-----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, KT93y+zJOF6ivtwpJKWEbAdXjneUGgqeJo3U2/fTGzT7UlVXOUZjPvCjNeao4pSh wzG/1f+RFp4Prfe8RANdcA== 0000918402-96-000074.txt : 19960604 0000918402-96-000074.hdr.sgml : 19960604 ACCESSION NUMBER: 0000918402-96-000074 CONFORMED SUBMISSION TYPE: PRER14A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960603 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: PRER14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-06580 FILM NUMBER: 96576122 BUSINESS ADDRESS: STREET 1: 751 HORIZON COURT STREET 2: SUITE 203 CITY: GRAND JUNCTION STATE: CO ZIP: 81506 BUSINESS PHONE: 3032455917 MAIL ADDRESS: STREET 1: PO BOX 1874 CITY: GRAND JUNCTION STATE: CO ZIP: 81502 FORMER COMPANY: FORMER CONFORMED NAME: WILLARD PEASE OIL & GAS CO DATE OF NAME CHANGE: 19920703 PRER14A 1 AMENDMENT NO. 1 PRELIMINARY PROXY STATEMENT SCHEDULE 14A (Rule 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by the Registrant [X] FILED BY THE PARTY OTHER THAN THE REGISTRANT [ ] Check the appropriate box: [X] Preliminary Proxy Statement [ ] Confidential for use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 PEASE OIL AND GAS COMPANY (Name of Registrant as Specified in its Charter) PEASE OIL AND GAS COMPANY (Name of Person(s) Filing Proxy Statement) Payment of Filing Fee (Check the appropriate box): [ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A. [ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which the transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [X] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: COMMON STOCK PROXY PEASE OIL AND GAS COMPANY PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JULY _, 1996 The undersigned hereby constitute(s) and appoint(s) Willard H. Pease, Jr. and Patrick J. Duncan, and each of them the true and lawful attorneys and proxies ("Proxies") of the undersigned with full power of substitution and appointment, for and in the name, place and stead of the undersigned, to act for and to vote all of the undersigned's shares of common stock of Pease Oil and Gas Company (the "Company") at the Annual Meeting of Stockholders to be held at the Ramada Inn, 2790 Crossroads Boulevard, Grand Junction, Colorado, 81506, on _______, July _, 1996, at 10:00 a.m., Mountain Daylight Time, and at any and all adjournments thereof, for the following purposes: (1) Election of Directors [ ] FOR all Class C director nominees listed below (except as marked to the contrary below) [ ] WITHHOLD AUTHORITY to vote for all nominees listed below INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW. WILLARD H. PEASE, JR. WILLIAM F. WARNICK (2) To amend Section 6.1, Automatic Conversion, and Section 6.2, Optional Conversion, of the Company's Certificate of Designation of Series A Cumulative Convertible Preferred Stock to read as follows: "6.1 Automatic Conversion. If at any time after the issuance of the Series A Preferred Stock, the last reported sales price for the Company's $.10 par value Common Stock as reported on the NASDAQ System (or the closing price as reported on any national securities exchange on which the Common Stock is then listed), shall, for a period of five (5) consecutive trading days, equal or exceed $2.50 per share, then, effective as of the close of business on the fifth such trading day, all shares of Series A Preferred Stock then outstanding and all accrued and undeclared dividends thereon shall immediately and automatically without further notice be converted into shares of Common Stock and Warrants to purchase Common Stock ("Warrants") with the same effect and the same result as if an optional conversion occurred as described in this Section 6." "6.2 Optional Conversion. Each share of Series A Preferred Stock and all accrued and undeclared dividends thereon shall be convertible at any time after the initial issuance of the Series A Preferred Stock and prior to the Redemption Date into the number of shares of Common Stock calculated using a price of $2.50 per share (the "Common Stock Price") based upon the following formula: (Issue price [$10.00] plus accumulated undeclared dividends plus undeclared dividends which would otherwise become due at the next Dividend Due Date) divided by the Common Stock Price equals Number of Shares Received Upon Conversion ("Conversion Price") In addition, if such conversion occurs prior to the close of business five years from August 13, 1993, the Effective Date of the Public Offering, the Company shall issue to each holder of Series A Preferred Stock the same number of Warrants to purchase Common Stock upon conversion, without any further payment. Each Warrant will be exercisable to purchase one share of Common Stock at a price, subject to adjustments described therein (hereafter the "Exercise Price") of $5.00 per share through December 31, 1996 and $6.00 per share thereafter for the life of the Warrant, August 13, 1998. If the Preferred Stock has been called for redemption, the conversion right shall terminate at the close of business on the last business day prior to the date fixed for redemption (unless the Company defaults in the payment of the redemption price). The Warrants shall be exercisable and shall have such other terms and conditions as shall be described in a Warrant Agency Agreement relative to the Warrants, between the Company and the Warrant Agent designated therein. The Warrants and the Warrant Agency Agreement shall be substantially in the form filed as an exhibit to the Registration Statement except as may be amended to conform to the terms hereof." [ ] FOR [ ] AGAINST [ ] ABSTAIN (3) Approval of the Company's 1996 Stock Option Plan. [ ] FOR [ ] AGAINST [ ] ABSTAIN (4) In their discretion, the Proxies are authorized to vote upon such other business as may lawfully come before the meeting, hereby revoking any Proxies as to said shares heretofore given by the undersigned and ratifying and confirming all that said attorneys and proxies may lawfully do by virtue hereof. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER(S). UNLESS OTHERWISE INSTRUCTED ABOVE, THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AT THE MEETING FOR ELECTION OF THE NOMINEES FOR DIRECTOR AS SELECTED BY THE BOARD OF DIRECTORS, AND IN FAVOR OF PROPOSALS (2) AND (3). It is understood that this Proxy confers discretionary authority in respect of matters not known or determined at the time of the mailing of the Notice of Annual Meeting of Stockholders to the undersigned. The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders and the Proxy Statement furnished therewith. Dated and Signed: ___________________________________, 1996 ----------------------------------------- ----------------------------------------- Signature(s) of Stockholder(s) Signature(s) should agree with the name(s) stenciled hereon. Executors, administrators, trustees, guardians and attorneys should so indicate when signing. Attorneys should submit powers of attorney. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. PLEASE SIGN AND RETURN THIS PROXY TO AMERICAN SECURITIES TRANSFER, INC., P.O. BOX 1596, DENVER, COLORADO 80201-9975. THE GIVING OF A PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING. SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK PROXY PEASE OIL AND GAS COMPANY PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JULY _, 1996 The undersigned hereby constitute(s) and appoint(s) Willard H. Pease, Jr. and Patrick J. Duncan, and each of them the true and lawful attorneys and proxies ("Proxies") of the undersigned with full power of substitution and appointment, for and in the name, place and stead of the undersigned, to act for and to vote all of the undersigned's shares of Series A Cumulative Convertible Preferred Stock of Pease Oil and Gas Company (the "Company") at the Annual Meeting of Stockholders to be held at the Ramada Inn, 2790 Crossroads Boulevard, Grand Junction, Colorado, 81506, on ______, July _, 1996, at 10:00 a.m., Mountain Daylight Time, and at any and all adjournments thereof, for the following purposes: (1) ELECTION OF DIRECTORS [ ] FOR all Series A Preferred director nominees listed below (except as marked to the contrary below) [ ] WITHHOLD AUTHORITY to vote for all nominees listed below INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW. DAVID W. WRIGHT JACK A. ALEXANDER (2) To amend Section 6.1, Automatic Conversion, and Section 6.2, Optional Conversion, of the Company's Certificate of Designation of Series A Cumulative Convertible Preferred Stock to read as follows: "6.1 Automatic Conversion. If at any time after the issuance of the Series A Preferred Stock, the last reported sales price for the Company's $.10 par value Common Stock as reported on the NASDAQ System (or the closing price as reported on any national securities exchange on which the Common Stock is then listed), shall, for a period of five (5) consecutive trading days, equal or exceed $2.50 per share, then, effective as of the close of business on the fifth such trading day, all shares of Series A Preferred Stock then outstanding and all accrued and undeclared dividends thereon shall immediately and automatically without further notice be converted into shares of Common Stock and Warrants to purchase Common Stock ("Warrants") with the same effect and the same result as if an optional conversion occurred as described in this Section 6." "6.2 Optional Conversion. Each share of Series A Preferred Stock and all accrued and undeclared dividends thereon shall be convertible at any time after the initial issuance of the Series A Preferred Stock and prior to the Redemption Date into the number of shares of Common Stock calculated using a price of $2.50 per share (the "Common Stock Price") based upon the following formula: (Issue price [$10.00] plus accumulated undeclared dividends plus undeclared dividends which would otherwise become due at the next Dividend Due Date) divided by the Common Stock Price equals Number of Shares Received Upon Conversion ("Conversion Price") In addition, if such conversion occurs prior to the close of business five years from August 13, 1993, the Effective Date of the Public Offering, the Company shall issue to each holder of Series A Preferred Stock the same number of Warrants to purchase Common Stock upon conversion, without any further payment. Each Warrant will be exercisable to purchase one share of Common Stock at a price, subject to adjustments described therein (hereafter the "Exercise Price") of $5.00 per share through December 31, 1996 and $6.00 per share thereafter for the life of the Warrant, August 13, 1998. If the Preferred Stock has been called for redemption, the conversion right shall terminate at the close of business on the last business day prior to the date fixed for redemption (unless the Company defaults in the payment of the redemption price). The Warrants shall be exercisable and shall have such other terms and conditions as shall be described in a Warrant Agency Agreement relative to the Warrants, between the Company and the Warrant Agent designated therein. The Warrants and the Warrant Agency Agreement shall be substantially in the form filed as an exhibit to the Registration Statement except as may be amended to conform to the terms hereof." [ ] FOR [ ] AGAINST [ ] ABSTAIN (3) In their discretion, the Proxies are authorized to vote upon such other business as may lawfully come before the meeting, hereby revoking any Proxies as to said shares heretofore given by the undersigned and ratifying and confirming all that said attorneys and proxies may lawfully do by virtue hereof. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER(S). UNLESS OTHERWISE INSTRUCTED ABOVE, THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AT THE MEETING FOR ELECTION OF THE NOMINEES FOR DIRECTOR AS NOMINATED BY THE HOLDERS OF PREFERRED STOCK, AND IN FAVOR OF PROPOSAL (2). It is understood that this Proxy confers discretionary authority in respect to matters not known or determined at the time of the mailing of the Notice of Annual Meeting of Stockholders to the undersigned. The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders and the Proxy Statement furnished therewith. Dated and Signed: ___________________________________, 1996 ----------------------------------------- ----------------------------------------- Signature(s) of Stockholder(s) Signature(s) should agree with the name(s) stenciled hereon. Executors, administrators, trustees, guardians and attorneys should so indicate when signing. Attorneys should submit powers of attorney. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. PLEASE SIGN AND RETURN THIS PROXY TO AMERICAN SECURITIES TRANSFER, INC., P.O. BOX 1596, DENVER, COLORADO 80201-9975. THE GIVING OF A PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING. PEASE OIL AND GAS COMPANY 751 Horizon Court, Suite 203 Grand Junction, Colorado 81506 ------------------ NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To Be Held on July _, 1996 ------------------ To Our Stockholders: The Annual Meeting of Stockholders of Pease Oil and Gas Company, a Nevada corporation ("Company"), will be held at the Ramada Inn, 2790 Crossroads Boulevard, Grand Junction, Colorado 81506, on ________, July _, 1996, at 10:00 a.m., Mountain Daylight Time, for the following purposes: MATTERS TO BE VOTED UPON BY HOLDERS OF COMMON STOCK (1) The election of two Class C directors to serve on the Company's Board of Directors totalling nine directors. (2) A proposal to amend the Certificate of Designation of Series A Cumulative Convertible Preferred Stock to change the event which triggers automatic conversion of the Preferred Stock into Common Stock, to lower the price for converting Preferred Stock into Common Stock and Warrants, and to state the exercise price of the Warrants. (3) A proposal to approve the Company's 1996 Stock Option Plan. (4) Such other matters as may properly come before the meeting or any adjournment thereof. MATTERS TO BE VOTED UPON BY HOLDERS OF PREFERRED STOCK (1) The election of two directors to represent the holders of Preferred Stock on the Company's Board of Directors totalling nine directors. (2) A proposal to amend the Certificate of Designation of Series A Cumulative Convertible Preferred Stock to change the event which triggers automatic conversion of the Preferred Stock into Common Stock, to lower the price for converting Preferred Stock into Common Stock and Warrants, and to state the exercise price of the Warrants. (3) Such other matters as may properly come before the meeting or any adjournment thereof and which may properly be voted upon by the holders of Preferred Stock. Only stockholders of record at the close of business on May 8, 1996, are entitled to notice of and to vote at the meeting. BY ORDER OF THE BOARD OF DIRECTORS PATRICK J. DUNCAN Corporate Secretary Grand Junction, Colorado _______, 1996 - -------------------------------------------------------------------------------- THE FORM OF PROXY IS ENCLOSED. TO ASSURE THAT YOUR SHARES WILL BE VOTED AT THE MEETING, PLEASE COMPLETE AND SIGN THE ENCLOSED WHITE PROXY FOR HOLDERS OF COMMON STOCK OR THE BLUE PROXY FOR HOLDERS OF PREFERRED STOCK AND RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE PREPAID, ADDRESSED ENVELOPE. IF YOU ARE A HOLDER OF SHARES OF BOTH COMMON STOCK AND PREFERRED STOCK, PLEASE COMPLETE AND RETURN BOTH CARDS. NO ADDITIONAL POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. THE GIVING OF A PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING. PEASE OIL AND GAS COMPANY 751 Horizon Court, Suite 203 Grand Junction, Colorado 81506 PROXY STATEMENT ANNUAL MEETING OF STOCKHOLDERS To Be Held July _, 1996 The enclosed Proxy is solicited by and on behalf of the Board of Directors of Pease Oil and Gas Company ("Company") for use at the Company's Annual Meeting of Stockholders to be held at 10:00 a.m. Mountain Daylight Time, at the Ramada Inn, 2790 Crossroads Boulevard, Grand Junction, Colorado 81506, on ________, July _, 1996, and at any adjournment thereof. It is planned that this Proxy Statement and the accompanying Proxy will be mailed to the Company's stockholders on or about _____, 1996. Any person signing and mailing the enclosed Proxy may revoke it at any time before it is voted by (i) giving written notice of the revocation to the Company's corporate secretary; (ii) voting in person at the Meeting; or (iii) voting again by submitting a new proxy card. Only the latest dated proxy card, including one which a person may vote in person at the Meeting, will count. If you are a stockholder of both Common Stock and Preferred Stock, you should receive with the Proxy Statement both a White Proxy and a Blue Proxy. You may vote on all matters described herein. VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT All voting rights, except the special voting rights granted to the holders of Series A Cumulative Convertible Preferred Stock ("Preferred Stock"), are vested exclusively in the holders of the Company's $0.10 par value common stock ("Common Stock") with each share entitled to one vote. Holders of Common Stock are entitled to vote at the Meeting for the election of two Class C directors to the Company's Board of Directors; on a proposal to amend the Certificate of Designation of the Series A Cumulative Convertible Preferred Stock ("Designation") to change the event which triggers the automatic conversion of Preferred Stock into Common Stock and Warrants, to lower the price for converting the Preferred Stock into Common Stock and Warrants, and to state the exercise price of the Warrants; on a proposal to approve the Company's 1996 Stock Option Plan; and on other matters which may properly come before the Meeting. Holders of the Company's outstanding Preferred Stock are entitled to vote at the meeting to elect two directors to represent them on the Company's Board of Directors pursuant to the terms of the Designation; a proposal to amend the Designation to change the event which triggers the automatic conversion of Preferred Stock into Common Stock and Warrants, to lower the price for converting the Preferred Stock into Common Stock and Warrants, and to state the exercise price of the Warrants, and any other matters which may properly come before the Meeting upon which the holders of Preferred Stock may vote. Cumulative voting in the election of directors is not permitted. Each share of Preferred Stock is entitled to one vote. Only stockholders of record at the close of business on May 8, 1996, are entitled to notice of and to vote at the meeting or any adjournments thereof. On May 9, 1996, the Company had 7,218,854 shares of Common Stock and 202,688 shares of Preferred Stock outstanding. - 1 - The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock, by (i) each person who is known to the Company to own beneficially more than 5% of the outstanding Common Stock with the address of each such person, (ii) each of the Company's directors and officers, and (iii) all officers and directors as a group:
Name and Address of Amount and Nature of Beneficial Owner Beneficial Ownership(1) Percent of Class - ------------------- ---------------------- ---------------- Willard H. Pease, Jr ................... 762,139 Shares (2) 10.1% P.O. Box 1874 Grand Junction, CO 81502 James C. Ruane ......................... 235,644 Shares (3) 3.2% 5010 Market St San Diego, CA 92102 Patrick J. Duncan ...................... 134,531 Shares (4) 1.8% P.O. Box 1874 Grand Junction, CO 81502 James N. Burkhalter .................... 130,709 Shares (5) 1.8% P.O. Box 1874 Loveland, CO 80537 William F. Warnick ..................... 47,508 Shares (6) 0.7% 2022 Broadway Lubbock, TX 79401 Robert V. Timlin ....................... 37,095 Shares (7) 0.5% 1989 South Balsam Lakewood, CO 80277 Homer C. Osborne ....................... 22,342 Shares (8) 0.3% 1200 Preston Road #900 Dallas, TX 75230 All Officers and Directors ........... 1,369,968 Shares (9) 17.1% as a group (seven persons) Chester LF Paulson & ................... 523,750 Shares(10) 7.1% Jacqueline M. Paulson JTWROS 811 SW Front Avenue Suite 200 Portland, OR 97204-3376 Beta Capital Group, Inc. ............... 1,000,000 Shares(11) 12.2% 901 Dove Drive, Suite 230 Newport Beach, CA 92660 - 2 -
- ----------------------- (1) Beneficial owners listed have sole voting and investment power with respect to the shares unless otherwise indicated. (2) Includes 61,173 shares that are owned directly by Mr. Pease, over which shares Mr. Pease has sole voting and investment power, 364,966 shares are owned by entities affiliated with Mr. Pease over which shares Mr. Pease has sole voting and investment power, 148,500 shares underlying presently exercisable options owned by Mr. Pease, 101,500 shares underlying presently exercisable warrants owned by Mr. Pease, and 26,000 and 60,000 shares, respectively, underlying two convertible promissory notes owned by Mr. Pease. (3) Includes 4,560 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, 11,250 shares underlying convertible preferred stock, 44,584 shares underlying presently exercisable warrants to purchase common stock and 56,675 shares underlying presently exercisable options. (4) Includes 3,281 shares underlying presently exercisable warrants and 105,000 shares underlying presently exercisable options. (5) Includes 115,000 shares underlying presently exercisable options. (6) Includes 32,675 shares underlying presently exercisable options. (7) Includes 32,675 shares underlying presently exercisable options. (8) Includes 17,975 shares underlying presently exercisable options. (9) Includes 508,500 shares underlying presently exercisable options, 149,365 shares underlying presently exercisable warrants, 11,250 shares underlying convertible preferred stock, and 86,000 shares underlying convertible notes. (10) Includes 178,480 shares underlying presently exercisable warrants. (11) Represents 1,000,000 shares underlying presently exercisable warrants. Currently, Lisa Antry, a 50% owner of Beta Capital Group, Inc., exercises sole voting and dispositive power with respect to the warrants. The following table sets forth certain information regarding the ownership of the Company's Preferred Stock by (i) each person who is known to the Company - 3 - to own beneficially more than five percent (5%) of the outstanding Preferred Stock with the address of each such person, (ii) each of the Company's officers and directors, and (iii) all officers and directors as a group.
Name and Address of Amount and Nature of Percent Beneficial Owner Beneficial Ownership of Class - ------------------- -------------------- -------- James C. Ruane ...................................... 4,000 1.9% 5010 Market Street San Diego, CA 92102 All Officers and Directors as a group ............... 4,000 1.9% (seven persons) Bob Gilman .......................................... 15,000 7.3% 505 Tadmore Court Schaumburg, IL 60194
ACTIONS TO BE TAKEN AT MEETING The meeting is called by the Board of Directors to consider and act upon the following matters: Action To Be Taken By The Holders of Common Stock (1) The election of two Class C directors to serve on the Board of Directors; (2) A proposal to amend the Certificate of Designation of Series A Cumulative Convertible Preferred Stock to change the event which triggers automatic conversion of the Preferred Stock into Common Stock, to lower the price for converting Preferred Stock into Common Stock and Warrants and to state the exercise price of the Warrants; (3) Approval of the Company's 1996 Stock Option Plan; and (4) Such other matters as may properly come before the meeting or any adjournment thereof. To vote on these matters, please mark, sign and date the WHITE Proxy and return it in the enclosed envelope. Action To Be Taken By The Holders of Preferred Stock - 4 - (1) The election of two additional directors to represent the holders of Preferred Stock of the Company on the Company's Board of Directors; (2) A proposal to amend the Certificate of Designation of Series A Cumulative Convertible Preferred Stock to change the event which triggers automatic conversion of the Preferred Stock into Common Stock, to lower the price for converting Preferred Stock into Common Stock and Warrants, and to state the exercise price of the Warrants; and (3) Such other matters as may properly come before the meeting or any adjournment thereof and which may properly be voted on by the holders of Preferred Stock. To vote on these matters, please mark, sign and date the BLUE Proxy and return it in the enclosed envelope. If you hold both Common and Preferred Stock, please return BOTH proxies in the enclosed envelopes. The holders of a majority of the outstanding shares of the Company, including both Common Stock and Preferred Stock taken together, present at the meeting in person or represented by proxy, shall constitute a quorum. Directors shall be elected by a plurality of the vote with respect to each class of stock voting, i.e., the candidates for each class of stock receiving the highest number of votes cast in favor of their election will be elected to the Board of Directors. The proposal to amend the Certificate of Designation requires the approval of the majority of the outstanding shares of Common Stock AND two-thirds of the outstanding shares of Preferred Stock. The proposal to adopt the Company's 1996 Stock Option Plan requires the approval of a majority of the shares of Common Stock present or represented by proxy at the Meeting. The holders of Preferred Stock do not have the right to vote on the Stock Option Plan. Where brokers have not received any instruction from their clients on how to vote on a particular proposal, brokers are permitted to vote on routine proposals but not on non-routine matters. Accordingly, brokers will not vote on the proposals to amend the Certificate of Designation or the Stock Option Plan. The absence of votes on non-routine matters are "broker non-votes". Abstentions and broker non-votes will be counted as present for purposes of establishing a quorum, but will have no effect on the election of directors. There are no dissenters' rights applicable to the election of directors. Abstentions and broker non-votes on proposals other than the election of directors will be counted as present for purposes of establishing a quorum AND will have the effect of a vote against the proposals. Matters to be voted on by stockholders are set forth below. EACH PROPOSAL IS MARKED TO INDICATE WHICH OR BOTH CLASSES OF STOCKHOLDERS ARE ENTITLED TO VOTE ON THE PROPOSAL. PLEASE REVIEW EACH PROPOSAL CAREFULLY TO DETERMINE WHICH PROPOSALS REQUIRE THE VOTE OF THE HOLDERS OF COMMON STOCK AND WHICH PROPOSALS REQUIRE THE VOTE OF THE HOLDERS OF PREFERRED STOCK. PROPOSAL ONE ELECTION OF DIRECTORS COMMON STOCK AND PREFERRED STOCK BOTH VOTE The number of directors on the Company's Board of Directors has been established by the Bylaws of the Company and by resolution of the Board of - 5 - Directors as seven directors in three classes which have been elected by the holders of Common Stock. However, because certain Company events have triggered the right of the holders of Preferred Stock to elect two directors, the number of directors on the Board will be nine following the Meeting. Accordingly, holders of both Common and Preferred Stock will elect directors at this Meeting. The terms of the Class A directors expire in 1998, the terms of the Class B directors expire in 1999 and the terms of the Class C directors expire at this meeting. Each director is elected for a term of three years, with the result that each year the holders of Common Stock will elect one class of directors. There currently are no directors representing the Preferred Stock on the Board. Directors elected by the holders of Preferred Stock will serve a term as set forth below. See "Directors--Preferred Stock." DIRECTORS--COMMON STOCK The persons named on the WHITE enclosed form of Proxy will vote the shares of Common Stock represented by such Proxy FOR the election of the two nominees for directors named below. The holders of the shares of Preferred Stock will NOT vote on the following two nominees. If, at the time of the meeting, either of these nominees shall become unavailable for any reason, which event is not expected to occur, the persons entitled to vote the Proxy will vote for such substitute nominee or nominees, if any, as they determine in their sole discretion. If elected, the Class C directors will hold office until the annual meeting of stockholders to be held in 1999. The nominees for directors, each of whom has consented to serve if elected, are as follows:
Director Name of Nominee Since Age Principal Occupation for Last Five Years - --------------- -------- --- ---------------------------------------- Willard H. Pease, Jr. ....... 1988 36 Chairman of the Board, President and Chief Exec- (Class C Director) utive Officer of the Company since August 1990. From 1983 to 1990, Mr. Pease was executive Vice President and Chief Operating Officer of the Company. Mr. Pease is responsible for corporate finance for the Company, manages the day-to-day operations of the Company and is principally responsible for the Company's oil and gas exploration and production activities. He has worked in the oil field business for over 16 years and has received a B.A. degree in Management with additional educational focus in geology from Mesa State College in 1983. William F. Warnick .......... 1988 49 Mr. Warnick is an attorney practicing in Lubbock, Texas. He (Class C Director) received his B.A. degree in finance from Texas Tech Univer- sity and his J.D. degree from the University of Texas in 1971. Mr. Warnick serves as the Texas Attorney General's appointee to the Texas School Board Land Commission and is a member of the American, Texas and Lubbock Bar Associations. He is an oil and gas investor and has served in various management positions of private independent oil and gas companies.
- 6 - THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF ELECTION OF THE TWO (2) NOMINEES LISTED ABOVE. PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED WHITE PROXY TO VOTE FOR YOUR CHOICE OF NOMINEES. ONLY YOUR LATEST DATED PROXY COUNTS. Directors--Preferred Stock The shares of Preferred Stock normally have no voting rights except those required by law or as set forth in the Certificate filed by the Company with respect to the rights and preferences of the Preferred Stock. Section 4.2 of the Certificate provides that whenever dividends from the Preferred Stock have not been paid in an amount equal to at least six quarterly dividends, the holders of the Preferred Stock shall have the right to elect two additional directors to the Company's Board of Directors. Because the Company has not paid the last six quarterly dividends on the Preferred Stock, the holders of Preferred Stock have the right to elect two directors to the Company's Board of Directors. The nominees for directors to be elected by the holders of Preferred Stock, each of whom has consented to serve if elected, are as follows. Only two directors will be elected from the following persons. The holders of shares of Common Stock will NOT vote on the following two nominees. Principal Occupation For Name of Nominee Age The Last Five Years - --------------- --- ------------------------ David D. Wright 38 Mr. Wright has had over seventeen (17) years experience in the securities, investment and banking industries. Since February 1995, Mr. Wright has been a vice president of Morris Investment Management Company, where he is responsible for management of Warwick Investors, L.P., a private investment partnership. From April 1989 to January 1995, Mr. Wright was a vice president with Folger Nolan Fleming Douglas, an NYSE-member firm, where he managed the Trading Department, including maintaining trading markets and service as supervisory analyst. Prior to 1989, he was associated with various banking and brokerage firms. Mr. Wright has served on the board of directors of the Big Brother/Big Sister Association of Philadelphia, the OTC/Bulletin Board Committee of the National Association of Securities Dealers, Inc. ("NASD") and various committees of the Securities Traders Association (National). Mr. Wright also holds Series 7, 16, 62 and 63 licenses from the NASD. Mr. Wright owns 9,100 shares of the Company's Preferred Stock (less than five percent of the outstanding shares of Preferred Stock). Jack A. Alexander 63 Mr. Alexander has been associated with the securities and investment industry since 1959. He founded in 1974 and served as President and Chief Executive Officer of First Affiliated Securities of San Diego which was acquired by American First Corporation, a publicly-held company, in 1982. After the acquisition, Mr. Alexander became Senior Vice President of the financial services group and a member of the board of directors until 1986. Since 1986, Mr. Alexander has served as general partner of 27 oil and gas limited partnerships and has owned and served as President of United Investment Bankers, Inc., a management consulting firm which specializes in corporate finance and investment banking services to owners and managers of large and small businesses. He was a director of Paulson Investments Company, Inc. from December 1991 to November 1995. He has been a director of Argent Securities, a publicly-held company, since November 1995. Mr. Alexander attended the University of Texas School of Business from 1949 to 1951 and graduated from the New York Institute of Finance in 1960. He is the beneficial owner of 6,000 shares of the Company's Preferred Stock (less than five percent of the outstanding shares of Preferred Stock). - 7 - THE BOARD OF DIRECTORS MAKES NO RECOMMENDATION IN FAVOR OR AGAINST THE ELECTION OF THE NOMINEES LISTED ABOVE. PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED BLUE PROXY TO VOTE FOR YOUR CHOICE OF NOMINEES. ONLY YOUR LATEST DATED PROXY COUNTS. The persons named in the enclosed form of Proxy will vote the shares represented by such Proxy FOR election of two directors from the nominees named above. If, at the time of the Meeting, any of these nominees shall become unavailable for any reason and there are less than two nominees, which event is not expected to occur, the persons entitled to vote the Proxy will vote any proxies so marked for the remaining nominee. The Certificate provides that the Board of Directors may then appoint a second director. The directors elected from the nominees above or appointed will hold office until all past dividends have been paid, or until re-elected or replaced at the next annual meeting of the Company's stockholders, and at each annual meeting thereafter, until their successors have been elected and qualified or until the past due dividends on the Preferred Stock have been paid. Information concerning the other directors of the Company whose terms extend beyond this Meeting is as follows.
Director Principal Occupation Name of Nominee Since Age for Last Five Years - ---------------- -------- --- --------------------- Robert V. Timlin ............ 1981 65 Mr. Timlin is self-employed as a consulting petroleum (Class A Director) engineer. He has been involved in the oil and gas industry for over 30 years and has served in a managerial capacity with several companies, including HMT Management, Inc., and oil and gas management firm, from 1983 to 1988; T&M Casing Service, Inc. from 1975 until 1983; Dowell, Studer, Inc., and Husky Oil Com- pany. Mr. Timlin received his B.S. degree from the University of Wyoming in 1957. James N. Burkhalter ......... 1993 60 Mr. Burkhalter became Vice President of Engineering and Pro- (Class A Director) uction for the Company in August 1993. Prior to joining the Company, he was the owner and President of Burkhalter Engineering, which he formed in 1975. Mr. Burkhalter is responsible for the Company's engineering, production, environmental compliance and gas plant operations. He has been Chairman of the Colorado Board of Registration for Professional Engineers and Surveyors, serving eight years. From 1959 to 1975 Mr. Burkhalter worked for Amoco and Rocky Mountain Natural Gas as a Petroleum Engineer. He received a B.S. degree in petroleum engineering from Colorado School of Mines in 1959. - 8 - Director Principal Occupation Name of Nominee Since Age for Last Five Years - ---------------- -------- --- --------------------- Patrick J. Duncan ........... 1995 33 Mr. Duncan has been the Company's Chief Financial (Class A Director) Officer since September 1994, the Company's Corporate Secretary since April 1995, and the Company's Treasurer since March 1996. Mr. Duncan is responsible for all the financial, accounting and administrative reporting and compliance obligations of the Company. Mr. Duncan was an Audit Manager with HEIN + ASSOCIATES, LLP Certified Public Accountants, from 1991 until joining the Company as the Company's Controller in April 1994. From 1988 until 1991, Mr. Duncan was an Audit Su- pervisor with Coopers & Lybrand, LLP Certified Public Accountants. James C. Ruane .............. 1980 62 Mr. Ruane has been an oil and gas investor for over 20 (Class B Director) years. He has served continually as a member of the Board of Directors for over 10 years. Since 1958 Mr. Ruane has owned and operated Goodall's Charter Bus Service, Inc., a bus chartering business representing Grey Line in San Diego, California. Homer C. Osborne ............ 1994 67 In September 1967, Mr. Osborne co-founded Garrett Computing (Class B Director) Systems, Inc., a petroleum engineering and computing firm. He was an officer and director of Garrett Computing until March 1976, at which time he organized Osborne Oil Company as a wholly-owned subsidiary of Garrett Computing. Mr. Osborne has operated Osborne Oil Company as a separate entity since April 1976. He was appointed by the Company's Board of Directors effective April 1, 1994, to serve as a Class B director.
The Company's Board of Directors held 11 meetings during 1995. Five meetings consisted of consent minutes signed by all directors and six were actual meetings at which all directors were present except Mr. William D. Fitch, a former officer and director, and Mr. Warnick, who were not present at one meeting each. The Company has an audit committee, consisting of Patrick J. Duncan and Willard H. Pease, Jr., which did not meet in 1995. The functions of the audit committee are to review financial statements, meet with the Company's independent auditors and address accounting matters or questions raised by the auditors. - 9 - The Company has a compensation committee consisting of James C. Ruane, Homer C. Osborne and William F. Warnick, which met once in 1995 at which meeting all members were present. The functions of the compensation committee are to review compensation of officers and employees and administer and award options under all stock option plans of the Company. EXECUTIVE OFFICERS The executive officers of the Company are elected annually at the first meeting of the Company's Board of Directors held after each annual meeting of stockholders. Each executive officer of the Company holds office until his successor is duly elected and qualified, his death or resignation or his removal in the manner provided by the Company's Bylaws. There are no family relationships between any of the directors and executive officers. 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. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of the Company's 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 the Company with copies of all Section 16(a) forms which 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 the Company's fiscal year ended December 31, 1995, and Forms 5 and amendments thereto furnished to the Company 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 the following persons who were directors, officers and beneficial owners of more than 10% of the Company's outstanding Common Stock during such fiscal year filed late reports on Forms 3 and 4. James N. Burkhalter filed two late reports on Form 4 reporting a total of four transactions. Patrick J. Duncan filed three late reports on Form 4 reporting a total of six transactions. Homer C. Osborne filed one late report on Form 4 reporting two transactions. Willard H. Pease, Jr., filed four late reports on Form 4 reporting a total of 17 transactions. James C. Ruane filed one late report on Form 4 reporting two transactions. Robert V. Timlin filed one late report on Form 4 reporting five transactions. William F. Warnick filed one late report on Form 4 reporting six transactions. 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. No executive officer's salary and bonus for fiscal year 1995 exceeded $100,000. The following information for the Chief Executive Officer includes the dollar value of base salary, bonus awards, the number of stock options granted and certain other compensation, if any, whether paid or deferred. - 10 -
Summary Compensation Table Long Term Compensation Annual Compensation Awards -------------------------------------------- ------------- Other Annual Number of All Other Name and Principal Salary Bonus Compensation Options Compensation Position at 12/31/94 Year ($) ($)(1) ($) Granted ($)(1) - -------------------- ---- -------- --------- ------------- ------------ ------------ Willard H. Pease, Jr. .........1995 ......... 75,000 0 0 139,600 0 President and Chief 1994 ......... 75,000 0 0 -- 0 Executive Officer 1993 ......... 75,000 0 0 62,000 0 - -----------------------
(1) No bonuses have been paid to Mr. Pease. In addition, no amounts have been shown as Other Annual Compensation because the aggregate incremental cost to the Company of personal benefits provided to Mr. Pease did not exceed the lesser of $50,000 or 10% of their annual salary and bonus in any given year. Option Grants in the Last Fiscal Year Set forth below is information relating to grants of stock options to the Chief Executive Officer pursuant to the Company's Stock Option Plans during the fiscal year ended December 31, 1995.
Individual Grants -------------------------------------------------------------------------- % of Total Options SARs Granted to Options/ Employees Exercise or Base Expiration Name SARs Granted (#) Fiscal Year Price ($/Sh)(3) Date - ---- --------------- ------------ ---------------- ----------- Willard H. Pease, Jr ............................ 99,600(1) 22.9% $ 0.83 05/15/00 President and Chief 40,000(2) 9.2% $ 0.70 06/15/00 Executive Officer - -------------------
(1) These options became exercisable on November 16, 1995. (2) These options became exercisable on December 16, 1995. (3) The exercise price for all options listed above was 100% of the market price of the Common Stock on the date of grant of the options. In May 1995, the Board of Directors cancelled certain incentive options for 224,000 shares of Common Stock which had been issued between 1990 and 1993. Options for 99,600 shares had been issued to Mr. Pease. The exercise price of the options ranged from $2.94 to $7.90 which represented the market price of the Common Stock on the date of grant. However, since 1993, the Company's equity capitalization changed significantly. Following a 1-for-5 reverse stock split in 1993, the Company had 994,248 shares of Common Stock outstanding at December 31, 1993. The Company also sold 1,170,000 shares of Preferred Stock in 1993, of which 933,492 shares were converted to 4,200,716 shares of Common Stock and warrants to purchase 2,450,416 shares of Common Stock. By June 30, 1995, there were 7,018,131 shares of Common Stock outstanding. The Company's Common Stock traded between a low of $0.625 and a high of $0.96875 during the second fiscal quarter of 1995. Accordingly, the Board of Directors cancelled and reissued the options at a lower price because the directors believed that the old options no longer constituted an incentive to the optionees and the new options better reflected the capitalization of the Company and the then-current market conditions. Concurrently, with the cancellations, the Company granted Mr. Pease options to purchase 99,600 shares of Common Stock at an exercise price of $0.83 per share. On the date of grant of the new options in 1995, the price of the Common Stock was $0.83 per share. - 11 - Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values Set forth below is information with respect to the unexercised options to purchase the Company's Common Stock held by Mr. Pease at December 31, 1995. No options were exercised during fiscal 1995.
Value of Unexercised Number of Unexercised In-the-Money Options Options at FY-End (#) at FY-End ($)(1)(2) ----------------------------------- ---------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- Willard H. Pease, Jr. ............... 139,600 -0- -0- -0- - -----------------
(1) Mr. Pease did not exercise any options during 1995. (2) None of the exercisable options held by Mr. Pease were in-the-money at December 31, 1995. Compensation of Directors Directors who are employees do not receive additional compensation for service as directors. Other directors each receive $350 per meeting attended and $50 per meeting conducted via telephone conference. Directors may elect to receive the compensation either in cash or stock. Employment Contract with a Director The Company has entered into an employment agreement with Willard H. Pease, Jr., the Company's President, Chief Executive Officer and Chairman of the Board of Directors. The employment agreement may be terminated by the Company without cause on 30 days notice provided that the Company continues to pay the salary of Mr. Pease for 36 months. The salary must be paid in a lump sum if the termination occurs after a change in control of the Company as defined in the employment agreement. Mr. Pease may terminate the employment agreement on 90 days written notice. The base salary of Mr. Pease under the employment agreement is $75,000 per year. PROPOSAL TWO PROPOSAL TO AMEND THE CERTIFICATE OF DESIGNATION OF THE SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK TO CHANGE THE EVENT WHICH TRIGGERS AUTOMATIC CONVERSION OF THE PREFERRED STOCK, TO LOWER THE CONVERSION RATE FOR CONVERSION OF PREFERRED STOCK AND TO STATE THE ACTUAL EXERCISE PRICE OF THE WARRANTS INSTEAD OF A FORMULA COMMON STOCK AND PREFERRED STOCK BOTH VOTE The Board of Directors of the Company has adopted a resolution recommending that stockholders approve amendments to the Certificate of Designation of the Series A Cumulative Convertible Preferred Stock of the Company which would change the event which triggers the automatic conversion of Preferred Stock, lower the price per share for conversion of Preferred Stock from $4.00 to $2.50, with the result that the holders of Preferred Stock will receive a greater number of shares of Common Stock upon any conversion of Preferred Stock than they would have received without adoption of the proposed amendment, and state the exercise price of the Warrants instead of a formula which determined the price. Sections 6.1 and 6.2 of the Certificate would be amended to read as follows: "6.1 Automatic Conversion. If at any time after the issuance of the Series A Preferred Stock, the last reported sales price for the Company's $.10 par value Common Stock as reported on the NASDAQ System (or the closing price as reported on any national securities exchange on which the Common Stock is then listed), shall, for a period of five (5) consecutive trading days, equal or exceed $2.50 per share, then, effective as of the close of business on the fifth such trading day, all shares of Series A Preferred Stock then outstanding and all accrued and undeclared dividends thereon shall immediately and automatically without further notice be converted into shares of Common Stock and Warrants to purchase Common Stock ("Warrants") with the same effect and the same result as if an optional conversion occurred as described in this Section 6." - 12 - "6.2 Optional Conversion. Each share of Series A Preferred Stock and all accrued and undeclared dividends thereon shall be convertible at any time after the initial issuance of the Series A Preferred Stock and prior to the Redemption Date into the number of shares of Common Stock calculated using a price of $2.50 per share (the "Common Stock Price") based upon the following formula: (Issue price [$10.00] plus accumulated undeclared dividends plus undeclared dividends which would otherwise become due at the next Dividend Due Date) divided by the Common Stock Price equals Number of Shares Received Upon Conversion ("Conversion Price") In addition, if such conversion occurs prior to the close of business five years from August 13, 1993, the Effective Date of the Public Offering, the Company shall issue to each holder of Series A Preferred Stock the same number of Warrants to purchase Common Stock upon conversion, without any further payment. Each Warrant will be exercisable to purchase one share of Common Stock at a price, subject to adjustments described therein (hereafter the "Exercise Price") of $5.00 per share of Common Stock through December 31, 1996 and $6.00 per share thereafter for the life of the Warrant, August 13, 1998. If the Preferred Stock has been called for redemption, the conversion right shall terminate at the close of business on the last business day prior to the date fixed for redemption (unless the Company defaults in the payment of the redemption price). The Warrants shall be exercisable and shall have such other terms and conditions as shall be described in a Warrant Agency Agreement relative to the Warrants, between the Company and the Warrant Agent designated therein. The Warrants and the Warrant Agency Agreement shall be substantially in the form filed as an exhibit to the Registration Statement except as amended to conform to the terms hereof." The amendment of Sections 6.1 and 6.2 of the Designation will affect the rights and preferences of the Preferred Stock in a number of ways, as is more fully described below. The Company believes that the new conversion provisions will be a benefit to the holders of Preferred Stock. Under the amendments, holders of Preferred Stock would receive more shares of Common Stock and warrants than under present conversion rights, because, upon conversion, they would receive four shares of Common Stock for each share of Preferred Stock (liquidation preference of $10.00) instead of two and one-half shares. Upon conversion, they will continue to receive all accrued and unpaid dividends, in cash or Common Stock, through the date of conversion. Following conversion, however, former holders of Preferred Stock will no longer have the right to receive dividends or a liquidation preference. AS OF MAY 25, 1996, THE MARKET PRICE OF THE COMMON STOCK WAS $1.50. IF THE AMENDMENTS ARE APPROVED, NO AUTOMATIC CONVERSION WILL OCCUR UNTIL SUCH TIME, IF AT ALL, THAT THE MARKET PRICE OF THE COMMON STOCK EQUALS OR EXCEEDS $2.50 PER SHARE. THE COMPANY IS UNABLE TO GIVE ANY ASSURANCE WHETHER THE PRICE OF THE COMMON STOCK WILL EVER EQUAL OR EXCEED $2.50 PER SHARE. Holders of Preferred Stock should carefully consider the following factors before making a voting decision. (i) Effect on Automatic Conversion. The amendment to Section 6.1 of the Designation provides that the reported market price of Common Stock, rather then Preferred Stock, will determine when the Preferred Stock is to be automatically converted to Common Stock and reduces both the price (from $13.00 per share of Preferred Stock to $2.50 per share of Common Stock) and the number of days (from 10 to 5) for which the Company's Common Stock must trade at the - 13 - price before the Preferred Stock will be automatically converted. The effect is to make it more likely that Preferred Stock will be automatically converted because the trigger would be linked to a class of stock with larger market volume, lower price and a greater likelihood of reaching and maintaining the triggering conversion price. No automatic conversion will occur upon the approval of amendments because the Company's Common Stock, as of the date of this Proxy Statement, is less than $2.50 per share. Automatic conversion will not occur unless and until the price of the Common Stock equals or exceeds $2.50 per share, if ever. (ii) Effect on Conversion Ratio. As of the date of this Proxy Statement, prior to the amendments, each share of Preferred Stock, plus all unpaid dividends accrued and declared through the end of the quarter in which the conversion occurs, is convertible into Common Stock and Warrants, whether automatically or at the option of the stockholder, at the rate of 2.9375 shares of Common Stock and Warrants for each share of Preferred Stock. The number of shares and Warrants is determined by dividing the total of the liquidation preference ($10.00 per share of Preferred Stock), plus unpaid accrued and declared dividends (currently $1.75 per share) by $4.00, the price presently set forth in Section 6.2 of the Certificate, as follows: $11.75 divided by $4.00 equals 2.9375 shares of Common Stock and Warrants for a total of 595,396 shares of Common Stock and Warrants Upon approval of the amendments, holders of Preferred Stock would receive more shares of Common Stock upon conversion, because each share of Preferred Stock would be convertible into 4.7 shares of Common Stock and Warrants, again determined by dividing the total of the liquidation preference ($10.00 per share of Preferred Stock) plus unpaid accrued and declared dividends (currently $1.75 per share) by the price of $2.50 proposed to be included in Section 6.2, as follows: $1.75 divided by $2.50 equals 4.7 shares of Common Stock and Warrants for a total of 952,633 shares of Common Stock and Warrants As of the date of this Proxy Statement, there were six quarters of unpaid dividends totaling $1.50 per share, plus dividends of $0.25 per share which accrue through the end of the current quarter ending June 30, 1996. If the amendments are approved, until conversion, dividends will continue to accumulate at the rate of $1.00 annually ($0.25 per quarter) per share. If automatic or optional conversion occurs prior to close of business on August 13, 1998, each holder will receive, in addition to shares of Common Stock, Warrants to purchase an equal number of shares of Common Stock. This does not represent any change from current conversion rights. (iii) Effect on Liquidation Rights. Holders of Preferred Stock whose shares of Preferred Stock are converted into Common Stock will lose their liquidation preference of $10.00 per share of Preferred Stock, plus future accrued and unpaid dividends, in the event of dissolution, liquidation or winding up of the Company. Holders of Common Stock are not entitled to any preferential payments upon such event, but may participate in any other distributions of assets by the Company following preferential payments to holders of Preferred Stock. This does not represent any change from current rights. However, approval of the amendments may cause the Preferred Stock to automatically convert into Common Stock sooner than it would have under the current provisions of Section 6.1. (iv) Effect on Payment of Dividends. Following conversion of Preferred Stock into Common Stock, holders of Preferred Stock will no longer be entitled to receive or have accrued any preferential dividends but shall only be entitled to participate in dividends, if any, declared by the Board of Directors on the Company's shares of Common Stock. To date, the Company has not declared any dividends on its Common Stock, and is prohibited by its agreement with its bank lender to pay any such dividends without the consent of the lender. Holders of Preferred Stock will continue to accrue dividends until such time as the Preferred Stock is converted or redeemed. However, automatic conversion may truncate, or shorten, the period of time over which Preferred Stock would accrue dividends because automatic conversion would most likely occur, if at all, sooner under the terms of the amendments than under the present terms. - 14 - (v) Voting Rights. Currently, the holders of Preferred Stock have no voting rights except as specially prescribed in the Designation or as otherwise required by law. Currently, the holders of Preferred Stock have the right to elect two directors of the Company because dividends on the Preferred Stock have not been paid for at least six quarters. See "Election of Directors." At such time, if ever, that the Preferred Stock is converted into Common Stock, or, if not converted, the Company has otherwise paid all outstanding accrued and unpaid dividends, the right to elect directors shall be terminated immediately. Concurrently, the terms of any directors elected by the holders of Preferred Stock will terminate. The amendments to the Designation do not affect the voting rights of the holders of Preferred Stock except that the holders of Preferred Stock will no longer have such rights if Preferred Stock is converted into Ccommon Stock. (vi) Effect on Antidilution Protections. The amendments will have no effect on the antidilution protections of the Designation. The Conversion Price will continue to be adjustable for certain events, including stock splits and subdivisions, combination or consolidations of Common Stock, mergers, reorganizations and dividends and distributions on the Common Stock. Upon adoption of the amendments to the Designation, each share of Preferred Stock would convert into one and one-half more shares of Common Stock and Warrants than they would have converted currently. Dividends which are accrued and unpaid on the date of conversion would also be converted into Common Stock and Warrants, as is currently provided. There are currently 202,688 shares of Preferred Stock issued and outstanding. As of the date of this Proxy Statement, before amending the Designation, the Preferred Shares are convertible into 595,396 shares of Common Stock and Warrants to purchase an equal number of shares of Common Stock (including accrued and unpaid dividends). Following the approval of the amendments, the shares of Preferred Stock would be convertible into 952,633 shares of Common Stock and Warrants, as of the date of this Proxy Statement (including accrued and unpaid dividends). Each Warrant would be exercisable for one share of Common Stock at $5.00 per share through December 31, 1996 and at $6.00 per share through August 13, 1996. Comparison of Recent Prices For Common Stock. Section 6.1 of the Designation currently provides that the Preferred Stock is automatically convertible when the last reported sales price for the Company's Preferred Stock as reported on the NASDAQ System equals or exceeds, for a period of 10 consecutive trading days, $13.00 per share. The proposed amendment will revise Section 6.1 so that it is the trading price of the Common Stock which triggers the automatic conversion, and that the price will be $2.50 per share, a lower equivalent price than is presently in effect. As a result it is more likely that the Preferred Stock would automatically convert into Common Stock. The following table shows the range of high and low bid quotations for Common Stock each quarterly period ended since January 1, 1994 as reported by the National Association of Securities Dealers, Inc. Automated Quotation System. Such quotations represent prices between dealers and do not include retail markups, markdowns, or commissions and do not necessarily represent actual transactions. - 15 -
Bid Prices ------------------------------------ Common Stock Preferred Stock ----------------- ---------------- Quarter Ended High Low High Low - ------------- ---- ----- ---- ----- March 31 - May 25, 1996 ............ 1 1/2 1 5/64 6 3/8 4 1/4 March 31, 1996 ..................... 1 3/8 19/32 5 3 1/2 December 31, 1995 .................. 9/16 13/32 4 5/8 3/7/8 September 30, 1995 ................. 7/8 1/2 4 5/8 4 5/8 June 30, 1995 ...................... 31/32 5/8 5 7/8 4 3/4 March 31, 1995 ..................... 1 3/4 23/32 5 7/8 3 5/8 December 31, 1994 .................. 3 5/8 1 5/8 8 1/2 4 3/4 September 30, 1994 ................. 3 1 3/4 8 1/2 6 7/8 June 30, 1994 ...................... 2 3/8 2 8 3/8 7 March 31, 1994 ..................... 2 3/8 1 7/8 8 1/2 7 1/2
In December 1994, the Company's Board of Directors voted not to declare the quarterly cash dividend to holders of the Preferred Stock and in March 1995, the Board voted to suspend the payment of any future Preferred Stock dividends indefinitely. Further, in January 1995, the Company extended a tender offer to the holders of Preferred Stock to convert their shares. On February 28, 1995, the Company completed the tender offer whereby holders of the Company's Preferred Stock converted 930,492 shares of the Preferred Stock into 4,200,716 shares of the Company's Common Stock and Warrants to purchase 2,450,417 shares of Common Stock. The Company's Common Stock price has not traded above $1.75 since the first quarter of the 1995 fiscal year and has not traded at or above $2.50 since the last quarter of the 1994 fiscal year. As of May 25, 1996, the closing price of the Company's Common Stock was $1.50. The Company is unable to predict when or if the trading price of the Common Stock will equal or exceed $2.50 and accordingly is unable to anticipate when, if ever, the automatic conversion provisions of Section 6.1 would be triggered. In view of the 955,092 shares of Preferred Stock converted as of May 8, 1996, the Company's equity structure has substantially changed. The Preferred Stock has become a minority interest in the Company's capitalization representing only approximately a 22% interest in the Company's net assets through the value of the liquidation preference, and holders of Preferred Stock have no further right to participate in any distribution of assets after payment of the liquidation preference. With only 202,688 shares of Preferred Stock outstanding as of May 8, 1996, the record date, there is very little trading activity in the market and the Company cannot ascertain that a market for the Preferred Stock will continue or that the Preferred Stock will continue to be listed or traded on a national exchange, or over-the-counter on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or otherwise. In addition, the Company has suspended indefinitely the payment of dividends on the Preferred Stock and at this time is uncertain when, if ever, the payment of dividends will be reinstated. As of May 25, 1995, the amount of unpaid accrued dividends is $1.50 per share, or $304,032. Through June 30, 1996, the amount will be $354,704, or $1.75 per share. There has been, however, greater market activity for the Common Stock. Although there can be no assurance that such market will continue, the Company believes that the market for the Company's Common Stock may provide an opportunity for greater liquidity of the investment of the Preferred Stockholders if their Preferred Stock converts to Common Stock. - 16 - Accordingly, the Board of Directors of the Company is proposing this change in the conversion terms in order to provide the holders of the Preferred Stock the opportunity to realize the liquidation value ($10.00) of the Preferred Stock in the event that the Company's Common Stock reaches a trading level of $2.50 per share, of which there is no assurance. As of May 25, 1996, the closing price of the Common Stock was $1.50. The Preferred Stock was issued in 1993 at $10.00 per share, and has not traded at greater than $8.50 per share since the first quarter of fiscal 1994. As of May 25, 1996, the closing bid price of the Preferred Stock was $6.375. By amending the Certificate to link the automatic conversion to the trading price of the Common Stock instead of the Preferred Stock, the Company believes that it will entitle the stockholders to convert their Preferred Stock into a number of shares of Common Stock which would then have a market value approximating the liquidation value of the Preferred Stock. Currently, the Preferred Stock is eligible for redemption by the Company at the Company's option at a sum equal to the issue price (liquidation value) of $10.00 plus all accumulated dividends. Until redeemed or converted, the Preferred Stock will continue to accumulate dividends at the rate of $1.00 annually ($.25 per quarter). The liquidation preference of the Preferred Stock of $10.00 plus accrued unpaid dividends will continue to exist until the Preferred Stock is redeemed or converted. Because there is no mandatory redemption date, the Company is unable to predict when, if ever, it would redeem the Preferred Stock. Consequently, the Preferred Stock could continue to accrue dividends for an indefinite period of time at the rate of $1.00 per share per year. The Company believes that the increased likelihood of automatic conversion after the effectiveness of the proposed amendment would permit the holders of Preferred Stock to realize the economic benefits of their investment sooner than they would by accumulating dividends at the current rate. Section 6.2 has also been amended to reflect the actual exercise price of the Warrants and to insert the issue price of the Preferred Stock and certain dates, which were determined definitively when the registration statement for the Preferred Stock was declared effective in August 1993 by the Securities and Exchange Commission. Such changes do not constitute a substantive change in the rights or privileges of the Preferred Stock. THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF APPROVAL OF THE AMENDMENT. EACH MEMBER OF THE BOARD OF DIRECTORS INTENDS TO VOTE HIS SHARES IN FAVOR OF THE APPROVAL OF THE AMENDMENT. In order to be approved, the amendment to the Certificate must receive the affirmative vote of a majority of the outstanding shares of the Company's Common Stock and two-thirds of the outstanding shares of the Company's Preferred Stock. Abstentions and broker non-votes will have the effect of a negative vote against the Amendment. PROPOSAL THREE PROPOSAL TO ADOPT THE 1996 EMPLOYEE STOCK OPTION PLAN TO BE VOTED ON ONLY BY HOLDERS OF COMMON STOCK Purpose. Effective March 9, 1996, the Board of Directors of the Company adopted the Company's 1996 Employee Stock Option Plan (hereafter the "Plan"). The purpose of the Plan as amended is to secure and retain employees responsible for the success of the Company, to motivate such persons to exert their best efforts on behalf of the Company, to encourage stock ownership and to provide such persons with proprietary interests in, and a greater concern for, the welfare of, and an incentive to continue service with, the Company. By encouraging the employees of the Company to become owners of shares, the Company is seeking to motivate, retain and attract employees whose efforts and loyalty have contributed and will contribute to the growth and profitability of the Company. Both incentive and nonstatutory stock options may be granted under the Plan. The following summary of the Plan is qualified by reference to the Plan, copies of which may be obtained from the Company and which will also be available for inspection at the Meeting. Administration. Under the terms of the Plan, the Company may grant options to purchase up to 350,000 shares of the Company's Common Stock to eligible employees. The Plan provides that it shall be administered by an Option Committee chosen by the Board of Directors of the Company (the "Committee"). The Committee will be the Compensation Committee of the Board of Directors, appointed by the Board of Directors, and will consist of at least two persons who are not, and have not been, during the preceding twelve (12) months, employees of the Company. Eligibility. Key employees of the Company and its subsidiaries, including officers of the Company and its subsidiaries who are also employees, who are from time to time responsible for the management, growth or success of the business of the Company, shall be eligible to receive grants of stock options under the Plan. The persons who may receive options under the Plan will be selected by the Committee. As of the date hereof, there are approximately 10 persons eligible for participation in the Plan. - 17 - Adjustments and Other Provisions. The Plan provides for an adjustment in the number of shares reserved and in the exercise prices if there is a stock dividend, split up, subdivision or combination of shares, recapitalization, merger, consolidation or other corporate reorganization in which the Company is a surviving corporation. In the event of dissolution or liquidation of the Company, or a merger, consolidation, sale of all or substantially all of its assets, corporate reorganization or similar occurrence, in which the Company is not a surviving corporation and the holders of Common Stock receive securities of another corporation, the options terminate as of the effective date of such event and after notice and an opportunity to exercise any unexpired option in whole or in part, then any unexercised option will terminate. Stock Option Terms. The Committee will determine the time or times when any option granted becomes exercisable, the period within which it becomes exercisable and the price per share at which the option is exercisable, provided, however, that no option may be exercised for six (6) months following the date of grant, no option will be exercisable for more than 10 years after it is granted and the exercise price must be at least 100% of the fair market value of the Company's Common Stock on the date of the grant. As of May 8, 1996, the closing sale price of the Company's Common Stock as quoted on NASDAQ was $1.25. If an optionee owns shares possessing more than 10% of the voting power of all classes of the Company's outstanding stock, the Committee may grant an option to such employee only if the exercise price of the option is at least 110% of the fair market value of the Common Stock on the day of the grant. The Plan provides that the fair market value shall be the closing price of the Common Stock as reported by the Wall Street Journal on the day the fair market value is to be determined, or if no such price is reported for such day, then the determination of such closing price shall be as of the last immediately preceding day on which the closing price is so reported; or if the Common Stock is not so listed or admitted to unlisted trading privileges or so quoted, the fair market value shall be the average of the last reported highest bid and the lowest asked prices quoted on the National Association of Securities Dealers, Inc. Automated Quotations System or, if not so quoted, then by the National Quotation Bureau, Inc. on the day the fair market value is determined. If no market exists, the Committee shall determine the fair market value. An option granted to any employee owning shares possessing more than 10% of the voting power of all classes of the Company's outstanding stock may not be exercised for longer than five years from the date of the grant. Any number of options may be granted to an employee so long as the fair market value of the shares on the date of grant which vest for the first time during any one calendar year does not exceed $100,000. Payment for shares purchased upon exercise of any option must be in full and in cash at the time the option is exercised unless the Committee authorizes payment by exchange of the Company's shares owned by the optionee by promissory note in conformance with applicable regulations if permitted by governing law. No option may be transferred except by will or by the laws of descent and distribution and if, during the optionee's lifetime, the person holding the option is terminated for any reason other than death, retirement or disability, the option will be terminated three months after the date the optionee's employment terminates. Options held by employees who die or are disabled may be exercised within one year following death or disability and options held by employees who retire may be exercised within three months after retirement, in all cases provided the options were otherwise exercisable on the date of death, disability or retirement. - 18 - Amendments and Discontinuance. The Board of Directors may amend, alter or discontinue the Plan in any respect provided the action does not impair the rights of any optionee under any options previously granted, without consent of the optionee, and, provided stockholder approval is obtained, to (i) increase the number of shares reserved under the Plan (except for certain adjustments described above), (ii) reduce the minimum option price, and (iii) alter the class of eligible persons or terms of eligibility. Tax Effects. Under ss.ss.421(a) and 422 of the Internal Revenue Code of 1986 ("Code"), as amended, the grant or exercise of incentive options under the Plan will not result in income taxable to the optionee or in a business expense deductible by the Company. Upon a later sale of the shares received on exercise of an incentive option, the optionee will realize capital gain or loss, so long as the optionee satisfies the minimum holding period requirements under the Plan and the Code. If an optionee disposes of shares acquired from the exercise of an option under the Plan prior to the expiration of the statutory holding period ("disqualifying disposition") or if the option is a nonstatutory option, such optionee will be required to recognize as compensation taxable as ordinary income the difference between the exercise price and the fair market value on the date of exercise as well as the amount realized on any disposition of the shares in excess of the option exercise price paid by the optionee. The Company will be entitled to a deduction equal to the amount that the optionee is required to include in income in the Company's taxable year which falls within the end of the participating employee's taxable year when the disqualifying disposition occurs. The current maximum rate for long-term capital gains realized by noncorporate taxpayers is less than the current maximum rate on ordinary income. The amount by which the fair market value of the Company's Common Stock exceeds the exercise price of an incentive option on the date of exercise will be considered a tax preference item for the optionee and may be subject to the alternative minimum tax under ss.55 of the Code in the year the option is exercised. The above summary of the tax effects of options granted or exercised under the Plan is based on an interpretation of the laws and regulations currently in effect. Changes in these laws and regulations or their construction may modify the projected tax effects of options granted or exercised under the Plan. Persons exercising options granted under the Plan will not be able to sell or otherwise distribute the shares issued upon exercise except pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Act"), or pursuant to an exemption from the registration requirements of the Act. Certificates evidencing shares purchased pursuant to the Plan will bear a restrictive legend until registered under the Act. The Company intends to register all shares underlying the option authorized under the Plan if the Plan is approved by the stockholders. - 19 - Nontransferability. Options granted under the Plan are nontransferable other than by will or by the laws of descent and distribution. Indemnification. The Board of Directors and the members of the Committee are entitled to indemnification by the Company against reasonable expenses, including attorneys' fees, actually incurred in connection with the defense of any action, suit or proceeding by reason of any action taken or failure to act under or in connection with the Plan or any option granted under the Plan or shares purchased pursuant to the exercise of options under the Plan, so long as a member of the Committee or Board of Directors is not determined in any action, suit or proceeding to be liable for gross negligence, fraud or willful misconduct in the performance of his duties. The Board of Directors has not determined any benefits or amounts that will be received by or allocated to officers of the Company should the Plan be approved by the stockholders. The Plan is intended to conform with Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended ("1934 Act"), which among other things, requires shareholder approval of the Plan. A plan which complies with Rule 16b-3 permits officers and directors to participate in employer benefit plans without violating the "short-swing profit" provisions which prohibit purchases and sales within any six month period of each other." Rule 16b-3 accomplishes this by exempting from the definition of purchases and sales a transaction by an officer or director made in compliance with the Rule. Grants of options under the Plan will be exempt if the Plan is approved by the stockholders. If the Plan is not approved, the Company may issue options under the Plan but they will not be exempt transactions. Consequently, it would be more difficult for option holders to exercise the options and sell the stock received upon exercise. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE PLAN AND EACH MEMBER OF THE BOARD OF DIRECTORS INTENDS TO VOTE HIS SHARE IN FAVOR OF APPROVAL OF THE PLAN. The affirmative vote of the holders of at least a majority of all the shares of Common Stock in attendance at the Annual Meeting of Stockholders, either in person or by proxy, is required to approve the Plan. Abstentions and broker non-votes will have the effect of a negative vote on the proposal. - 20 - CERTAIN TRANSACTIONS From time to time in the past, various officers and directors of the Company and their affiliates have participated in the drilling of oil and gas wells, drilled and operated by the Company. All such persons and entities have taken working interests in the wells and have paid the drilling, completion and related costs of the wells on the same basis as the Company and all other working interest owners. On the occasions of such participation the Company retained the maximum interest in the wells that it could justify, given its cash availability and the risk involved. In May 1995, James C. Ruane, a director of the Company, purchased 66,667 shares of Common Stock and 33,334 warrants to purchase shares of Common Stock for $50,000 on the same terms as other nonaffiliated purchasers. At December 31, 1995, the Company owed certain affiliates of Willard H. Pease, Jr. $116,717 plus $26,539 in accrued interest for oil and gas revenue attributable to interests in wells operated by the Company that are owned by the individuals and related entities. Of such amount $2,877 was incurred in 1994, $4,603 was incurred in 1993, $20,992 was incurred in 1992, $85,518 was incurred in 1991 and $2,728 was incurred in 1990. At December 31, 1995, the Company also owed $60,000 to Willard H. Pease, Jr. This loan is unsecured, bears interest at 8% per annum and is due January 1997. Until June 1993, Willard H. Pease, Jr. owned an oil well servicing business, Grand Junction Well Services, Inc. ("GJWS"), which operated a workover and completion rig. In June 1993, the Company acquired GJWS from Mr. Pease by merging GJWS into a newly-formed subsidiary corporation, Rocky Mountain Well Services, Inc. In the merger, the Company issued 46,667 shares of its Common Stock and the Company's 6% secured convertible promissory note in the principal amount of $175,000 to Mr. Pease for a total value of $350,000, the estimated fair market value of GJWS assets and business. The note is payable in three annual principal installments of $45,000 on October 1, 1994, $65,000 on April 1, 1995 and $65,000 on April 1, 1996. The October 1, 1994 principal payment of $45,000 has been paid and the remaining installments have been extended to October 1, 1997 and October 1, 1998, respectively. The unpaid principal portion of $130,000 is convertible at the election of Mr. Pease into Common Stock at $5.00 per share. The transaction was approved unanimously by the disinterested directors of the Company. Mr. Pease remained a guarantor of GJWS debt owed to a bank, which totalled $37,000 on the date of acquisition. As a result of the transaction, the obligation of the Company to GJWS, totaling approximately $188,000 at March 31, 1993, was eliminated, reducing the Company's obligation to Mr. Pease and affiliates by approximately $13,000. In August 1994, Willard H. Pease, Jr. and entities affiliated with Mr. Pease, exchanged promissory notes with an aggregate principal balance of $150,000 for $150,000 principal amount of 12% Convertible Unsecured Promissory Notes ("Notes"). The Notes were automatically converted by their terms into 93,750 shares of the Company's Common Stock on September 30, 1994. The Notes and the conversion thereof were on the same terms as the Company's 12% Convertible Unsecured Promissory Notes ("Private Notes") that the Company sold in a private offering during August and September, 1994. An entity affiliated with Mr. Pease also purchased on the same terms as other unaffiliated purchasers $50,000 - 21 - principal amount of the Private Notes. These Private Notes were automatically converted by their terms into 31,250 shares of the Company's Common Stock on September 30, 1994. In August 1994, Patrick J. Duncan, the Chief Financial Officer and Corporate Secretary of the Company, purchased $25,000 of the Private Notes on the same terms as other nonaffiliated purchasers. Mr. Duncan's Private Notes were automatically converted by their terms into 15,625 shares of the Company's Common Stock on September 30, 1994. All existing loans or similar advances to, and transactions with, officers and their affiliates were approved or ratified by the independent and disinterested directors. Any future material transactions with officers, directors and owners of 5% or more of the Company's outstanding Common Stock or any affiliate of any such person shall be on terms no less favorable to the Company than could be obtained from independent unaffiliated third parties and must be approved by a majority of the independent and disinterested directors. DOCUMENTS INCORPORATED BY REFERENCE The following documents previously filed by the Company with the Securities and Exchange Commission are incorporated herein by reference: (i) the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995 and (ii) the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996. All documents filed by the Company pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 after the date of this Proxy Statement and prior to the Annual Meeting (or any adjournments or postponements thereof) shall be deemed to be incorporated into this Proxy Statement by reference and to be a part hereof from the date of filing of such documents. This Proxy Statement is accompanied by copies of the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995. The Company will provide without charge to each person to whom a copy of this Proxy Statement has been delivered, on the written or oral request of such person, by first class mail or equally prompt means,copies of the other reports of the Company that have been incorporated herein by reference. A request for such copies should be directed to Patrick J. Duncan, Corporate Secretary, at the Company's address specified at the beginning of this Proxy Statement, or by telephone at (970) 245-5917. Representatives of HEIN + ASSOCIATES LLP, the Company's principal accountants, are expected to be available at the Meeting either in person or via electronic or telephone conference facilities and will have an opportunity to make a statement if they desire and are expected to be available to respond to appropriate questions. STOCKHOLDER PROPOSALS Stockholder proposals for inclusion in the Company's proxy materials relating to the next annual meeting of stockholders must be received by the Company on or before February __, 1997. SOLICITATION OF PROXIES The cost of soliciting proxies, including the cost of preparing, assembling and mailing this proxy material to stockholders, will be borne by the Company. Solicitations will be made only by use of the mails, except that if necessary to obtain a quorum, officers and regular employees of the Company may make solicitations of proxies by telephone or electronic facsimile or by personal calls. Brokerage houses, custodians, nominees and fiduciaries will be requested to forward the proxy soliciting material to the beneficial owners of the Company's shares held of record by such persons and the Company will reimburse them for their charges and expenses in this connection. - 22 - OTHER BUSINESS The Company's Board of Directors does not know of any matters to be presented at the meeting other than the matters set forth herein. If any other business should come before the meeting, the persons named in the enclosed form of Proxy will vote such Proxy according to their judgment on such matters. PATRICK J. DUNCAN Corporate Secretary Grand Junction, Colorado _________, 1996 - 23 - EX-1 2 APPENDIX A APPENDIX A CERTIFICATE OF DESIGNATION OF SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK 4.2 ELECTION OF DIRECTORS. Whenever dividends on the Series A Preferred Stock or any outstanding shares of Parity Stock have not been paid in an aggregate amount equal to at least six quarterly dividends on such shares (whether or not consecutive), the Company shall cause the number of directors of the Company to be increased by two, and shall call a meeting of the holders of the Series A Preferred Stock for the purpose of electing two additional directors. The Company shall use reasonable efforts to cause the meeting to occur on the earliest practicable date. In connection with the meeting, the Company shall cause to be nominated as a candidate for director any person that, at least twenty five calendar days prior to the meeting (i) is designated in writing by a holder of Series A Preferred Stock, (ii) who agrees in writing to serve if elected, and (iii) who provides the Company with a reasonable description of his/her personal and business background and qualifications to serve as a director of the Company; provided, however, that, (i) the Company may refuse to cause any person to be so nominated if, based on a review of such person's qualifications, the Board of Directors reasonably and objectively concludes that such person is unfit to serve as a director of the Company, and (ii) if more than ten such persons are nominated, the Company shall nominate the ten persons designated by the holders of the greatest number of shares of Series A Preferred Stock. If no persons are nominated as described above, (i) the meeting may be cancelled, and (ii) the Board of Directors shall, as soon as practicable, appoint as directors two persons who are not affiliates of and have no material business dealings with the Company or any member of the Board of Directors. From and after such appointment, and until all dividends deemed past due have been paid (i) such directors shall serve until the next annual meeting of the shareholders of the Company and until their successors have been elected and qualified, and (ii) at each annual meeting of the shareholders of the Company, the Series A Preferred Stock, voting as a single class, shall be entitled to elect two directors of the Company. Any vacancy on the Board of Directors caused by the death or resignation of a director so elected or appointed shall be filled at the next annual meeting of the shareholders of the Company, provided, however, that the Board of Directors shall promptly appoint to fill such vacancy any qualified person designated in writing by the holders of more than 50% of the then outstanding Series A Preferred Stock. The term of office of all directors so designated by the holders of the Series A Preferred Stock will terminate immediately upon payment or setting apart for payment of all past due dividends. EX-2 3 APPENIDX B--STOCK OPTION PLAN PRELIMINARY COPIES APPENDIX B PEASE OIL AND GAS COMPANY 1996 STOCK OPTION PLAN 1. Purpose of Plan. The purpose of this 1994 Employee Stock Option Plan ("Plan") is to secure and retain employees responsible for the success of Pease Oil and Gas Company ("Company"), to motivate such persons to exert their best efforts on behalf of the Company, to encourage stock ownership and to provide such persons with proprietary interests in, and a greater concern for, the welfare of, and an incentive to continue service with, the Company. For purposes of this Plan, the term "Company" shall include where appropriate in the context used any "parent corporation" or "subsidiary corporation" of the Company, as those terms are defined in Sections 424(e) and (f) of the Code, whether in existence on the date of adoption of the Plan or formed after the adoption of this Plan. Options issued pursuant to this Plan will constitute incentive stock options within the meaning of ss. 422 of the Internal Revenue Code of 1986, as amended ("Code"), at the time of grant ("Incentive Stock Options"), or other options ("Nonstatutory Stock Options"). Incentive Stock Options and Nonstatutory Stock Options may both be granted hereunder and any option granted which for any reason does not qualify as an Incentive Stock Option shall be a Nonstatutory Stock Option; provided, however, that in no event shall an Incentive Stock Option and a Nonstatutory Stock Option granted to any Optionee under a single stock option agreement be subject to a "tandem" exercise arrangement such that the exercise of one such Option affects the Optionees's right to exercise the other Option granted under such stock option agreement. Unless the context requires otherwise, the term "Option" in this Plan refers to both Incentive Stock Options and Nonstatutory Stock Options. 2. Stock Subject to the Plan. The number of shares of the Company's $.10 par value common stock ("Common Stock") which may be optioned under this Plan is 350,000 shares. Such shares may consist, in whole or in part, of unissued shares or treasury shares. The maximum number of shares issuable pursuant to this Plan, including shares subject to outstanding options, shall be subject to adjustment as provided in Section 6 of this Plan. The aggregate fair market value of the shares subject to Incentive Stock Options granted to any Optionee which become exercisable in a particular calendar year shall not exceed $100,000. For purposes of such limitation, the fair market value of Common Stock shall be determined as of the date of grant and the limitations shall be applied by taking into account Incentive Stock Options in the order granted. For purposes of this Plan, market value of shares subject to an option shall be determined as follows: (i) If the Common Stock is listed on the New York Stock Exchange, the American Stock Exchange or such other securities exchange designated by the Committee, or admitted to unlisted trading privileges on any such exchange, or if the Common Stock is quoted on a National Association of Securities Dealers, Inc. system that reports closing prices, the fair market value shall be the closing price of the Common Stock as reported by the Wall Street Journal on the day the fair market value is to be determined, or if no such price is reported for such day, then the determination of such closing price shall be as of the last immediately preceding day on which the closing price is so reported; or (ii) If the Common Stock is not so listed or admitted to unlisted trading privileges or so quoted, the fair market value shall be the average of the last reported highest bid and the lowest asked prices quoted on the National Association of Securities Dealers, Inc. Automated Quotations System or, if not so quoted, then by the National Quotation Bureau, Inc. on the day the fair market value is determined; or (iii) If the Common Stock is not so listed or admitted to unlisted trading privileges or so quoted, and bid and asked prices are not reported, the fair market value shall be determined in such reasonable manner as may be prescribed by the Committee. If any outstanding Option under this Plan for any reason expires or is terminated, the shares of Common Stock allocable to the unexercised portion of such Option may again be optioned under this Plan subject to the limitations, terms and conditions of this Plan. The Board of Directors, and the proper officers of the Company, shall from time to time take appropriate action required for delivery of Common Stock, in accordance with any exercise of Options under this Plan. 3. Administration. Administration of the Plan shall be administered by the Compensation Committee of the Board of Directors of the Company, hereinafter referred to as the "Committee." The Committee shall consist of at least two members of the Board of Directors having full authority to act in the matter, none of whom during the one year prior to such appointment or while serving on the Committee, is granted an Option under this Plan or is granted or awarded equity securities pursuant to any other plan of the Company or any of its affiliates, except as permitted by Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "1934 Act"). If the Committee thus established shall consist of fewer than two members at the time of any action by the Committee, then the directors shall select enough other shareholders to serve on the Committee to have two members and to meet any requirements of ss. 422 of the Code and regulations adopted thereunder and regulations adopted under the 1934 Act. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time, the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. - 2 - With respect to persons subject to Section 16 of the 1934 Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. Subject to compliance with Section 16 of the 1934 Act, members of the Board who are either eligible for Options or who have been granted Options may vote on any matters affecting the administration of the Plan or the grant of any Options pursuant to the Plan, except that no such member shall act upon the granting of an Option to himself, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting of Options to such member. The decision of a majority of those present at any meeting of the Committee where a quorum consisting of a majority of the Committee is present shall constitute the decision of the Committee. The Committee is authorized and empowered to administer the Plan insofar as it relates to Options and, consistent with the terms of the Plan, to (a) select the employees to whom Options are to be granted and to fix the number of shares and other terms and conditions of the Options to be granted; (b) determine the date upon which Options shall be granted and the terms and conditions of the granted Options in a manner consistent with the Plan, which terms need not be identical as between Options or Optionees; (c) interpret the Plan and the Options granted under the Plan; (d) adopt, amend and rescind rules and regulations for the administration of the Plan insofar as it relates to Options; and (e) direct the Company to execute Stock Option agreements pursuant to the Plan. All such actions of the Committee shall be binding upon all participants in the Plan. 4. Eligibility. The employees of the Company who shall be eligible to receive grants of Options under this Plan shall be those key employees, including officers or directors of the Company who are also employees, who are from time to time responsible for the management, growth or success of the business of the Company and who shall have been selected by the Committee. The Company may also grant Options to Consultants and Directors who are not employees of the Company; provided, however, that Consultants and Directors who are not employees are eligible to receive only Nonstatutory Options. The persons to receive Options under the Plan shall be selected from time to time by the Committee, in its sole discretion, and the Committee shall determine, in its sole discretion, the number of shares to be covered by the Options granted to each person selected. [Subject to the exception under Section 5(b), no person may be granted an Option if such person, at the time the Option is granted, owns shares of Common Stock possessing more than 10% of the total combined voting power of all classes of stock of the Company. For purposes of - 3 - calculating such stock ownership, the attribution rules of stock ownership set forth in Section 424(d) of the Code shall apply. Accordingly, an Optionee, with respect to whom such 10% limitation is being determined, shall be considered as owning Common Stock owned directly or indirectly by or for the Optionee's brothers and sisters (whether by the whole or half-blood), spouse, ancestors and lineal descendants; and any Common Stock owned directly or indirectly by or for a corporation, partnership, estate or trust, shall be considered as being owned proportionately by or for its shareholders, partners or beneficiaries.] 5. Terms and Conditions. The Plan shall become effective upon the approval of a majority of the holders of the Company's Common Stock present, or represented, and entitled to vote, at a meeting at which a quorum of stockholders of the Company is present or represented. Such approval must occur within 12 months after the date this Plan is adopted by the Board of Directors. It shall continue in effect for a period of ten years from the date of its effectiveness. All Options granted under this Plan shall be subject to the terms and conditions of this Plan, including all of the following: (a) Option Price. Subject to the provisions of Section 5(b), the Option price per share shall be determined by the Committee but shall not be less than 100% of the fair market value of such shares at the time the Option is granted. (b) More than 10% Shareholder. If an employee owns more than 10% of the total combined voting power of all classes of stock of the Company as determined under Section 4, at the time an Incentive Stock Option is granted under this Plan, the Committee may issue an Incentive Stock Option to such person at 110% of the fair market value of the Common Stock. Any Incentive Stock Option granted to any such employee shall not be exercisable after the expiration of five years from the date such Incentive Stock Option is granted. (c) Limitations on Grant of Options. Subject to the limitations under Section 5(b) of this Plan, no Option shall be granted which may be exercised more than ten years after the date it was granted. (d) Limitations on Exercise of Option. No Optionee granted an Option under this Plan may exercise such Option for six months following the date of grant of the Option and unless at all times during the period beginning on the date of the granting of the Option and ending on the day three months before the date of such exercise such Optionee was employed by the Company or a corporation or subsidiary thereof issuing or assuming the Option in a transaction set forth under Section 6 of this Plan. (e) Payment for Shares. Payment in full, in cash, shall be made for all shares issued pursuant to the exercise of an Incentive Stock Option, provided that the Committee may permit payment to be made with shares of the Company's - 4 - Common Stock owned by the Optionee to be valued at the fair market value at the date of exercise. All Options shall be exercised for 100 shares, or a multiple thereof, or for the full number of shares for which the Option is then exercisable. No Optionee shall have the right to dividends or other rights of a stockholder with respect to shares subject to an Option until the Optionee has given written notice of exercise of the Optionee's Incentive Stock Option and paid in full for such shares. (f) Manner of Exercise. Any Option granted pursuant to this Plan may be exercised at such time or times as set forth in the Option, by the delivery of written notice to any officer of the Company, other than the Optionee, together with payment in full, for the number of shares to be purchased pursuant to such exercise. Such notice (i) shall state the election to exercise the Option, (ii) shall state the number of shares in respect of which the Option is being exercised, (iii) shall state the Optionee's address, (iv) shall state the Optionee's social security number, (v) shall contain such representations and agreements concerning Optionee's investment intent with respect to such shares of Common Stock as shall be satisfactory to the Company's counsel, (vi) shall state that the certificate evidencing the shares may be stamped with a restrictive legend and the shares evidenced by such certificate will constitute "restricted securities" as defined in Rule 144 promulgated under the Securities Act of 1933, as amended (the "Act") (unless the shares to be acquired are registered under the Act) and (vii) shall be signed and dated by Optionee. (g) Conditions of Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation,the Act, the 11934 Act, the rules and regulations promulgated thereunder, applicable state securities law, and the requirements of any stock exchange or automated quotation system upon which the Share may be listed or quoted, and shall be subject to the approval of legal counsel for the Company with respect to such compliance. (h) Limitation on Transfer of Shares. Unless shares issued upon exercise are at the time of exercise registered under the Act, all shares of Common Stock acquired by an Optionee upon exercise of an Option granted under this Plan shall be deemed to be "restricted securities" as defined in Rule 144 promulgated under the Act and the certificate evidencing such shares shall contain a legend as follows: "The securities represented by this certificate may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Securities Act of 1933 (the `Act') or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Company." - 5 - (i) Other Representations or Warranties. As a further condition to the exercise of any Option granted under this Plan, the Company may require each Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. (j) Holding Period of Shares. No shares of Common Stock acquired upon exercise of an Incentive Stock Option granted under this Plan shall be sold or otherwise disposed of, within the meaning of Section 424(c) of the Code, at any time before the sooner of two years from the date of the grant of an Incentive Stock Option under this Plan or one year after the date of exercise of the Incentive Stock Option. However, an Optionee who has acquired shares of Common Stock upon exercise of a stock option granted under this Plan, who transfers such shares to a trustee, receiver, or other similar fiduciary in any proceeding under Title 11 of the United States Bankruptcy Law or any other similar insolvency proceeding at a time when such Optionee is insolvent shall not have been deemed to have made a transfer or disposition for purposes of this subsection, nor shall one who acquires the shares from the Company with another person in joint tenancy be deemed to have made a transfer or disposition. Shares of Common Stock acquired by exercise of a Nonstatutory Stock Option under the Plan shall not be sold or otherwise disposed of at any time before one year from the date of the grant of the Nonstatutory Stock Option. (k) Death of Optionee. If an Optionee dies, any Option previously granted to the Optionee shall be exercisable by the personal representative or administrator of the deceased Optionee's estate, or by any trustee, heir, legatee or beneficiary (collectively referred to for convenience as the "legal representative") who shall have acquired the Option directly from the Optionee by will or by the laws of descent and distribution at any time within one year after his death, but not more than ten years [five years if Section 5(b) is applicable] after the date of granting of the Option, provided the deceased Optionee was entitled to exercise such Option at the time of his death. Prior to the exercise of any such Option, the legal representative of the deceased Optionee shall furnish to the Company written notice of such exercise, together with a certified copy of letters testamentary or other proof deemed sufficient by the Committee of the right of the legal representative to exercise such Option in accordance with the provisions of this Plan. (l) Retirement. If an Optionee's employment with the Company terminates by reason of retirement, any Option previously granted to him shall be exercisable as determined in the sole discretion of the Committee at any time within three months after the date of such termination, but not more than ten years [five years if Section 5(b) is applicable] after the date of granting of the Option, and then only to the extent to which it was exercisable at the time of such termination by retirement; provided, however, that if the Optionee dies within three months after termination by retirement, any unexercised Option, to the extent to which it was exercisable at the time of his death, shall thereafter be exercisable for one year after - 6 - the date of his death, but not more than ten years [five years if Section 5(b) is applicable] after the date of granting of the Option. (m) Disability. If an Optionee becomes disabled within the meaning of Section 22(e)(3) of the Code, and at the time of such disability the Optionee is entitled to exercise an Option, the Optionee shall have the right to exercise such Option within one year after such disability provided that the Optionee exercises within ten years after the date of grant thereof [or five years if Section 5(b) is applicable], and then only to the extent to which it was exercisable at the time of such disability. (n) Optionee's Termination. If an Optionee ceases to serve an Employee, Consultant or Director, as the case may be, for any reason other than death, retirement or disability, any Option previously granted to the Optionee which was exercisable at the time of termination shall terminate three months after the date of such termination or at such earlier time as provided in the terms of the Option granted to the Optionee. To the extent that an Option is not exercised within the time specified herein, the Option shall terminate. (o) Leave of Absence. For the purposes of this Plan (i) a leave of absence, duly authorized in writing by the Company for military service or sickness, or for any other purpose approved by the Company, if the period of such leave does not exceed 90 days and (ii) a leave of absence in excess of 90 days, duly authorized in writing by the Company provided the Optionee's right to re-employment is guaranteed either by statute or by contract, shall not be deemed a termination of employment. (p) Nontransferability of Options. No Option granted under this Plan will be transferable by the Optionee other than by will or the laws of descent and distribution. During the lifetime of the Optionee, the Option will be exercisable only by Optionee. (q) Exercisability of Options. No Optionee granted an Option under this Plan shall be entitled to exercise such Option at any time after the expiration of such Option as specified in the option certificate evidencing such Option. 6. Adjustments Upon Recapitalization, Merger, Etc. If the outstanding shares of $.10 par value Common Stock of the Company shall at any time be changed or exchanged by declaration of a stock dividend, split-up, subdivision or combination of shares, recapitalization, merger, consolidation or other corporate reorganization in which the Company (including a merger or similar reorganization which effects a reincorporation of the Company in a different county or province) is the surviving corporation, the number and kind of shares subject to this Plan or subject to any Options previously granted, and the Option prices, shall be appropriately and equitably adjusted, so as to maintain the proportionate number of shares without changing the aggregate Option price. - 7 - In the event of a dissolution or liquidation of the Company, or a merger, consolidation, sale of all or substantially all of its assets, or other corporate reorganization in which the Company is not the surviving corporation and the holder of Common Stock receives securities of another corporation, then any outstanding Options hereunder shall terminate as of the effective date of such event; provided that immediately prior to such event each Optionee shall have the right to exercise any unexpired Option in whole or in part whether or not the Option would otherwise be exercisable. The Company shall afford each person who holds an Incentive Stock Option under this Plan with at least 30 days advance written notice of such event. The existence of this Plan, or of any Options hereunder, shall not in any way prevent any transaction described in this section, nor shall anything contained in this Plan prevent the substitution of a new Option by a surviving corporation. 7. Use of Proceeds. Proceeds from the sale of stock pursuant to Options granted under this Plan shall constitute general funds of the Company may be used for such general corporate purposes as the Company's Board of Directors shall determine. 8. Reservation of Issuance of Shares. The Company shall at all times during the duration of this Plan reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of all Options granted pursuant to this Plan, and shall pay all original issue and transfer taxes with respect to the issuance of shares pursuant to the exercise of such Options, and shall pay all of the fees and expenses necessarily incurred in connection with the exercise of such Options and the issuance of such shares. 9. Amendments. The Board of Directors may amend, alter, or discontinue this Plan, but no amendment, alteration or discontinuation shall be made which would impair the rights of any Optionee under any Options previously granted, without the Optionee's consent, or which, without the approval of the stockholders, would: (i) except as is provided in Section 6 of this Plan, increase the total number of shares reserved for the purposes of this Plan; (ii) decrease the Option price to less than 100% of the fair market value or 110% if Section 5(b) is applicable on the date of the granting of the Option; (iii) change the persons (or class of persons) eligible to receive Options under this Plan; or (iv) so long as the Company has a class of equity security registered under Section 12 of the 1934 Act, make any material amendment to the Plan. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if the Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board in a writing signed by both parties. - 8 - 10. Indemnification. In addition to such other rights of indemnification as they may have as directors, the members of the Committee and the Board of Directors shall be indemnified by the Company against reasonable expenses, including attorneys' fees actually incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therefrom, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with this Plan or any Option granted hereunder, or shares purchased pursuant to the exercise of Options under this Plan, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of judgment in any action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding, that such member of the Board of Directors is liable for gross negligence, fraud or willful misconduct in the performance of the director's duties so long as within 60 days after institution of any such action, suit or proceeding, the director shall in writing offer the Company the opportunity, at its own expense, to handle and defend such action, suit or proceeding. 11. Miscellaneous. Unless the context requires otherwise, words denoting the singular may be construed as denoting the plural, and words denoting the plural may be construed as denoting the singular, and words of one gender may be construed as denoting such other gender as is appropriate. Paragraph headings are not to be considered part of this Plan and are included solely for convenience and are not intended to be full or accurate descriptions of the contents thereof. Adopted by Directors: Adopted by Shareholders: PEASE OIL AND GAS COMPANY organized under the laws of Nevada ATTEST: By /s/ Willard H. Pease, Jr. --------------------------------- Willard H. Pease, Jr. , Chairman - ------------------------------------ Patrick J. Duncan, Secretary S E A L - 9 - -----END PRIVACY-ENHANCED MESSAGE-----