-----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, RGecaaPt5JEnzEY3+Zyq3xQtVrnmNE7zfoqFX/TW0EDqM51eMcmm11r8eWXwZpSm yHb68pHaUezKwxeZnfJ1Zw== 0000918402-96-000120.txt : 19960802 0000918402-96-000120.hdr.sgml : 19960802 ACCESSION NUMBER: 0000918402-96-000120 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960801 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: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 033-94536 FILM NUMBER: 96602426 BUSINESS ADDRESS: STREET 1: 751 HORIZON COURT STE 203 STREET 2: P O BOX 60219 CITY: GRAND JUNCTION STATE: CO ZIP: 81506-8758 BUSINESS PHONE: 3032455917 MAIL ADDRESS: STREET 1: 751 HORIZON CT STE 203 STREET 2: P O BOX 60219 CITY: GRAND JUNCTION STATE: CO ZIP: 81506-8758 FORMER COMPANY: FORMER CONFORMED NAME: WILLARD PEASE OIL & GAS CO DATE OF NAME CHANGE: 19920703 POS AM 1 PE-AMENDMENT NO. 2 ON FORM S-3 TO FORM SB-2 As filed with the Securities and Exchange Commission on August 1, 1996 Registration No. 33-94536 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 POST-EFFECTIVE AMENDMENT NO. 2* ON FORM S-3 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PEASE OIL AND GAS COMPANY ---------------------------------------------------- (Exact name of registrant as specified in its charter) Nevada 87-0285520 ------------------------------ ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 751 Horizon Court, Suite 203 P.O. Box 60219 Grand Junction, Colorado 81506-8758 (970) 245-5917 -------------------------------------------- (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Willard H. Pease, Jr. 751 Horizon Court, Suite 203 P.O. Box 60219 Grand Junction, Colorado 81506-8758 (970) 245-5917 --------------------------------------- (Name, address, including ZIP code, and telephone number, including area code, of agent for service) ----------------------------------------------------- With Copies to: Annita M. Menogan, Esq. Hopper and Kanouff, P.C. 1610 Wynkoop Street, Suite 200 Denver, Colorado 80202 (303) 892-6000 ----------------------------------------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. ----------------------------------------------------- If the only securities being registered on this Form are being offered pursuant to dividend or interest investment plans, please check the following box. [ ] ----------------------------------------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] ----------------------------------------------------- If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ----------------------------------------------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ----------------------------------------------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ----------------------------------------------------- *Pursuant to Rule 429 adopted under the Securities Act of 1933, this Registration Statement constitutes post-effective Amendment No. 6, and the prospectus filed as part of this Registration Statement also relates to Registration Statement No. 33-64448. ----------------------------------------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. PROSPECTUS PEASE OIL AND GAS COMPANY 5,038,437 Shares of Common Stock This Prospectus relates to the resale by the holders (the "Selling Securityholders") named herein of, or the exercise or conversion of other securities of Pease Oil and Gas Company ("Company") for, up to 5,038,437 shares of the $0.10 par value common stock ("Common Stock") of the Company, which are either currently issued and outstanding, or which are issuable upon the exercise of warrants ("Warrants") to purchase shares of Common Stock, which Warrants are either currently outstanding or are issuable upon conversion of shares of the Company's Series A Cumulative Preferred Stock ("Preferred Stock"). Of the 5,038,437 shares of Common Stock offered hereby for resale or upon exercise or conversion, 1,264,820 shares which are currently outstanding are being offered for resale by certain stockholders of the Company; 3,082,429 shares are issuable upon exercise of Warrants that were issued or which are issuable upon conversion of shares of Preferred Stock; and 691,188 shares are offered for resale after exercise by the holders of other outstanding warrants of the Company. See "Selling Securityholders." The Company will not receive any proceeds from the sale of shares by the Selling Securityholders and will not receive any proceeds upon the conversion of the Preferred Stock which is convertible without payment of additional consideration into Common Stock or Common Stock and Warrants. If all of the Warrants are exercised, of which there is no assurance, the Company will receive proceeds of up to approximately $19,476,255. There is no assurance that the all or any portion of the Warrants will be exercised. However, the holders of the Warrants will have to exercise the Warrants in order to sell the shares of Common Stock offered for resale hereby, excluding the 1,264,820 shares which are currently outstanding and offered hereby. ----------------------------------------------- FOR INFORMATION CONCERNING CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PURCHASERS OF THE COMMON STOCK OFFERED HEREBY AND BY PERSONS WHO CONVERT THEIR PREFERRED STOCK OR WHO EXERCISE WARRANTS, SEE "RISK FACTORS" COMMENCING ON PAGE 5 OF THIS PROSPECTUS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is July 24, 1996 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance with the Exchange Act files periodic reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company with the Commission can be inspected and copied (at prescribed rates) at the Commission's Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, 13th Floor, New York, New York 10048. The Commission maintains a Website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding the Company. In addition, reports, proxy statements and other information concerning the Company can be inspected and copied at the office of the National Association of Securities Dealers, Inc., 9513 Key West Avenue, Rockville, Maryland 20850-3389. The Company has filed with the Commission registration statements (the "Registration Statements") under the Securities Act of 1933 (the "Securities Act") with respect to the Common Stock offered hereby. This Prospectus, which is part of the Registration Statements, does not contain all the information set forth in the Registration Statements and the exhibits and schedules thereto, certain items of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is hereby made to the Registration Statements and such exhibits and schedules. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission are incorporated in this Prospectus by reference. (a) Annual Report on Form 10-KSB for the year ended December 31, 1995 (the "Annual Report on Form 10-KSB"); and (b) Quarterly Report on Form 10-QSB for the Quarter ended March 31, 1996 (the "First Quarter Report"). Any statement contained in the above-referenced documents shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained in this Prospectus modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. All documents filed after July 24, 1996, by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering shall be deemed to be incorporated by reference into this Prospectus. Copies of any documents or portions of such other documents incorporated in this Prospectus, not including exhibits to the information that is incorporated by reference, unless such exhibits are specifically incorporated by reference in this Prospectus, may be obtained at no charge by any person (including any beneficial owner) to whom this Prospectus is delivered by a written or oral request to Patrick J. Duncan, Corporate Secretary, 751 Horizon Court, P.O. Box 60219, Grand Junction, Colorado 81506-8758, telephone (970) 245-5917. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus or contained in other reports and documents of the Company which are incorporated by reference in this Prospectus. The Company Pease Oil and Gas Company, a Nevada corporation ("Company"), has been engaged in the oil and gas exploration, development and production business since 1972. The Company's operations have been conducted primarily in Colorado, Nebraska, Utah and Wyoming. Through the acquisition of Skaer Enterprises, Inc. in 1993 and its affiliated properties and businesses, the Company substantially expanded its operations. The Company's business strategy is to expand its reserve base and cash flow primarily through: Raising significant capital to take advantage of leading edge technologies such as horizontal drilling and 3-D seismic exploration projects; Positioning itself with strategic sources of capital and partners that can react to opportunities in the oil and gas business when they present themselves; Developing alliances with major oil and gas finders that have been trained by the major oil companies; Participating in projects that have opportunities involving relatively small amounts of capital that could potentially generate significant rates of return. These projects include areas with large field potentials in the Rocky Mountains, Transition Zone Louisiana, and the Gulf of Mexico; Implementing the Company's investment strategy to carefully consider, analyze, and exploit the potential value of the Company's existing assets to increase the rate of return to its shareholders; Reinvesting operating cash flows into development drilling and recompletion activities; Expanding the Company's operations outside the D-J Basin; Continuing the implementation of asset rationalization and operating efficiencies designed to improve operating margins and lower per unit operating cost; Acquiring properties that build upon and enhance the Company's existing asset base; Developing a long term track record regarding stock price performance and a reasonable rate of return to the shareholder. The Company recognizes that the ability to implement its business strategies is largely dependent on the ability to increase its operating cash flows by raising additional debt or equity capital to fund future drilling and development activities. Since the acquisition of Skaer in 1993, the Company has suffered from undercapitalization, lacking the necessary working capital to peroperly exploit the assets acquired from Skaer or explore other opportunities. Management believes it will be necessary to raise additional equity or debt capital to overcome the Company's undercapitalization. Management further believes that the union with Beta will provide the vehicle necessary to overcome this obstacle. For instance, it is anticipated that the Company, with Beta's assistance, will be raising capital in the second quarter of 1996. The proceeds from these efforts, if successful, will be used for working capital, horizontal drilling in Loveland Field, Colorado, and possibly to participate with other industry participants in drilling ventures in Louisiana, the Gulf of Mexico or elsewhere in the continental United States. As of June 30, 1996, the Company had varying ownership interests in 216 gross productive wells (186 net) located in four states. The Company operates 196 of the wells, with the other wells being operated by independent operators under contracts that are standard in the industry. In May 1995, the Company restructured its operations by substantially downsizing its oil field service and supply store operations as well as closing its administrative office in Denver, Colorado. As a result of this restructuring, the Company terminated 40 of its 71 employees. Management of the Company does not expect any material negative impact in its financial condition as a result of the restructuring. Prior to its actions in May 1995, and due to the Company's cash position, in December 1994, the Board of Directors of the Company voted not to declare the quarterly dividend on the Company's Preferred Stock. In March 1995, the Board of Directors voted to suspend indefinitely the payment of any future Preferred Stock dividends, although dividends will continue to cumulate on a monthly basis. In January 1995, the Company commenced a tender offer to the Preferred Stockholders to convert each share of Preferred Stock and all then accrued dividends through March 31, 1995 into 4.5 shares of Common Stock and warrants to purchase 2.625 shares of Common Stock. Prior to the tender offer, the Preferred Stock would have been convertible into 2.625 shares of Common Stock. As a result of the tender offer, 933,492 shares of Preferred Stock were converted into 4,200,716 shares of Common Stock and warrants to purchase 2,450,416 shares of Common Stock. 3 Pursuant to the Company's Articles of Incorporation, the Preferred Stockholders are permitted to elect two directors to the Company's Board of Directors whenever quarterly dividends have not been paid for six quarters. Because no dividends have been paid since September 1994, holders of Preferred Stock will be able to elect two directors at the Company's annual meeting in August 1996. The Company has also proposed to amend the Certificate of Designation for the Preferred Stock to change the event which triggers automatic conversion of the Preferred Stock into Common Stock and Warrants, to lower the price for converting Preferred Stock into Common Stock and Warrants and to state the exercise price of the Warrants issuable upon conversion of the Preferred Stock. All stockholders of the Company may vote on the proposed amendment at the annual meeting. The Company's address is 751 Horizon Court, Suite 203, Grand Junction, Colorado 81506 and its telephone number is (970) 245-5917. 4 RISK FACTORS Company's Continuing Losses and Financial Condition. As described in the financial statements contained in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995, the Company has sustained operating losses during each of the last five years. The Company had net losses of approximately $1,707,000, and $765,000 for the fiscal years ended December 31, 1994 and 1995, respectively, and net losses applicable to common shares of $2,865,000 and $2,609,000 for fiscal years 1994 and 1995, respectively. However, the Company had operating cash flow of approximately $383,000 (unaudited) for the first quarter of 1996. Although the Company's current assets and the estimated present value of the Company's oil and gas reserves exceeded the Company's liabilities by $8.58 million as of December 31, 1995, there can be no assurance that the Company can produce the oil and gas reserves or otherwise liquidate those assets during the times or at the prices assumed in valuing those reserves. In addition, despite the results for the first quarter of 1996, no assurance can be made that the Company will operate profitably in the future as an oil and gas exploration, development and production company. Any likelihood of future profitability of the Company must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the oil and natural gas exploration, development and production business in which the Company will be engaged. Need for Additional Capital. The Company's ability to complete its planned drilling and development programs which is intended to expand its reserve base and diversify its operations, is dependent upon the Company's ability to obtain the necessary capital. The Company's cash flow and borrowing capacity, together with any proceeds from this offering, will not be sufficient for the Company to complete its planned drilling and development programs. Additional sources of financing will be needed and there can be no assurance that additional sources of financing will be available at all or at a reasonable cost. In April 1996, the Company began offering, in a private placement, $2,000,000 of units, each consisting of one $50,000 10% Collateralized Convertible Debentures and 25,000 Warrants to purchase shares of the Company's Common Stock at $1.25 per share. The offering expires August 14, 1996 but may be extended by the Company. The Company believes that the proceeds of such placement, when combined with the cash that the Company currently has and anticipates receiving from operations, will support the Company for at least 12 months and additional financing will be required thereafter. Development Risks and Production. A portion of the Company's oil and gas reserves are proved undeveloped reserves. Successful development and production of such reserves, although they are categorized as "proved," cannot be assured. Additional drilling will be necessary in future years both to maintain production levels and to define the extent and recoverability of existing reserves. There is no assurance that present oil and gas wells of the Company will continue to produce at current or anticipated rates of production, that development drilling will be successful, that production of oil and gas will commence when expected, that there will be favorable markets for oil and gas which may be produced in the future or that production rates achieved in early periods can be maintained. Bank Loan Repayment Priority. As of June 30, 1996, the Company's outstanding loan ("Bank Loan") with Colorado National Bank ("Bank") was $1,271,374. The Bank Loan is secured by a first priority security interest on substantially all of the Company's oil and gas reserves as well as the Company's gas processing facility. If the Company's obligations under the terms of the Bank Loan agreement are ever declared immediately due and payable, the Bank would have a first lien on all of the Company's major assets and might sell a significant portion of the assets to repay the Bank Loan. Price Volatility. The revenues generated by the Company and estimated future net revenue are highly dependent upon the prices of oil, natural gas and natural gas liquids. The energy market makes it difficult to estimate future prices of oil, natural gas and natural gas liquids. For instance, the price of oil dropped from approximately $18.00 per barrel as of December 31, 1992, to less than $12.00 per barrel as of December 31, 1993. The Company's average collected price for oil in 1994 was $15.94 per barrel and for natural gas was $1.36 per thousand cubic feet ("mcf"), for 1995 was $16.77 and $1.18, respectively and through May 1996, $18.60 and $1.23, respectively. On April 19, 1996, the posted price for oil was $22.50 per barrel and for natural gas was $1.46 per mcf but on July 19, 1996, the price for oil was $20.25 per barrel and $1.11 for natural gas per mcf. The reserve valuations shown in the Company's 5 Annual Report on Form 10-KSB are based on the December 31, 1995 prices of $17.66 per barrel of oil and $1.71 per mcf of natural gas. Various factors beyond the control of the Company affect prices of oil and natural gas, including worldwide and domestic supplies of, and demand for, oil and natural gas, the ability of the members of the Organization of Petroleum Exporting Countries ("OPEC") to agree to and maintain oil price and production controls, political instability or armed conflict in oil-producing regions, the price of foreign imports, the level of consumer demand, the price and availability of alternative fuels, the availability of pipeline capacity and changes in existing federal regulation and price controls. As in the past, it is likely that oil and gas prices will continue to fluctuate in the future which may adversely affect the Company's business. Limitations on Accuracy of Reserve Estimates and Future Net Revenue. This Prospectus contains estimates of the Company's oil and gas reserves and the future net revenue therefrom which have been prepared by independent petroleum engineers. These estimates are based on various assumptions and, therefore, are inherently imprecise. Estimates of reserves and of future net revenue prepared by different petroleum engineers may vary substantially depending, in part, on the assumptions made and may be subject to adjustment either up or down in the future. Actual future production, revenue, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves may vary substantially from those assumed in the estimates. In addition, the Company's reserves may be subject to downward or upward revision, based upon production history, results of future exploration and development, prevailing oil and gas prices and other factors. If these estimates of quantities, prices and costs prove inaccurate, the Company is unsuccessful in expanding its oil and gas reserves base with its capital expenditure program, and/or declines in and instability of oil and natural gas prices occur, then writedowns in the capitalized costs associated with the Company's oil and gas assets may be required. Purchasers should note the different categories of reserves and that the category of "probable" reserves carries substantially more risk than the category of "proved" reserves. Risks Inherent in Oil and Gas Operations The search for oil and gas is a highly speculative activity that may be marked by numerous unproductive efforts. Many wells will be dry, and productive wells may not produce enough oil or gas to produce a profit or even return the invested capital. The Company must continually acquire and explore for and develop new oil and gas reserves to replace those being depleted by production. Without successful drilling or acquisition ventures, the Company's assets, properties and revenues will decline. Oil and gas exploration and development are speculative, involve a high degree of risk and are subject to all the hazards typically associated with the search for, development of and production of oil and gas. The Company's operations are subject to all of the risks incident to exploration for and production of oil and gas including blow-outs, cratering, pollution and fires, each of which could result in damage to or destruction of oil and gas wells or production facilities or damage to persons and property. The Company's insurance may not fully cover certain of these risks and the occurrence of a significant event not fully insured against could have a material adverse effect on the Company's financial position. Although the Company has recently emphasized development drilling in the Denver--Julesburg Basin where drilling operations are believed to be of a lower risk than in some other areas, the process of drilling for oil and gas can be hazardous and carry the risk that no commercially viable oil or gas production will be obtained. The cost of drilling, completing and operating wells is often uncertain. Moreover, drilling may be curtailed, delayed or canceled as the result of many factors, including title problems, weather conditions, shortages of or delays in delivery of equipment, as well as the financial instability of well operators, major working interest owners and well servicing companies. The availability of a ready market for the Company's oil and gas depends on numerous factors beyond its control, including the demand for and supply of oil and gas, the proximity of the Company's natural gas reserves to pipelines, the capacity of such pipelines, fluctuations in production and seasonal demand, the effects of inclement weather and governmental regulation. New gas wells may be shut-in for lack of a market until a gas pipeline or gathering system with available capacity is extended into the area. New oil wells may have production curtailed until production facilities and delivery arrangements are acquired or developed. The Company's business will always be subject to these types of risks. Loss of Revenue from Take-or-Pay Contract. A "take-or-pay" contract with Public Service Company of Colorado which called for PSCo to purchase annually a minimum of 2.92 billion cubic feet (BCF) of natural gas from the Company expired 6 June 30, 1996. Historically, the price paid by PSCo under that contract had been at a premium above the market and therefore allowed for the "marketing and trading" activities which represented gas purchased from third parties and sold to PSCo under the terms of the contract. The Company is currently negotiating with PSCo for a new long-term contract, as well as examining other alternatives with natural gas end users. However, with the increasing competition fostering within all phases of the natural gas industry, it is unlikely that the contract will be renewed at an above market premium. Accordingly, the expiration of this contract will have a material negative impact on the Company's future operations since this activity generated gross margin between $500,000 and $600,000 annually. Competition. The oil and gas industry is highly competitive in many respects, including identification of attractive oil and gas properties for acquisition, drilling and development, securing financing for such activities and obtaining the necessary equipment and personnel to conduct such operations and activities. In seeking suitable opportunities, the Company competes with a number of other companies, including large oil and gas companies and other independent operators with greater financial resources and, in some cases, with more experience. Many other oil and gas companies in the industry have financial resources, personnel and facilities substantially greater than those of the Company and there can be no assurance that the Company will continue to be able to compete effectively with these larger entities. Shortage of Equipment, Services, and Supplies. The Company is involved in intense competition for scarce drilling and completion equipment, services and supplies, and there can be no assurance that sufficient drilling and completion equipment, services and supplies will be available when needed. The likelihood of shortages is greater at the present time than in the past because of the recent increase in oil and gas prices causing an increase in drilling activity and a resulting decrease in available material and equipment. Any such shortages could delay the proposed exploration, development, and sales activities of the Company and could cause a material adverse affect to the financial condition of the Company. Dependence on Key Personnel. The success of the Company will largely be dependent upon the efforts and active participation of Willard H. Pease, Jr. the President of the Company, James N. Burkhalter, the Vice President of Engineering and Production of the Company and Patrick J. Duncan the Chief Financial Officer of the Company. The loss of the services of any of its officers may adversely affect the Company's business. Government Regulation and Environmental Risks. The production and sale of gas and oil are subject to a variety of federal, state and local government regulations, including regulations concerning the prevention of waste, the discharge of materials into the environment, the conservation of natural gas and oil, pollution, permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, the unitization and pooling of properties, and various other matters, including taxes. Many jurisdictions have at various times imposed limitations on the production of gas and oil by restricting the rate of flow for gas and oil wells below their actual capacity to produce. In addition, many states have raised state taxes on energy sources and additional increases may occur, although increases in state energy taxes would have no predictable effect on natural gas and oil prices. The Company believes it is in substantial compliance with applicable environmental and other government laws and regulations, however, there can be no assurance that significant costs for compliance will not be incurred in the future. Anti-Takeover Protections. The Company's Articles of Incorporation and Bylaws include certain provisions, the effect of which may be to inhibit a change of control of the Company. These include the authorization of additional classes of Preferred Stock and classification of the Board of Directors. In addition, certain of the Company's officers have entered into employment contracts providing for certain payments to be made upon termination. These provisions may discourage a party from making a tender offer for or otherwise attempting to obtain control of the Company. Preferred Stock. The Company is authorized to issue 2,000,000 shares of preferred stock. The shares of preferred stock may be issued from time to time in one or more series as may be determined by the Board of Directors without stockholder approval. Further, the voting powers and preferences, the relative rights of each such series, and the qualifications, limitations and restrictions may be established by the Board of Directors without stockholder approval. The 7 Company has previously issued a total of 1,170,000 shares of Preferred Stock, 202,688 shares of which are currently outstanding and currently are convertible into 595,396 shares of Common Stock and 595,396 Warrants. The other 967,312 shares of Preferred Stock that were issued were converted into 4,288,005 shares of Common Stock and 2,537,705 Warrants. If stockholders approve, at the Company's Annual Meeting in August 1996, certain proposed amendments to the Certificate of Designation of the Preferred Stock which is contained in the Company's Articles of Incorporation, the conversion rate will change and the Preferred Stock will be convertible into 952,633 shares of Common Stock and Warrants. Any issuance of Preferred Stock could affect the rights of the holders of Common Stock and therefore reduce the value of the Common Stock. Holders of the shares of Preferred Stock are entitled to preferences ahead of holders of Common Stock as to dividends and at liquidation and any such preferences could affect the value of the Common Stock. Any preferences will be lost if the holders of the outstanding shares of Preferred Stock have conversion rights and convert their Preferred Stock into Common Stock and Warrants. Dividend Policy. Holders of shares of Preferred Stock are entitled to receive cumulative cash dividends at an annual rate of 10% per year (equal to $1.00 per share annually) payable quarterly in arrears, when, as and if declared by the Board of Directors of the Company out of funds at the time legally available therefor. Payment of dividends is subject to declaration by the Board of Directors and if not declared, dividends will cumulate from quarter to quarter without interest until declared and paid. Unpaid dividends increase the number of shares of Common Stock into which Preferred Stock may be converted. The Company's Board of Directors decided not to pay the 1994 fourth quarter dividend in December 1994. In March 1995, the Board of Directors suspended the payment of preferred stock dividends indefinitely. As of June 30, 1996, there was $354,704, or $1.75 per share, of preferred stock dividends in arrears. The Company does not currently pay cash dividends on its Common Stock (into which the Preferred Stock is convertible) and does not anticipate paying such dividends in the foreseeable future. The Company's agreement with Colorado National Bank restricts the payment of dividends on its Common Stock without consent of the lender. Election of Additional Directors by Preferred Stockholders. The Company's Articles of Incorporation provide that whenever dividends on the Preferred Stock (or any outstanding shares of Parity Stock, as defined) have not been paid in an aggregate amount equal to at least six quarterly dividends on such shares (whether or not consecutive), the number of directors of the Company will be increased by two, and the holders of the Preferred Stock, voting separately as a class, will be entitled to elect such two additional directors to the Board of Directors at any meeting of stockholders of the Company at which directors are to be elected held during the period such dividends remain in arrears. Such voting rights will terminate when all such dividends accrued and in default have been paid in full or set apart for payment. The term of office of all directors so elected will terminate immediately upon such payment or setting apart for payment. As of June 30, 1996, no dividends had been declared or paid on the Preferred Stock for seven quarters. Accordingly, two directors will be elected by the Preferred Stockholders at the Company's 1996 Annual Meeting in August 1996. Outstanding Options and Warrants. As of June 30, 1996, the Company has outstanding options and warrants to purchase a total of 5,028,501 shares of the Company's Common Stock. The exercise prices of the outstanding options and warrants range from $.70 per share to $6.00 per share. The holders of the outstanding options and warrants might have the opportunity to profit from a rise in the market price (of which there is no assurance) of the shares of the Company's Common Stock underlying the options and warrants, and their exercise may dilute the ownership interest in the Company held by other stockholders. USE OF PROCEEDS The Company will not receive any proceeds from the sale of shares by the Selling Securityholders and will not receive any proceeds upon the conversion of the Preferred Stock, which is convertible without payment of additional consideration into Common Stock or Common Stock and Warrants. If all of the Warrants are exercised, of which there is no assurance, the Company will receive proceeds of up to approximately $19,476,255. Any proceeds from the exercise of Warrants will be used by the Company for general corporate purposes. 8 SELLING SECURITYHOLDERS The following table sets forth certain information regarding the shares of Common Stock beneficially owned as of June 30, 1996, by each Selling Securityholder herein as adjusted to reflect the sale by all Selling Securityholders of the shares offered hereby by each Selling Securityholder. This list indicates any position, office or other material relationship with the Company that the Selling Securityholder had within the past three (3) years, the number of Common Shares owned by such Selling Securityholder prior to the offering, the maximum number of shares to be offered for such Selling Securityholder's account and the amount of the class owned by the Selling Securityholder after completion of the offering (assuming the Selling Securityholder sold the maximum number of shares of Common Stock). The Selling Securityholders are not required, and may choose not, to sell any of their shares of Common Stock.
Shares Owned Shares Prior to Being Shares Owned Name Offering Offered After Offering - ---- ------------ ------- -------------- Bell, Howard B. & Leslie R .............................. 9,375 9,375 0 Bronstein, Irwin I. (1) ................................. 40,000 40,000 0 Broadbent, Robert C. & Helena ........................... 15,625 15,625 0 Broadbent, Robert N. & Marjie Sue Family Trust .......... 15,625 15,625 0 Buehler, John J. & Jeri L ............................... 31,250 31,250 0 Burkhalter, James N. (2) ................................ 130,709 3,906 126,803 Crownover, Enid E. & Clyde .............................. 62,500 62,500 0 Dawes, Steven A ......................................... 31,250 31,250 0 Dawson, Kent J. & Ruth W ................................ 15,625 15,625 0 Duncan, Patrick J. & Eilleen M. (3) ..................... 134,531 15,625 118,906 Ellis, Robert P. & Sandra D ............................. 15,625 15,625 0 Findlay, Clifford O. IRA ................................ 15,625 15,625 0 Findlay, Pete Olds Profit Sharing ....................... 15,625 15,625 0 Flood, Laurence B ....................................... 58,824 58,824 0 Flynn, Timothy P. & Terri L ............................. 62,500 62,500 0 Fried, Stanley and Helen Fried Family Trust ............. 15,625 15,625 0 Gleave, Rodney S. & Kelly ............................... 15,625 15,625 0 Gleave, Kelly W. (4) .................................... 45,000 45,000 0 Greene Clark & Associates, (P/S Trust FBO A. Kent Greene) ........................................ 15,625 15,625 0 9 Shares Owned Shares Prior to Being Shares Owned Name Offering Offered After Offering - ---- ------------ ------- -------------- Harris, Webb & Garrison (5) ............................. 11,250 11,250 0 Hutchings, Darryl & Birgit .............................. 9,375 9,375 0 Invest L'Inc ............................................ 31,250 31,250 0 Mcferran, Sam ........................................... 5,882 5,882 0 Mart Warehousing & Storage Inc. (6) ..................... 31,250 31,250 0 Michelas, Michael T. (7) ................................ 45,625 45,625 0 Moleton, Gerald P. (Southwest Securities CF IRA Rollover) ............................................. 15,625 15,625 0 Paris, T. Mark and Janiel ............................... 15,625 15,625 0 Pfeiffer, Gene F. & Jeanne .............................. 15,625 15,625 0 Plasso, Frank ........................................... 9,375 9,375 0 Presidential Securities (8) ............................. 5,000 5,000 0 Ritger, William J. (9) .................................. 20,000 20,000 0 Ronin Group, Ltd. (10) .................................. 200,000 200,000 0 Ruane, James C (11) ..................................... 253,183 100,000 153,183 Rufty, Archibald ........................................ 15,625 15,625 0 Rufty, Frances F. C/F Sara F. Parkton UTNUGMA ........... 15,625 15,625 0 Stock, Lincoln F. and Helen, TTESS Lincoln F. and Helen Revocable Trust (12) ............................. 73,125 73,125 0 Jack D. and Maurine Swartz Family Trust ................. 15,625 15,625 0 Swartz, George C ........................................ 15,625 15,625 0 Tanner, Janet, First Trust Corp. TTEE Janet J. Tanner IRA .......................................... 15,625 15,625 0 Tanner, Max C. (Delaware Charter C/F Max C. Tanner Profit Sharing Keogh) ........................... 62,500 62,500 0 Tanner, Max C., Southwest Securities Inc., FBO IRA (13) ........................................... 50,000 50,000 0 Tanner, Max C. & Janet J. (14) .......................... 45,833 45,833 0 Tanner, Morris & Christi ................................ 11,250 11,250 0 Tanner, Mont E .......................................... 6,250 6,250 0 Thermo Cogeneration Partnership, L.P. ................... 65,000 65,000 0 10 Shares Owned Shares Prior to Being Shares Owned Name Offering Offered After Offering - ---- ------------ ------- -------------- TNC Incorporated (15) ................................... 50,000 50,000 0 USA Capital Management (16) ............................. 3,125 3,125 0 Wagner Investment Managment, Inc. (17) .................. 50,000 50,000 0 Wagner, Rolf (18) ....................................... 20,375 20,375 0 Wagner, W. Rolf, Scott & Stringfellow, Inc., FBO IRA................................................. 25,000 25,000 0 Walker, Clemons F. (19) ................................. 171,813 171,813 0 Walker, Clemons F., First Trust Corp TTEE IRA (20) .......................................... 93,750 93,750 0 Walker, Clemons F. & Leslie A. Walker Family Trust ........................................... 75,000 75,000 0 Warren, Clark A. & Melissa M ............................ 11,250 11,250 0 Weekley, Richard ........................................ 31,250 31,250 0 Witkowski, John J. & Carolyn A .......................... 15,625 15,625 0 --------- --------- --------- Totals ......................................... 2,354,899 1,956,007 398,892 ========= ========= =========
- ---------------------- (1) Includes 20,000 shares issuable upon exercise of presently exercisable warrants. (2) Mr. Burkhalter is the Vice President of Engineering and Production for the Company. Includes 115,000 shares underlying currently exercisable options. (3) Mr. Duncan is the Company's Chief Financial Officer. Includes 3,281 shares underlying presently exercisable warrants and 105,000 shares underlying presently exercisable options. (4) Includes 15,000 shares underlying presently exercisable warrants. (5) Consists of 11,250 shares underlying presently exercisable warrants. (6) Willard H. Pease, Jr. owns approximately 30% of the outstanding common stock of Mart Warehousing and Storage, Inc., and is President of Mart Warehousing and Storage, Inc. 11 (7) Includes 30,000 shares underlying presently exercisable warrants. (8) Consists of 5,000 shares underlying presently exercisable warrants. (9) Consists of 20,000 shares underlying presently exercisable warrants. (10) Consists of 200,000 shares underlying presently exercisable warrants. (11) 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, 45,083 shares underlying presently exercisable warrants to purchase Common Stock and 56,675 shares underlying presently exercisable options, and 11,750 shares of Common Stocks underlying convertible preferred stock. Mr. Ruane is a director of the Company. (12) Includes 15,000 shares underlying presently exercisable warrants. (13) Includes 16,667 shares underlying presently exercisable warrants. (14) Consists of 45,833 shares underlying presently exercisable warrants. (15) Consists of 50,000 shares underlying presently exercisable warrants. (16) Consists of 3,125 shares underlying presently exercisable warrants. (17) Consists of 50,000 shares underlying presently exercisable warrants. (18) Includes 12,500 shares underlying presently exercisable warrants. (19) Includes 138,480 shares underlying presently exercisable warrants. (20) Includes 25,000 shares underlying presently exercisable warrants. PLAN OF DISTRIBUTION The shares of Common Stock issuable upon exercise of the Warrants and the shares of Common Stock and Warrants issuable upon conversion of the shares of Preferred Stock will be issued directly by the Company to the Warrant holders or Preferred Stockholders upon submission of the particular Warrants together with the exercise price or upon submission of the shares of Preferred Stock to the Company. The exercise or conversion are subject to the terms of the Warrants and shares of Preferred Stock, and such Warrants and shares of Preferred Stock may be exercisable or convertible during different periods of time. The Selling Securityholders intend to sell their shares directly, through agents, dealers, or underwriters, in the over-the-counter market, or otherwise, on terms and conditions determined at the time of sale by the Selling Securityholders or as a result of private negotiations between buyer and seller. Sales of the shares of Common Stock may be made pursuant to this Prospectus and pursuant to Rule 144 adopted under the Securities Act of 1933, as amended. No underwriting arrangements exist as of the date of this Prospectus for the Selling Securityholders to sell their shares. Upon being advised of any underwriting arrangements that may be entered into by a Selling Securityholder after the date of this Prospectus, the Company will prepare a supplement to this Prospectus to disclose such arrangements. It is anticipated that the per share selling price for the shares will be at/or between the "bid" and "asked" prices of the Company's Common Stock as quoted in the over-the-counter market immediately preceding the sale. Expenses of any such sale will be borne by the parties as they may agree. 12 Paulson Investment Company ("Paulson"), who participated as the Representative of the underwriters in the Company's previous offering of Preferred Stock, may participate in the distribution of the securities offered hereby. Because Paulson is an affiliate of the Company, as defined by the By-Laws ("By-Laws") of the National Association of Securities Dealers, Inc. ("NASD"), any such participation must comply with the provisions of Schedule E of the By-Laws. The Company will pay securities broker-dealers who are members of the NASD a solicitation fee of 5% of the exercise price of the shares of Common Stock issued upon exercise of the Warrants of the Company that are exercisable at $5.00 per share until December 1996 and, thereafter at $6.00 per share through expiration of the Warrants on August 13, 1998, for soliciting the exercise and assisting in the exercise of the Company's outstanding Warrants. In order to qualify to receive the solicitation fee, the broker-dealer must be designated in writing by the Warrant holder as having solicited the exercise of the Warrant and the compensation payable to the broker-dealer in connection with the exercise of the Warrant must have been disclosed to the Warrant holder. The Company will pay the solicitation fee to qualifying broker-dealers through the expiration of the Warrants. No solicitation fee will be paid with respect to the exercise of Warrants directly by Warrant holders without the assistance or participation of a broker-dealer. No broker-dealers which are members of the NASD will be entitled to receive the solicitation fee if (i) the exercise of the Warrants is made at a time when the market price of the Company's Common Stock is lower than the exercise price of the Warrants, (ii) the Warrants to be exercised are held in a discretionary account or (iii) the solicitation of the exercise of such Warrants would violate Rule 10b-6 promulgated under the Securities Exchange Act of 1934, as amended. Further, unless granted an exemption by the Securities and Exchange Commission to its Rule 10b-6, the soliciting broker-dealers might be prohibited from engaging in any market making activities with regard to the Company's securities for the period from two or nine business days prior to any solicitation of the exercise of Warrants until the later of the termination of such solicitation activity or the termination (by waiver or otherwise) of any right that the soliciting broker-dealers may have to receive a fee for the exercise of Warrants following the solicitation. As a result, the soliciting broker-dealers may be unable to continue to provide a market for the Company's securities during certain periods while the Warrants are exercisable. LEGAL MATTERS The validity of the Common Stock will be passed upon for the Selling Securityholders by Hopper and Kanouff, P.C., Denver, Colorado. EXPERTS The consolidated financial statements as of December 31, 1995, and for each of the two years in the period ended December 31, 1995, incorporated by reference in this Prospectus, have been audited by HEIN + Associates LLP, independent auditors, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 13 - ------------------------------------------------------------------------------- No dealer, salesperson or other person has been authorized to give any information or to make any representation not contained in this Prospectus and, if given or made, such information or representation must not be relied upon as PEASE OIL AND GAS COMPANY having been authorized by the Company or any Selling Securityholder. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby 5,038,437 SHARES OF COMMON STOCK in any jurisdiction to any persons to whom it is unlawful to make such offer in such jurisdiction. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create an implication that the information herein is correct as of any time subsequent to the date hereof or that there has been no change in the affairs of the Company since such date. ----------------------------------- ----------------- Page No. PROSPECTUS AVAILABLE INFORMATION................... 2 ----------------- INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................. 2 PROSPECTUS SUMMARY...................... 3 RISK FACTORS............................ 5 USE OF PROCEEDS......................... 8 SELLING SECURITYHOLDERS................. 9 PLAN OF DISTRIBUTION.................... 12 LEGAL MATTERS........................... 13 EXPERTS................................. 13 July 24, 1996 - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution. Expenses payable by Registrant in connection with the issuance and distribution of the securities being registered hereby are as follows: SEC Registration Fee**................... N/A Accounting Fees and Expenses*............ $ 2,000 Legal Fees and Expenses*................. 15,000 Printing, Freight and Engraving*......... 1,500 Miscellaneous*........................... 500 ------- Total........................... $19,000 ======= - ----------------- * Estimated. **Previously paid; no change from previous registration statement. Item 15. Indemnification of Directors and Officers. No changes from Registration Statement previously filed. Item 16. Exhibits. In addition to the exhibits previously filed by Registrant, the following is a list of all exhibits filed as part of this Registration Statement or, as noted, incorporated by reference to this Registration Statement: Exhibit No. Description and Method of Filing (10.23) Agreement between Beta Capital Group, Inc. and Pease Oil and Gas Company dated March 9, 1996, incorporated by reference to the Company's 1995 Annual Report on Form 10-KSB as Exhibit No. 10.22. (10.25) Form of $50,000 Five Year 10% Collateralized Convertible Debenture issuable by Registrant in connection with its 1996 private placement. (10.26) Form of Warrant to Purchase Common Stock issuable in connection with Registrant's 1996 private placement. (23.1) Consent of HEIN + ASSOCIATES LLP Independent Certified Public Accountants.* - ---------------- *Previously filed. Item 17. Undertakings The undersigned registrant hereby undertakes that it will: II-1 (1) File, during any period in which Registrant offers or sells securities, a post-effective amendment to this registration statement to include any material information on the plan of distribution. (2) For determining liability under the Securities Act, treat such post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time shall be deemed to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-2 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form S-3, and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City of Grand Junction, State of Colorado on July 30, 1996. PEASE OIL AND GAS COMPANY By /s/Willard H. Pease, Jr. ------------------------------------- Willard H. Pease, Jr., President and Chief Executive Officer By /s/ Patrick J. Duncan ------------------------------------- Patrick J. Duncan, Principal Financial Officer and Principal Accounting Officer In accordance with the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated: Signature Title Date - --------- ----- ----- /s/ Willard H. Pease, Jr. Director July 30, 1996 - ------------------------- Willard H. Pease, Jr. /s/ Patrick J. Duncan Director July 30, 1996 - ------------------------- Patrick J. Duncan /s/ James N. Burkhalter Director July 30, 1996 - ------------------------- James N. Burkhalter /s/ James C. Ruane* Director July 30, 1996 - ------------------------- James C. Ruane /s/ Robert V. Timlin* Director July 30, 1996 - ------------------------- Robert V. Timlin /s/ William F. Warnick* Director July 30, 1996 - ------------------------- William F. Warnick /s/ Homer C. Osborne* Director July 30, 1996 - ------------------------- Homer C. Osborne /s/ Willard H. Pease, Jr. - ------------------------- *by Willard H. Pease, Jr. Power of Attorney II-3 EXHIBIT INDEX Exhibit Description Page No. - ------- ----------- -------- (10.23) Agreement between Beta Capital Group, Inc. and Pease Oil N/A and Gas Company dated March 9, 1996, incorporated by reference to the Company's 1995 Annual Report on Form 10-KSB as Exhibit No. 10.22. (10.25) Form of $50,000 Five Year 10% Collateralized Convertible Debenture issuable by Registrant in connection with its 1996 private placement. (10.26) Form of Warrant to Purchase Common Stock issuable in connection with Registrant's 1996 private placement. (23.1) Consent of HEIN + ASSOCIATES LLP Independent Certified N/A Public Accountants.* - ----------------- *Previously filed. EX-1 2 EXHIBIT 10.25 PEASE OIL AND GAS COMPANY 10% COLLATERALIZED CONVERTIBLE DEBENTURE No. $ ------------ --------- Pease Oil and Gas Company, a Nevada corporation (herein called the "Company", which term includes any successor corporation), for value received, hereby promises to pay to [insert name of holder] ----------------, or registered assigns, the sum of ------------------------ Dollars ($ ) on April 15, 2001 (the "Maturity Date") and to pay interest thereon quarterly on September 30, December 31, March 31, and June 30 of each year (the "Interest Payment Dates"), commencing September 30, 1996, at the rate of 10% per annum, until the entire principal thereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will be paid to the person in whose name this Debenture is registered at the close of business on the Regular Record Date for such interest, which shall be the September 15, December 15, March 15, or June 15 next preceding such Interest Payment Date Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Registered Holder on such Regular Record Date, and may be paid to the person in whose name this Debenture is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Company, notice whereof shall be given to the Holders not less than ten (10) days prior to such Special Record Date, or may be paid at any time in any other lawful manner and upon such notice as may be required, and interest on this Debenture will be made at the office or agency of the Company maintained for that purpose, which may be the Corporate Office of the Company, or in such other office or agency as may be established by the Company, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public (and private debts; provided, however, that at the option of the Company, payment of interest may be made (subject to collection) by check mailed to the address of the person entitled thereto as such address shall appear on the Company's Debenture Register. Reference is hereby made to the further provisions of this Debenture set forth on the reverse side hereof and such further provisions shall for all purposes have the same effect as though fully set forth at this place. 1 IN WITNESS WHEREOF, Pease Oil and Gas Company has caused this Debenture to be signed in its name by the manual or facsimile signature of its President or one of its Vice Presidents and attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries. Dated: Pease Oil and Gas Company -------------- By: ------------------------------- Its: ------------------------------- ATTEST: - ------------------------------------ Secretary 2 PEASE OIL AND GAS COMPANY 10% COLLATERALIZED CONVERTIBLE DEBENTURE General Provisions. This Debenture is one of a duly authorized issue of the Debentures of the Company designated as its 10% Collateralized Convertible Debentures (herein called the "Debentures"), limited in aggregate principal amount of $2,000,000 (except for such additional principal amounts, not to exceed $3,000,000, of Debentures which may be issued pursuant to an option granted to the Company in the private offering of the Debentures) issued and to be issued under the Private Placement Memorandum of the Company dated April 24, 1996 (the "Private Placement Memorandum") to which Private Placement Memorandum and all appendices and attachments supplemental thereto reference is hereby made of a statement of the respective rights thereunder of the Company and the Holders of the Debentures, and the terms upon which the Debentures are, and are to be, authenticated and delivered. Subordination of Debentures. The payment of principal of, and interest on the Debentures is subordinated to the extent described below to the payment in full of the Company's Bank Debt now outstanding. In the event of any voluntary or involuntary insolvency or bankruptcy proceedings or any receivership, liquidation, reorganization, dissolution or other winding-up of the Company (whether or not involving insolvency or bankruptcy) or similar proceedings related to the Company, or if any Debenture is declared due and payable before its expressed maturity for any reason, the Bank Debt then outstanding will be entitled to receive payment in full of all principal and interest before the holders of the Debentures are entitled to receive any payment on account of the principal of or interest on, the Debentures. An Event of Default under a Debenture may create an event of default under the Bank Debt. In the event and during the continuation of any default with respect to the Bank Debt, no payment on account of principal or interest may be made on the Debentures, but the obligation of the Company to make payment of principal and interest on the Debentures will not otherwise be affected.By reason of such subordination to the Bank Debt, in the event of insolvency, holders of the Debentures shall not be paid until the Bank Debt is paid in full. The aggregate principal amount of indebtedness senior in right of payment to the Debentures outstanding at April 1, 1996 was the Company's Bank Loan of approximately $1.44 million ("Bank Debt"). The Company is prohibited from incurring indebtedness senior to the Debentures with the exception of the Bank Debt, so long as any Debentures are outstanding; provided, however, that in the event the Bank Debt is paid in full, the Company shall have the right to issue up to $9 million (including the Debentures) in debt which shall be pari passu with the first lien security interest of the Debentures. The Company is obligated to discharge the Bank Debt with all amounts received in the subject offering in excess of $1.75 million, so that, in the event $3.2 million in Units are sold, the Bank Debt will be paid in full. 3 By the acceptance of this Debenture, the Holder hereof agrees, expressly for the benefit of the present holders of the Bank Debt, to be bound by the provisions of this Debenture and the Private Placement Memorandum relating to such subordination and authorizes and appoints as his attorney-in-fact the Company to take such action on his behalf as may be necessary or appropriate to effectuate such subordination. Conversion Rights. Debentures will be convertible at their principal amount into shares of common stock of the Company any time prior to the Maturity Date at the rate of $3.00 per share (the "Conversion Price"), subject to adjustment as described below. For example, at the Conversion Price, $50,000 in Debentures would be convertible into 16,666 shares of common stock. In case any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in case of any statutory exchange of securities with another corporation, there will be no adjustment of the Conversion Price but the holder of each Debenture then outstanding will have the right to continue to hold the Debenture and the Debenture shall be convertible into the kind and amount of securities, cash or other properties which such holder would have owned or have been entitled to receive immediately after such consolidation, merger or statutory exchange, sale or conveyance had such Debenture been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale or conveyance. The conversion rate shall be subject to adjustment as follows: (a) In case the Company shall (a) pay a dividend on Common Stock in Common Stock, (b) subdivide its outstanding shares of Common Stock, (c) combine its outstanding shares of Common Stock into a smaller number of shares, or (d) reclassification of any Common Stock, the conversion rate in effect immediately prior thereto shall be adjusted so that the number of shares of Common Stock into which each $1,000 principal amount of Debentures shall thereafter be convertible shall be determined by multiplying the number of shares of Common Stock into which such principal amount of Debentures was therefore convertible by a fraction, of which the numerator shall be the sum of the number of shares of Common Stock outstanding immediately following such action, and of which the denominator shall be the sum of the number of shares of Common Stock outstanding immediately prior thereto. An adjustment made pursuant thereto shall become effective retroactively immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision or combination. (b) In the case the Company shall issue rights or warrants to all holders of its Common Stock entitling them (for a period expiring within forty-five days after the record date mentioned below) to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share of Common Stock (as defined below) at the record date mentioned below, the conversion rate in effect immediately prior thereto shall be adjusted so that the number of shares of Common Stock into which each $1,000 principal amount of Debentures shall thereafter be convertible shall be determined by multiplying the number of shares of Common Stock into which such principal amount of 4 Debentures was theretofore convertible by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares of Common Stock that the aggregate offering price of the total number of shares of Common Stock so offered would purchase at such current market price per share of Common Stock. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective retroactively immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. (c) In case the Company shall distribute to all holders of its Common Stock shares of capital stock (other than Common Stock), evidences of its indebtedness or assets (excluding cash dividends or distributions to the extent permitted elsewhere herein), or rights or warrants to subscribe or purchase (excluding those referred to above), then in each such case the conversion rate in effect immediately prior thereto shall be adjusted so that the number of shares of Common Stock into which each $1,000 principal amount of Debentures shall thereafter be convertible shall be determined by multiplying the number of shares of Common Stock into which such principal amount of Debentures was theretofore convertible by a fraction, of which the numerator shall be the total number of outstanding shares of Common Stock multiplied by the current market price per share of Common Stock on the date of such distribution and of which the denominator shall be the total number of outstanding shares of Common Stock multiplied by such current market price per share of Common Stock, less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive, and described in an Officers' Certificate filed with the Trustee) of the capital stock, assets, or evidences of indebtedness so distributed or of such rights or warrants. Such adjustment shall be made whenever any such distribution is made and shall become effective retroactively immediately after the record date for the determination of stockholders entitled to receive such distribution. (d) For the purpose of any computation hereinabove of the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for the thirty consecutive business days commencing forty-five business days before the day in question. The closing price for each day shall be the reported last sale price or, in case no such reported sale takes place on such day, the average of the reported closing bid-and-asked prices on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if neither listed nor admitted to trading on any national securities exchange, the average of the closing bid-and-asked prices as furnished by any New York Stock Exchange firm selected from time to time by the Company for the purpose. (e) Upon the expiration of any subscription rights or warrants referred to hereinabove, the number of shares of Common Stock into which each $1,000 principal amount of Debentures shall thereafter be convertible shall be adjusted to such amount as would have then obtained had the adjustment in such number of shares made upon the distribution of such subscription rights or warrants been made upon the basis of the distribution of only such number of subscription rights or warrants as were actually exercised. 5 (f) No adjustment in the conversion rate shall be required unless such adjustment would require an increase or decrease of at least one percent in such rate; provided, however, that any adjustments that, by reason of this Subsection, are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations hereunder shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. (g) When the conversion rate is adjusted, as herein provided, the Company shall promptly cause a notice of such adjustment of the conversion rate to be mailed to the Holder of each Debenture at his last address appearing in the Debenture Register. Upon conversion, no adjustment will be made for accrued interest or dividends and, therefore, Debentures surrendered for conversion after the record date for an interest payment date and prior to such interest payment must be accompanied by payment of an amount equal to the interest thereon which is to be paid on such interest payment date. Debentures which are converted prior to the record date for an interest payment will not receive any interest for the quarter during which conversion occurred. No adjustment of the Conversion Price will be required to be made in any case until cumulative adjustments amount to 1% or more of the Conversion Price. The Company reserves the right to make such reductions in the Conversion Price in addition to those required in the foregoing provisions as the Company's discussions shall determine to be advisable in order that certain stock related distributions hereafter made by the Company to its stockholders shall not be taxable. Conversion of the Debentures may be effected by delivering them at the offices of the Company in Grand Junction, Colorado, together with appropriate written instructions. Fractional shares of common stock will not be delivered upon conversion, but a cash adjustment will be paid in respect of such fractional interest, based on the Conversion Price. Redemption. The Debentures are non-redeemable by the Company for the first two years after issuance. The Company will be entitled to redeem the Debentures, in whole or in part, at any time which is 731 days (the first day of the third year) after the date of issuance until the date the Debentures mature, at 110% of the original principal amount of the Debentures if redemption occurs in the third year; at 105% of the original principal amount of the Debentures if redemption occurs in the fourth year; and at 100% of the original principal amount of the Debentures if redemption occurs in the fifth year. Before redemption can occur, the Company must first give 45 days prior written notice of its intent to redeem the Debentures to Debenture holders by certified mail. In the event the Company gives notice of its intention to redeem the Debentures, the holders of the Debentures will be required to decide whether to convert their Debentures within such 45 day notice. If this Debenture, or a portion hereof, shall be redeemed by call for redemption or shall be accepted for repayment upon the death of the holder, and payment be duly provided therefore, interest shall cease to accrue on this Debenture or such portion hereof, as the case may be. 6 Interest installments whose Stated Maturity is on or before the Redemption Date or Repayment Date will be payable to the Holders of such Debentures, or one or more Predecessor Debentures, of record at the close of business on the relevant Record Date referred to on the face hereof, all as provided in the Indenture, in the event of redemption or repayment of this Debenture in part only, a new Debenture or Debentures for the unredeemed or unrepaid portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. In the event of redemption or conversion of this Debenture in part only, a new Debenture or Debentures for the unredeemed or unconverted portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. Collateral for Debentures. The Company will execute and record in the appropriate recording offices in Colorado a mortgage and Deed of Trust covering the Collateral as defined in the Private Placement Memorandum. Presently, the Company's obligations under its Bank Loan are secured by a mortgage and Deed of Trust which create a first lien on all of the Company's oil and natural gas properties east of the Rocky Mountains and the Company's natural gas processing plant near Loveland, Colorado, which includes the properties which will secure the obligations of the Company under the Debentures. As a result, the lien in favor of the Debenture holders will be a second lien unless and until the Bank Loan is repaid in full. The Company agrees to utilize all proceeds received from the sale of Units in the offering above $1.75 million (i.e., if more than 35 Units are offered and sold) to prepay a portion or all of the Bank Loan. If and only if the Bank Loan is repaid in full, the lien securing the Company's obligations under the Bank Loan will be released and the security interest in favor of the Debentures: (i) in the oil and natural gas properties shall become a first lien; and (ii) in the gas processing plant shall be released. The Company reserves the right to liquidate up to 25% of the real property pledged as Collateral for the Debentures subject to the requirement that the Company use such proceeds only for further development of the Collateral. The security interest in the Collateral will benefit all holders of the Debentures on a pro rata basis and any action taken to enforce the security interest upon a default in payment of principal or interest on any Debenture must be taken by the holders of at least 25% of the Debentures then outstanding and must be taken on behalf of holders of all Debentures. There will be no separate indenture or trustee authorized to enforce the security interest for holders of the Debentures. Further. the Company reserves the right, without prior notice to the holders of Debentures, to issue up to $9.0 million of additional secured debentures or similar secured debt securities of the Company ("New Securities") subsequent to this offering to be secured on a "pari passu" [i.e., equal on a pro rata basis] with the Debentures by the security interest on the Collateral. In such event the Company, if it grants a security interest in all of its producing oil and gas properties in Colorado and Utah in addition to the Collateral properties, would have the right, at its election upon 20 days notice, (a) to exchange the Debentures for New Securities in the same principal amount with a maturity no longer than April 15, 2001 and which pays interest at the same or higher rate or (b) provide that any such New Securities would be secured by the Collateral on a "pari passu" basis with the Debentures. 7 Modification of the Debentures. With the consent of the holders of two-thirds (66-2/3%) of the aggregate principal amount of the outstanding Debentures, the Company may add provisions to, or change in any manner or eliminate any provisions of, the Debentures or modify in any manner the rights of the holders of the Debentures, provided that, without the consent of the holders of all outstanding Debentures so affected, no such modification shall, among other things: (i) change the stated maturity of principal of, or any installment of interest on, any Debentures, or reduce the principal amount thereof or the rate of interest thereon; (ii) adversely affect the right to convert Debentures; or (iii) reduce the aforesaid percentage of the holders of the Debentures whose consent shall be required for the authorization of any such modification to the Debentures. No rights afforded under the Bank Loan to enforce the subordination provisions of the Debentures may at any time be prejudiced by any modification to the Debentures. Events of Default, Notice and Waiver. The following shall constitute an Event of Default: (a) default for 30 days in payment of interest on the Debentures; (b) default in payment of principal of the Debentures at their maturity; (c) default, for 30 days after notice, in the performance of any other covenant or warranty in the Debentures; and (d) bankruptcy, insolvency and reorganization of the Company. If an Event of Default shall occur and be continuing, the holders of 25% in principal amount of Debentures then outstanding may declare the principal of all Debentures to be due and payable immediately and take any appropriate action to enforce the security interest for the benefit of holders of all Debentures. The holder of any Debenture has an absolute right to receive payment of the principal of and interest on such Debenture on the respective stated maturity date expressed in the Debenture and to institute suit for the enforcement of any such payment. The holders of a two-thirds majority (66- 2/3%) in aggregate principal amount of the Debentures then outstanding (exclusive of Debentures held by the Company and its affiliates) may waive any default and its consequences under the Debenture, including a default in the payment of the principal of or interest on any Debenture or a default in respect of certain covenants or provisions of the Debenture. Holders of a two-thirds majority (66-2/3%) in aggregate principal amount of the Debentures then outstanding (exclusive of Debentures held by the Company and its affiliates) may rescind any declaration of acceleration of maturity of principal of all Debentures. Miscellaneous Provisions. No reference herein to the Private Placement Memorandum and no provisions of this Debenture or of the Private Placement Memorandum shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Debenture at the time, places and rate, and in the coin and currency, herein prescribed. 8 As provided in the Private Placement Memorandum, this Debenture is transferable on the Debenture Register of the Company, upon surrender of this Debenture for registration of transfer at the office or agency of the Company to be maintained for that purpose, established by the Company for such purpose, duly endorsed by, or accompanied by written instrument of transfer in form satisfactory to the Company and the Debenture Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Debentures, of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees. The Debentures are issuable only in registered form, without coupons, in denominations of $1,000 and any integral multiple thereof. Debentures are exchangeable for a like aggregate principal amount of Debentures of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. All terms used in this Debenture which are defined in the Private Placement Memorandum have the meanings assigned to them in the Private Placement Memorandum. The Company and any agent of the Company may treat the person in whose name this Debenture is registered as the owner hereof for all purposes, whether or not this Debenture be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. The Company shall serve as registrar, paying agent and conversion agent of the Debentures. If any party named herein brings an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorneys fees to be paid by the losing party as fixed by the court. This Debenture shall be governed by the laws of the State of Colorado and any litigation concerning this Debenture shall be initiated in the Courts of the State of Colorado. 9 EX-2 3 EXHIBIT 10.26 WARRANT AGREEMENT THIS WARRANT AGREEMENT (this "Agreement") is made and entered into as of - -------------, 1996, between PEASE OIL AND GAS COMPANY, a Nevada corporation (the "Company") and ------------------------------ ("Holder"). R E C I T A L S WHEREAS, the Company proposes to issue to Holder warrants (the "Warrants"), each such Warrant entitling the holder thereof to purchase one share of Common Stock, no par value, of the Company (the "Shares" or the "Common Stock"); and WHEREAS, the Warrants which are the subject of this Agreement will be issued by the Company to Holder as part of consideration payable to Holder in connection with an investment by the Holder pursuant to the concurrent private offering of the Company (the "Offering"). NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: A G R E E M E N T 1. Warrant Certificates. The warrant certificates to be delivered pursuant to this Agreement (the "Warrant Certificates") shall be in the form set forth in Exhibit A, attached hereto and made a part hereof, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Warrant Agreement. 2. Right to Exercise Warrants. Each Warrant may be exercised from 9:00 A.M. (Mountain time) on August 1, 1996 until 5:00 P.M. (Mountain time) on July 31, 2001 (the "Expiration Date"). Each Warrant not exercised on or before the Expiration Date shall expire. Each Warrant shall entitle its holder to purchase from the Company one share of Common Stock at an exercise price of $1.25 per share, subject to adjustment as set forth below ("Exercise Price"). The Company shall not be required to issue fractional shares of capital stock upon the exercise of this Warrant or to deliver Warrant Certificates which evidence fractional shares of capital stock. In the event that a fraction of an Exercisable Share would, except for the provisions of this paragraph 2, be 1 issuable upon the exercise of this Warrant, the Company shall pay to the Holder exercising the Warrant an amount in cash equal to such fraction multiplied by the current market value of the Exercise Share. For purposes of this paragraph 2, the current market value shall be determined as follows: (a) if the Exercise Shares are traded in the over-the-counter market and not on any national securities exchange and not in the NASDAQ Reporting System, the average of the mean between the last bid and asked prices per share, as reported by the National Quotation Bureau, Inc., or an its successor in interest, for the last business day prior to the date on which this Warrant is exercised, or, if not so reported, the average of the closing bid and asked prices for an Exercise Share as furnished to the Company by any member of the National Association of Securities Dealers, Inc., selected by the Company for that purpose. (b) if the Exercise Shares are listed or traded on a national securities exchange or in the NASDAQ Reporting System, the closing price on the principal national securities exchange on which they are so listed or traded or in the NASDAQ Reporting System, as the case may be, on the last business day prior to the date of the exercise of this Warrant. The closing price referred to in this Clause (b) shall be the last reported sales price or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, in either case on the national securities exchange on which the Exercise Shares are then listed on in the NASDAQ Reporting System; or (c) if no such closing price or closing bid and asked prices are available, as determined in any reasonable manner as may be prescribed by the Board of Directors of the Company. 3. Mutilated or Missing Warrant Certificates. In case any of the Warrant Certificates shall be mutilated, lost, stolen or destroyed prior to its expiration date, the Company shall issue and deliver, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and in substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent right or interest. 4. Reservation of Shares. The Company will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Shares or its authorized and issued Shares held in its treasury for the purpose of enabling it to satisfy its obligation to issue Shares upon exercise of Warrants, the full number of Shares deliverable upon the exercise of all outstanding Warrants. The Company covenants that all Shares which may be issued upon exercise of Warrants will be validly issued, fully paid and nonassessable outstanding Shares of the Company. 5. Rights of Holder. The Holder shall not, by virtue of anything contained in this Warrant Agreement or otherwise, prior to exercise of this Warrant, be entitled to any right whatsoever, either in law or equity, of a stockholder of the Company, including without limitation, the right to receive dividends or to vote or to consent or to receive notice as a shareholder in respect of the meetings of shareholders or the election of directors of the Company of any other matter; provided however that Holders of Warrants will be entitled to notice if: (a) the Company grants holders of its common stock rights to purchase any shares of capital stock or any other rights, or (b) the Company authorizes a reclassification, capital reorganization, consolidation, merger or sale of substantially all of its assets. 2 6. Callability. The Warrants are callable at the option of the Company at any time commencing at 9:00 A.M. (Mountain time) 90 days after the date of issuance of the Warrants until the Expiration Date, at a price of $0.10 per share of common stock underlying the Warrants, upon 45 days prior written notice to Warrant holders by certified mail. 7. Registration Under the Securities Act of 1933. Holder represents and warrants to the Company that Holder is acquiring the Warrants for investment and with no present intention of distributing or reselling any of the Warrants. 8. Certificates to Bear Language. The Warrants and the certificate or certificates therefor shall bear the following legend by which each holder shall be bound: "THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES OF COMMON STOCK (OR OTHER SECURITIES) ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE." The Shares and the certificate or certificates evidencing any such Shares shall bear the following legend: "THE SHARES (OR OTHER SECURITIES) REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE." Certificates for Warrants without such legend shall be issued if such warrants or shares are sold pursuant to an effective registration statement under the Securities Act of 1933 (the "Act") or if the Company has received an opinion from counsel reasonably satisfactory to counsel for the Company, that such legend is no longer required under the Act. 3 9. Registration Rights. The Company shall utilize its best efforts to register for resale: (i) the Warrants; and (ii) the shares of common stock issuable upon exercise of the Warrants by including such securities on a registration statement on an appropriate form filed by the Company with the United States Securities and Exchange Commission ("SEC") within 60 days of the termination of this offering. The Company shall use its best efforts to have the registration statement become effective and maintain the registration statement for at least six months after its effective date. In such registration, the Company shall pay its expenses and filing fees and shall make a reasonable number of copies of the registration statement and any prospectus available to holders. The Company will not pay any selling commissions or similar expenses incurred by sellers or expenses of any counsel or other representative of a seller. 10. Adjustment of Number of Shares and Class of Capital Stock Purchasable. The Number of Shares and Class of Capital Stock purchasable under this Warrant Agreement are subject to adjustment from time to time as set forth in this Section. (a) Adjustment for Change in Capital Stock. If the Company: (i) pays a dividend or makes a distribution on its Common Stock, in each case, in shares of its Common Stock; (ii) subdivides its outstanding shares of Common Stock into a greater number of shares; (iii) combines its outstanding shares of Common Stock into a smaller number of shares; (iv) makes a distribution on its Common Stock in shares of its capital stock other than Common Stock; or (v) issues by reclassification of its shares of Common Stock any shares of its capital stock; then the number and classes of shares purchasable upon exercise of each Warrant in effect immediately prior to such action shall be adjusted so that the holder of any Warrant thereafter exercised may receive the number and classes of shares of capital stock of the Company which such holder would have owned immediately following such action if such holder had exercised the Warrant immediately prior to such action. For a dividend or distribution the adjustment shall become effective immediately after the record date for the dividend or distribution. For a subdivision, combination or reclassification, the adjustment shall become effective immediately after the effective date of the subdivision, combination or reclassification. 4 If after an adjustment the holder of a Warrant upon exercise of it may receive shares of two or more classes of capital stock of the Company, the Board of Directors of the Company shall in good faith determine the allocation of the adjusted Exercise Price between or among the classes of capital stock. After such allocation, that portion of the Exercise Price applicable to each share of each such class of capital stock shall thereafter be subject to adjustment on terms comparable to those applicable to Common Stock in this Agreement. Notwithstanding the allocation of the Exercise Price between or among shares of capital stock as provided by this Section 11(a), a Warrant may only be exercised in full by payment of the entire Exercise Price currently in effect. (b) Consolidation, Merger or Sale of the Company. If the Company is a party to a consolidation, merger or transfer of assets which reclassifies or changes its outstanding Common Stock, the successor corporation (or corporation controlling the successor corporation or the Company, as the case may be) shall by operation of law assume the Company's obligations under this Warrant Agreement. Upon consummation of such transaction the Warrants shall automatically become exercisable for the kind and amount of securities, cash or other assets which the holder of a Warrant would have owned immediately after the consolidation, merger or transfer if the holder had exercised the Warrant immediately before the effective date of such transaction. As a condition to the consummation of such transaction, the Company shall arrange for the person or entity obligated to issue securities or deliver cash or other assets upon exercise of the Warrant to, concurrently with the consummation of such transaction, assume the Company's obligations hereunder by executing an instrument so providing and further providing for adjustments which shall be as nearly equivalent as may be practical to the adjustments provided for in this Section 10. 11. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or Holder shall bind and inure to the benefit of their respective successor and assigns hereunder. 12. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute by one and the same instrument. 13. Notices. All notices or other communications under this Warrant shall be in writing and shall be deemed to have been given if delivered by hand or mailed by certified mail, postage prepaid, return receipt requested, addressed as follows: if to the Company: Pease Oil and Gas Company, 751 Horizon Street, Suite 203, P.O. Box 60219, Grand Junction, Colorado 81506-5917, Attention: Chief Executive Officer, and to the Holder: at the address of the Holder appearing on the books of the Company or the Company's transfer agent, if any. Either the Company or the Holder may from time to time change the address to which notices to it are to be mailed hereunder by notice in accordance with the provisions of this Paragraph 13. 5 14. Supplements and Amendments. The Company may from time to time supplement or amend this Warrant Agreement without the approval of any Holders of Warrants in order to cure any ambiguity or to be correct or supplement any provision contained herein which may be defective or inconsistent with any other provision, or to make any other provisions in regard to matters or questions herein arising hereunder which the Company may deem necessary or desirable and which shall not materially adversely affect the interest of the Holder. 15. Severability. If for any reason any provision, paragraph or term of this Warrant Agreement is held to be invalid or unenforceable, all other valid provisions herein shall remain in full force and effect and all terms, provisions and paragraphs of this Warrant shall be deemed to be severable. 16. Governing Law and Venue. This Warrant shall be deemed to be a contract made under the laws of the State of California and for all purposes shall be governed and construed in accordance with the laws of said State. Any proceeding arising under this Warrant Agreement shall be instituted in Orange County, State of California. 17. Headings. Paragraphs and subparagraph headings, used herein are included herein for convenience of reference only and shall not affect the construction of this Warrant Agreement nor constitute a part of this Warrant Agreement for any other purpose. 6 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the date and year first above written. "COMPANY" "HOLDER" PEASE OIL AND GAS COMPANY --------------------------------- By: By: ------------------------------------ ------------------------------ Willard H. Pease, Jr., President Its: ------------------------------ 7 EXHIBIT A
NUMBER WARRANT Warrant to Purchase PEASE OIL AND GAS COMPANY Shares COMMON STOCK PURCHASE WARRANT will be void if not exercised prior to 5:00 P.M. Mountain Time on July 31, 2001 see reverse for certain definitions This Certifies that CUSIP ------------ for value received, the registered holder or assigns ("Holder"), is entitled to purchase from Pease Oil and Gas Company, a Warrant certificate with the Purchase Form on the reverse Nevada corporation (the "Company") at any time after 9:00 side hereof fully executed (with a signature guarantee as A.M. Mountain Time on August 1, 1996 at the purchase price provided on the reverse side hereof) and simultaneous per share of $1.25 (the "Warrant Price"), the number of payment of the Warrant Price (subject to adjustment) at the shares of Common Stock of the Company set forth above (the principal office of the Company. Payment of such price shall "Shares"). The number of shares purchasable upon exercise of be made at the option of the holder in cash or by certified each warrant evidenced hereby and the Warrant Price per check or bank draft. The Warrants evidenced hereby are part Share shall be subject to adjustment from time to time as of a duly authorized issue of Common Stock Purchase Warrants set forth in the Warrant Agreement executed by the Company with rights to purchase an aggregate of up to 1,000,000 and the holder hereof (the "Warrant Agreement"). The shares of Common Stock of the Company. Upon any partial Warrants expire at 5:00 P.M. Mountain Time on July 31, 2001 exercise of the Warrant evidenced hereby, there shall be (the "Expiration Date"). Holders will not have any rights or countersigned and issued to the Holder a new Warrant privileges of shareholders of the Company prior to exercise Certificate in respect of the Shares as to which the of the Warrants except as set forth in the Warrant Warrants evidenced hereby shall not have been exercised. Agreement. Holders of the Warrants evidenced hereby and the This Warrant Certificate may be exchanged at the office of shares of Common Stock issuable upon exercise hereof have the Company by surrender of this Warrant Certificate certain rights with respect to registration with the properly endorsed with a signature guarantee either Securities and Exchange Commission of the Warrants and separately or in combination with one or more other Warrants Common Stock issuable upon exercise hereof. These for one or more new Warrants to purchase the same aggregate registration rights are set forth in that certain Private number of Shares as evidenced by the Warrant or Warrants Placement memorandum dated as of April 24, 1996 pursuant to exchanged. No fractional Shares will be issued upon the which this Warrant Certificate has been issued, as well as exercise of rights to purchase hereunder, but the Company in the Warrant Agreement. Subject to the provisions of the shall pay the cash value of any fraction upon the exercise of Warrant Agreement, the Warrants evidenced hereby may be one or more Warrants. The Holder hereof may be treated by called at the option of the Company, at any time commencing the Company and all other persons dealing with this Warrant at 9:00 A.M. Mountain Time 90 days after the date of Certificate as the absolute owner hereof for all purposes issuance of the Warrants until the Expiration Date, at a and as the person entitled to exercise the rights price of $0.10 per share of common stock underlying the represented hereby, any notice to the contrary warrants, upon 45 days prior written notice to Warrant notwithstanding, and until such transfer is on such books, holders by certified mail. The Warrants evidenced hereby may the Company may treat the Holder as the owner for all be exercised in whole or in part by presentation of this purposes. Dated: , 1996 PEASE OIL AND GAS COMPANY Secretary President SEE LEGEND ON REVERSE
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED (THE "ACT") OR THE SECURITIES LAWS OF CERTAIN STATES AND MAY NOT BE OFFERED, SOLD, TRANSFERRED PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE LAWS, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE LAW IS AVAILABLE. ELECTION TO PURCHASE The undersigned hereby elects irrevocably to exercise the within Warrant and to purchase -------------------- shares of Common Stock of Pease Oil and Gas Company and hereby makes payment of $---------- (at the rate of $-------- per share) in payment of the Exercise Price pursuant hereto. Please issue the shares as to which this Warrant is exercised in accordance with the instructions given below. The undersigned represents and warrants that the exercise of the within Warrant was solicited by the member firm of the National Association of Securities Dealers. Inc. ("NASD") listed below. If not solicited by an NASD member, please write "unsolicited" in the space below. -------------------------------------------- (Insert Name of NASD Member or "Unsolicited") Dated: , 19 ---------------- --- Signature: ----------------------------------- INSTRUCTIONS FOR REGISTRATION OF SHARES Name (print) ----------------------------------------------- Address (print) -------------------------------------------- ASSIGNMENT FOR VALUE RECEIVED, ------------------------------- does hereby sell, assign and transfer unto -------------------------------, the right to purchase - ----------------- shares of Common Stock of Pease Oil and Gas Company evidenced by the within Warrant, and does hereby irrevocably constitute and appoint - ------------------------------ attorney to transfer such right on the books of Pease Oil and Gas Company, with full power of substitution on the premises. Dated: , 19 -------------- ------ Signature: ---------------------------------- Notice: The signature of Election to Purchase or Assignment must correspond with the name as written upon the face of the within Warrant in every particular without alteration or enlargement or any change whatsoever. The signature(s) must by guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule 17Ad-15. ------------------------------------------- Signature Guarantee -----END PRIVACY-ENHANCED MESSAGE-----