value of the oil and gas properties (which at the time consisted principally of the Rocky Mountain properties). A significant drop in oil and gas prices between December 31, 1996 and March 31, 1997 substantially lowered the "ceiling" on the full cost pool and the Company incurred the additional impairment charge. Dividends and Net Loss Per Common Share Net loss per common share is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding during the year. All common stock equivalents have been excluded from the computations because their effect would be antidilutive. The net loss applicable to common stockholders is determined by adding any dividends accruing to the benefit of the preferred stockholders to the net loss. The dividends included for this calculation include both accrued but unpaid dividends and any imputed dividends attributable to the beneficial conversion feature. During the first quarter of 1997, the net loss applicable to common stockholders includes $44,984 of accrued but unpaid dividends related to the Series A Preferred Stock that automatically converted into common on June 11, 1997. During the first quarter -14- of 1998, the net loss applicable to common stockholders includes $70,833 of accrued dividends plus an additional imputed non-cash dividend charge of $782,506 related to the beneficial conversion feature attached to the Series B Preferred Stock that was issued on December 31, 1997. The Series B Preferred Stock became convertible into common stock on March 31, 1998 at a conversion price equal to a 12% discount to the average trading price of the common stock prior to conversion. This discount increases monthly through March 1999 when the discount tops out at 25% (this discount is considered a "beneficial conversion feature"). The additional non-cash imputed dividend charge of $782,506 included in the net loss applicable to common stockholders during the first quarter of 1998 represents the intrinsic value of the 12% discount applicable at March 31, 1998. As long as any Series B Preferred Stock is outstanding, additional non-cash imputed dividend charges will be incurred in future periods as the conversion discount increases. OTHER MATTERS Recently Issued Financial Accounting Standards In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and display of comprehensive income and its components. The components of comprehensive income refer to revenues, expenses, gains and losses that are excluded from net income under current accounting standards, including foreign currency translation items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. SFAS 130 requires that all items that are recognized under accounting standards as components of comprehensive income be reported in a financial statement displayed in equal prominence with the other financial statements; the total of other comprehensive income for a period is required to be transferred to a component of equity that is separately displayed in a statement of financial position at the end of an accounting period. SFAS 130 is effective for both interim and annual periods beginning after December 15, 1997. The Company does not believe that this SFAS will have any significant impact on its financial statements. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way public enterprises are to report information about operating segments in annual financial statements and requires the reporting of selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS 131 is effective for periods beginning after December 15, 1997. The Company does not believe that this SFAS will currently result in any significant new disclosures in its financial statements. 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 "Business and Properties" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, reserve quantities and net present values, business strategy, plans and objectives of management of the Company 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. The Company 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 the control of the Company. Such things may cause actual results, performance, achievements or expectations to differ materially from the anticipated results, performance, achievements or expectations. Factors that may affect such forward-looking statements include, but are not limited to: the Company's ability to generate additional capital to complete its planned drilling and exploration activities; risks inherent in oil and gas acquisitions, exploration, drilling, development and production; price volatility of oil and gas; competition; shortages of 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 the -15- Company's control. In addition, since all of the prospects in the Gulf Coast are currently operated by another party, the Company 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 the Company or persons acting on its behalf subsequent to the date of this report are expressly qualified in their entirety by this disclosure. Year 2000 Issue The Company has begun to address possible remedial efforts in connection with computer software that could be affected by the Year 2000 problem. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company has been informed by the suppliers of substantially all of the Company's software that all of those suppliers' software that is used by the Company is Year 2000 compliant. The Company has no internally generated software. After reasonable investigation, the Company has not yet identified any Year 2000 problems but will continue to monitor the issue. However, there can be no assurances that Year 2000 problems will not occur with respect to the company's computer systems. The Year 2000 problem may impact other entities with which the Company transacts business, and the Company cannot predict the effect of the Year 2000 problem on such entities. PART II - OTHER INFORMATION Item 1. Legal Proceedings 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 operation 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 condition or results of operations. Item 2. Changes in Securities (a) and (b): not applicable (c) 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 March 31, 1998 and through the date of this Report. 1. On February 2, 1998, the Company issued 1,250 shares of its common stock upon exercise of outstanding stock purchase warrants at $0.75 per shares for total proceeds of $938 to the Company. These warrants were issued in February 1996 in connection with the consulting agreement entered into with Beta Capital Group, Inc. Shares of common stock issued upon exercise of the warrants were registered for resale by the holder in Registration No. 333-19589. In connection with the issuance of the above noted securities, the Company 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 a restrictive legend and stop transfer instructions have been entered prohibiting transfer of the securities except in compliance with applicable securities law. Item 3. Defaults Upon Senior Securities (a) There has been no material default in the payment of principal, interest, or any other material default, with respect to any indebtedness of the small business issuer during the period covered by this report. -16- (b) There has been no material default in the payment of dividends for any class of preferred stock during the period covered by this report. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of Company's security holders during the period covered by this report. Item 5. Other Information There is no information reportable under this item for the period covered by this report. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed with this report: (1) Exhibit 27-1, "Financial Data Schedule" - for the quarter ended March 31, 1998. (2) Exhibit 27-2, "Financial Data Schedule" - for the quarter ended March 31, 1997 as restated for accounting change from successful efforts to full cost for oil and gas activities. (b) The following reports on Form 8-K were filed during the quarter ended March 31, 1998:
Item Reported Date Financial Statement ------------- ------------------------ -------------------- (1) 5, 7 January 13, 1998 None - Not Applicable (2) 5, 7 March 9, 1998 None - Not Applicable
There were no financial statements filed during the quarter ended March 31, 1998 other than the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997. SIGNATURES In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PEASE OIL AND GAS COMPANY Date: May 19, 1998 By: /s/ Willard H. Pease, Jr. Willard H. Pease, Jr. President and Chief Executive Officer Date: May 19, 1998 By: /s/ Patrick J. Duncan Patrick J. Duncan Chief Financial Officer, Treasurer, and Principal Accounting Officer -17- EX-27 2 03/31/98 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 MAR-31-1998 3,472,158 0 369,761 24,395 268,276 3,832,376 20,995,979 5,577,442 20,462,391 1,914,607 3,003,649 0 1,133 1,579,121 0 15,246,955 836,876 852,530 542,379 1,216,083 0 478,043 246 (774,828) 0 (774,828) 0 0 0 (1,628,167) (0.10) (0.10)
EX-27 3 03/31/97 RESTATED FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1997 MAR-31-1997 2,901,908 0 615,730 24,395 459,304 4,041,183 26,248,231 9,257,386 22,556,165 1,126,013 3,134,936 0 1,229 1,151,083 0 22,556,165 1,197,035 1,218,840 587,315 1,462,753 2,356 1,621,532 215,473 (2,060,503) 0 (2,060,503) 0 0 0 (2,105,487) (0.24) (0.24)
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