-----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, K++J1uZnIreAv50m7SyAyRsLswsr+MD5Jj9RqELtPDNw7bzXlw/aAAlfnmhzByca 17Ih9+0WRcqYS3jVB6ZuOw== /in/edgar/work/20000815/0001021890-00-000310/0001021890-00-000310.txt : 20000922 0001021890-00-000310.hdr.sgml : 20000921 ACCESSION NUMBER: 0001021890-00-000310 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 20000815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEASE OIL & GAS CO /CO/ CENTRAL INDEX KEY: 0000076878 STANDARD INDUSTRIAL CLASSIFICATION: [1311 ] IRS NUMBER: 870285520 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-95213 FILM NUMBER: 701727 BUSINESS ADDRESS: STREET 1: 751 HORIZON COURT STE 203 STREET 2: P O BOX 60219 CITY: GRAND JUNCTION STATE: CO ZIP: 81506-8718 BUSINESS PHONE: 9702455917 MAIL ADDRESS: STREET 1: 751 HORIZON CT STE 203 STREET 2: P O BOX 60219 CITY: GRAND JUNCTION STATE: CO ZIP: 81506-8758 FORMER COMPANY: FORMER CONFORMED NAME: WILLARD PEASE OIL & GAS CO DATE OF NAME CHANGE: 19920703 S-4/A 1 0001.txt AMENDMENT NO. 1 REGISTRATION STATEMENT ON FORM S-4 As filed with the Securities and Exchange Commission on August 14, 2000 SEC File No. 333-95213 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- PEASE OIL AND GAS COMPANY (Exact name of registrant as specified in its charter) Nevada 1311 87-0285520 ------------------------------ --------------------------- ------------------ (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code No.) Identification No.) CARPATSKY PETROLEUM INC. ---------------------------------------------------- (a corporation to be formed) (Exact name of registrant as specified in its charter) Delaware 1311 To be applied for ------------------------------ --------------------------- ----------------- (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code No.) Identification No.) Patrick J. Duncan 751 Horizon Court, Suite 203 751 Horizon Court, Suite 203 P.O. Box 60219 P.O. Box 60219 Grand Junction, Colorado 81506-8758 Grand Junction, Colorado 81506-8758 (970) 245-5917 Phone: (970) 245-5917 ---------------------------------- --------------------------------------- (Address, including ZIP Code, (Name, address, including ZIP Code, and and telephone number, including telephone number, including area code, area code, of registrant's of agent for service) principal executive offices) Copies to: Alan W. Peryam, Esq. George G. Young III, Esq. Alan W. Peryam, LLC Haynes and Boone, L.L.P. 1120 Lincoln Street, Suite 1000 1000 Louisiana, Suite 4300 Denver, Colorado 80203-2138 Houston, Texas 77002 Phone: (713) 547-2081 Fax: (713) 236-5699 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Calculation of Registration Fee Proposed Proposed maximum maximum Amount of Title of each class of Amount to offering aggregate registration securities to be registered be registered price per unit offering price fee - --------------------------- ------------- -------------- -------------- ------------ Common Stock, $0.001 par value(1) .... 44,959,582(2) $0.359375(4) $16,157,350(2) $4,265.54(6) Preferred Stock, $0.001 par value .... 102,410,000(3) $0.359375(5) $10,393,484(3)(5) $2,743.88(6) ----------- ---------- ---------- -------- Total ....................... -- -- $26,550,825 $7,009.42(6)
(1) Includes subscription interests in Carpatsky Petroleum Inc., a company to be incorporated in the state of Delaware, pursuant to the continuance described herein. (2) Represents: the maximum number of shares of Pease common stock issuable in connection with the merger in exchange for Carpatsky common shares. (3) Includes 28,921,000 shares of common stock of Pease which may be issued from time to time upon conversion of the preferred stock and an indeterminate number of shares issuable pursuant to anti-dilution provisions of the preferred stock. (4) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f)(1) and Rule 457(c) adopted under the Securities Act based on the market price of Registrant's common shares to be issued in the merger. (5) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f)(1) and Rule 457(c) adopted under the Securities Act based on the market price of Registrant's common shares into which the preferred stock is convertible. (6) A registration fee of $7,850.55 has been previously paid. - -------------------------------------------------------------------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- Subject to completion, dated August 14, 2000 The information in this proxy statement and prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Carpatsky Petroleum Inc. Pease Oil and Gas Company [logo] [logo] SPECIAL MEETINGS OF SHAREHOLDERS MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT The boards of directors of Carpatsky Petroleum Inc. and Pease Oil and Gas Company have unanimously approved a merger and related transactions which, if completed, will result in Carpatsky becoming a wholly-owned subsidiary of Pease. The combined company will be named Radiant Energy, Inc. If the merger is completed, each Carpatsky common share will be converted into .57842 shares of Radiant Energy common stock and each Carpatsky preferred share will be converted into 1.07292 shares of Radiant Energy preferred stock. Holders of common stock of Pease will continue to own their common stock after the merger. Based on the stock outstanding on July 31, 2000, Radiant Energy will issue approximately 45.0 million shares of common stock and 102.4 million shares of preferred stock to former Carpatsky shareholders, representing 87.5% of our fully- diluted common stock and all of our preferred stock following the merger. We are asking the holders of common shares and preferred shares of Carpatsky to vote to approve the merger and related transactions and the holders of common stock of Pease to vote to approve amendments to our articles of incorporation and to elect directors. Whether or not you plan to attend your meeting, please take the time to vote on the proposals submitted to shareholders at your meeting by completing and mailing the appropriate enclosed proxy card. The dates, times and places of the special meetings are as follows: For shareholders of For shareholders of Carpatsky Petroleum Inc.: Pease Oil and Gas Company: ____________, 2000, 10:00 _________________, 2000, 9:00 a.m., local time a.m., local time 1210 606-4th St. S.W. __________________________ Calgary, AlbertaT2P 1T1 Houston, Texas 770 [ ] Carpatsky Petroleum Inc. Pease Oil and Gas Company Douglas G, Manner Patrick J. Duncan Chief Executive Officer President and Chief Financial Officer -------------------- For a description of risk factors and other significant considerations in connection with the merger and related matters described in this document, see "Risk Factors" beginning on page 8. -------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued under this proxy statement and prospectus or passed upon the adequacy or accuracy of this proxy statement and prospectus. Any representation to the contrary is a criminal offense. No securities commission or similar authority in Canada has in any way passed on the merits of the securities offered under this proxy statement and prospectus and any representation to the contrary is an offense. This proxy statement and prospectus is dated ____________, 2000, and is first being mailed to shareholders on or about ______________, 2000. CARPATSKY PETROLEUM INC. 1331 Lamar, Suite 1450 Houston, Texas 77010 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD _______, 2000 To the Shareholders of Carpatsky Petroleum Inc.: A special meeting of shareholders of Carpatsky Petroleum Inc. will be held on , ---------------------------------------------- 2000, at 10:00, a.m., local time, at 1210 606-4th St. S.W., Calgary, Alberta, Canada T2P 1T1, to consider and vote upon ------------------------- the following matters: 1. A proposal to adopt a special resolution in the form set forth on page 15, the effect of which will change the law under which Carpatsky is organized from Alberta, Canada to the state of Delaware, United States of America. If the special resolution is adopted, Carpatsky will become a Delaware corporation and each outstanding Carpatsky common and preferred share, other than shares for which appraisal rights are perfected under Alberta law, will become one share of common or preferred stock of the Delaware corporation. 2. A proposal to approve the Amended and Restated Agreement and Plan of Merger, dated August 11, 2000, among Carpatsky, Pease and a wholly-owned subsidiary of Pease, and the related merger described in this proxy statement and prospectus. 3. To conduct any other business which may properly come before the special meeting or any adjournment or postponement of the special meeting. The board of directors has fixed the close of business on ________ , 2000 as the record date for determining shareholders entitled to notice of and to vote at the special meeting and any adjournment or postponement of the special meeting. A list of shareholders entitled to vote on the merger agreement will be kept at [ ] for ten days before the meeting. BY ORDER OF THE BOARD OF DIRECTORS ---------------------------------------- Secretary ________, 2000 To assure that your shares are represented at the special meeting, you are urged to complete, date and sign the enclosed proxy and mail it promptly in the postage-paid envelope provided, whether or not you plan to attend the special meeting in person. You may revoke your proxy in the manner described in the accompanying proxy statement and prospectus at any time before it has been voted at the special meeting. Any shareholder attending the special meeting may vote in person even if that shareholder has returned a proxy. PEASE OIL AND GAS COMPANY 751 Horizon Court, Suite 203 Grand Junction, Colorado 81506-8758 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD _______, 2000 To the Shareholders of Pease Oil and Gas Company: A special meeting of shareholders of Pease Oil and Gas Company will be held at 9:00 a.m., local time, on _____________, 2000 at ___________, Houston, Texas, to consider and vote upon the following matters: 1. A proposal to approve and adopt amended and restated articles of incorporation, pursuant to which: o our name will be changed to "Radiant Energy, Inc.," and o the number of shares of our authorized common stock will be increased to 150,000,000 and the number of shares of our authorized preferred stock will be increased to 200,000,000. 2. The election of a board of directors composed of the following five persons: Class I: B. Dee Davis Class II: Dr. Jack Birks and Patrick J. Duncan Class III: J. P. Bryan and Douglas G. Manner 3. To conduct any other business which may properly come before the special meeting or any adjournment or postponement of the special meeting. The board of directors has fixed the close of business on , 2000 as the record date for determining shareholders entitled to notice of and to vote at the special meeting and any adjournment or postponement of the special meeting. BY ORDER OF THE BOARD OF DIRECTORS Patrick J. Duncan President ________, 2000 To assure that your shares are represented at the special meeting, you are urged to complete, date and sign the enclosed proxy and mail it promptly in the postage-paid envelope provided, whether or not you plan to attend the special meeting in person. You may revoke your proxy in the manner described in the accompanying proxy statement and prospectus at any time before it has been voted at the special meeting. Any shareholder attending the special meeting may vote in person even if that shareholder has returned a proxy. WHERE YOU CAN FIND MORE INFORMATION Available Information Pease files annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document filed with the SEC by Pease at the SEC's public reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549 or at the SEC's regional offices located in New York, New York and Chicago, Illinois. You may obtain further information on the operation of the SEC's Public Reference Room by calling 1-800- SEC-0330. Pease's filings are also available to you without charge from the SEC's web site at http://www.sec.gov. The SEC allows Pease to incorporate by reference information from the documents it files with them. This means that Pease can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this proxy statement and prospectus, and information that Pease later files with the SEC will automatically update and supersede this information. Specifically, Pease incorporates by reference the documents listed below and any future filings Pease makes with the SEC prior to the date of the meetings, including any filings Pease makes prior to the effectiveness of the registration statement, under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934: o Annual Report on Form 10-KSB for the year ended December 31, 1999; o Quarterly Report on Form 10-QSB for the quarter ended March 31, 2000; and o Current Report on Form 8-K filed on January 12, 2000. Carpatsky files annual audited and quarterly unaudited financial statements, information circulars relating to shareholder meetings and other information and reports with the Alberta Securities Commission. You may read and copy documents maintained by the Alberta Securities Commission in its public files located at Fourth Floor, 300-5th Avenue S.W., Calgary, Alberta T2P 3C4. Information filed electronically with the Alberta Securities Commission may also be obtained at http://www.sedar.com. This proxy statement and prospectus is part of a registration statement on Form S-4 filed by Pease and Carpatsky with the SEC under the Securities Act of 1933 with respect to this offering of common and preferred stock. This proxy statement and prospectus does not contain all of the information filed with the SEC. This proxy statement and prospectus incorporates important business and financial information about us that is not included in or delivered with this document. You may request a copy of this information at no cost by writing or telephoning us at the following addresses: Pease Oil and Gas Company Carpatsky Petroleum Inc. 751 Horizon Court, Suite 203 1331 Lamar, Suite 1455 Grand Junction, Colorado 81506 Houston, Texas 77010 Phone: (970) 245-5917 Phone: (713) 650-1025 The meetings to approve the merger and related transactions will be held on __________, 2000 and you must make your decision of whether or not to approve the transactions by that date. To obtain timely delivery of the requested information, you must request this information by ________, 2000, or the date that is no later than five business days before the date of your meeting. You should rely only on the information contained or incorporated by reference in this proxy statement and prospectus or any supplement to vote on the merger and related transactions. We have not authorized anyone else to provide you with different information. You should not assume that the information included in this proxy statement and prospectus or any documents incorporated by reference herein is accurate as of any date other than the date on the front of such documents. i TABLE OF CONTENTS Page Where You Can Find More Information.......................................... i Questions and Answers About the Pease and Carpatsky Merger................... 1 Summary...................................................................... 2 Summary Historical and Pro Forma Financial Data..................... 6 Risk Factors................................................................. 8 Forward-Looking Statements................................................... 14 The Special Meetings......................................................... 15 The Continuance And Merger................................................... 20 Federal Income Tax Considerations in the United States.............. 26 Tax Consequences of Ownership and Disposition of Our Stock by Canadian Holders ....................................... 28 Income Tax Considerations in Canada................................. 29 The Merger Agreement......................................................... 32 Selected Financial Data of Pease............................................. 35 Pease Management's Discussion and Analysis of Financial Conditions and Results of Operations................................ 36 Selected Financial Data of Carpatsky......................................... 44 Carpatsky Management's Discussion and Analysis of Financial Conditions and Results of Operations................................ 45 Comparative Per Share Data................................................... 49 Comparative Per Share Market Price and Related Shareholder Matters........... 50 Pro Forma Combined Financial Information..................................... 51 Business of Pease............................................................ 56 Business of Carpatsky........................................................ 63 Republic of Ukraine.......................................................... 69 Material Contracts Between Pease and Carpatsky............................... 74 Security Ownership of Management and Certain Beneficial Owners of Pease...... 75 Security Ownership of Management and Certain Beneficial Owners of Carpatsky.. 77 Directors and Executive Officers............................................. 78 Certain Relationships and Related Transactions of Pease...................... 80 Certain Relationships and Related Transactions of Carpatsky.................. 81 Description of Capital Stock................................................. 83 Comparison of Rights of Holders of Carpatsky, Pease and Radiant Energy Common Stock......................................... 85 Legal Opinions............................................................... 88 Experts...................................................................... 88 Glossary of Oil and Gas Term................................................. 89 Index to Consolidated Financial Statements...................................F-1 Appendix A - Amended Agreement and Plan of Merger [see Exhibit 2.3] Appendix B - Opinion of Houlihan Smith & Company, Inc. Appendix C - Sections of the Corporation Law of Alberta relating to dissenters' rights for Carpatsky shareholders Appendix D - Sections of the General Corporation Law of Delaware relating to dissenters' rights for Carpatsky shareholders ii QUESTIONS AND ANSWERS ABOUT THE PEASE AND CARPATSKY MERGER Q: What is being proposed at the meetings? A: The boards of directors of Carpatsky and Pease have unanimously approved a series of transactions which, when completed, will result in the following: o Carpatsky will become a wholly owned subsidiary of Pease; o Carpatsky shareholders will become Pease shareholders; o Carpatsky's nominees will be elected to four of five seats on our board of directors; o Our combined company will be renamed Radiant Energy, Inc. Q: Will this change the business of Pease? A: Yes. Currently, Pease's operations focus on the exploration and development of oil and gas properties located in the Gulf Coast area. After the merger, we will focus our business activities primarily on operations in the Republic of Ukraine. Q: What do I need to do now? A: Carefully read and consider the information contained in this document, and fill out and sign your proxy card. Please mail your signed proxy card in the enclosed return envelope as soon as possible so that your shares may be represented at the meetings. Your proxy card will instruct the persons named on the card to vote your shares at the meeting as you direct on the card. Q: If my broker holds my shares in nominee or "street name," will my broker vote my shares for me? A: Your broker will vote your shares only if you provide instructions on how to vote. You should therefore provide your broker with instructions on how to vote your shares. Q: May I change my vote after I have mailed my signed proxy card? A: Yes, you may change your vote up to the time it is cast at the special meeting. We have provided instructions for changing your vote under the caption "The Special Meetings--Procedures for Revocation of Proxies." Q: Should I send in my stock certificates now? A: No. If the merger is completed, we will send written instructions to Carpatsky shareholders for exchanging their certificates. Pease shareholders will keep their existing certificates. However, Pease shareholders may elect to surrender their stock certificates in exchange for certificates reflecting the name Radiant Energy. Q: When will Carpatsky shareholders be permitted to sell the shares they receive in the merger? A: Immediately following the merger, Carpatsky shareholders will be entitled to sell the Radiant Energy common stock or preferred stock received in the merger, unless they are an "affiliate" of Carpatsky immediately before the merger or of Radiant Energy following the merger. Q: When do you expect the merger to be completed? A: We expect to complete the merger shortly after receiving shareholder approval at the meetings. Q. Who can help answer my questions about the merger? A. If you have more questions about the merger: Pease shareholders should contact: Pease Oil and Gas Company 751 Horizon Court, Suite 203 Grand Junction, CO 81506 Attention: Patrick J. Duncan Telephone: (970) 245-5917 Carpatsky shareholders should contact: Carpatsky Petroleum Inc. 1331 Lamar, Suite 1450 Houston, TX 77010 Attention: Robert Bensh Telephone: (713) 756-7029 Carpatsky's registered office in Canada is: 1210, 606-4th Street S.W. Calgary, Alberta T2P 1T1 2 SUMMARY This summary highlights selected information from this proxy statement and prospectus and may not contain all of the information that is important to you. To understand the merger and related transactions fully and for a more complete description of the legal terms of the transactions, you should read carefully this entire proxy statement and prospectus and the documents to which we have referred you. We have provided definitions of terms used to describe oil and gas reserves and our ownership in those reserves under "Glossary of Oil and Gas Terms." References to "we," "us" or "our" refer to Pease before the merger and Radiant Energy thereafter. The Companies Carpatsky. Carpatsky holds interests in two producing oil and gas fields in Ukraine. As of December 31, 1999, Carpatsky had estimated net proved reserves of 86 MBbls of oil and 229 MMcf of natural gas in the Bitkov field, located in Eastern Ukraine, and had estimated net proved reserves of 113 MBbls of condensate and 15.6 Bcf of natural gas in the RC field, located in Western Ukraine. Carpatsky's address and phone number is: Carpatsky Petroleum Inc. 1331 Lamar, Suite 1450 Houston, Texas 77010 (713) 756-7029 Pease. Pease owns working interests in two producing oil and gas fields in southern Louisiana and a 12.5% working interest in a proprietary 3-D seismic data project covering approximately 130,000 acres in Texas. Pease had estimated net proved reserves of approximately 334 MBbls of oil and 1.4 Bcf of natural gas at December 31, 1999. Pease's address and phone number is: Pease Oil and Gas Company, 751 Horizon Court, Suite 203, Grand Junction, Colorado 81506, (970) 245-5917 Business After the Merger Following the merger, we intend to devote substantially all of our business activities to developing our projects in Ukraine. We are proposing to merge because we believe the resulting combination will create a stronger, more competitive company capable of achieving greater financial strength, operational efficiencies, earning power and growth potential than either company would have on its own. Our ability to achieve these benefits depends upon our ability to integrate our businesses and other risks described under "Risk Factors." The Continuance (Page 32) A continuance is a transaction permitted by Delaware and Alberta law pursuant to which Carpatsky will change its state of incorporation from the province of Alberta to Delaware. Under Delaware law, following the continuance, Carpatsky will be deemed to have been a Delaware corporation since the date of its incorporation in Alberta, and shareholders of the continued Carpatsky will be deemed to have been shareholders of the continued Carpatsky from the date they initially acquired their Carpatsky shares. The Merger (Page 20) What Shareholders of Carpatsky Will Receive in the Merger (Page 32). Except for shares as to which appraisal rights are perfected, each Carpatsky common share will be converted into .57842 shares of our common stock and each Carpatsky preferred share will be converted into 1.07292 shares of our preferred stock. Carpatsky shareholders will receive cash in lieu of any fractional shares of our stock. 3 Exchange of Our Preferred Stock. In connection with the merger, several holders of our preferred stock will exchange approximately 27,000 shares of their preferred stock for approximately 2.3 million shares of common stock, representing 57%, of our currently outstanding common stock. This exchange will occur on the day before the record date for the merger. The holders of our preferred stock have agreed to exchange all the remaining shares of their preferred stock for approximately 6.6 million shares of common stock immediately following the closing of the merger. The holders of our preferred stock have agreed to accept less common stock in the exchange than they would have received if they converted their preferred stock pursuant to its conversion terms. In total, holders of our preferred stock will receive 8,865,665 shares of our common stock in exchange for their preferred stock, representing 10.5% of our common stock immediately following the merger. The conversion terms of our preferred stock provide that each share of our outstanding preferred stock is convertible into a number of shares of common stock having a market value of $66.67 immediately prior to the conversion. Based on the closing price of our common stock on July 31, 2000 of $.32, our preferred stock is currently convertible into 22 million shares of common stock, which would represent 93% of our common stock immediately following the conversion. Ownership Following the Merger. Following the merger, our common stock will be owned by the following persons, assuming all of our preferred stock is exchanged for common stock: Former Carpatsky shareholders................................... 87.5% Former Pease preferred shareholders............................. 10.5% Pease common shareholders....................................... 2% Amendments to Articles of Incorporation Our articles of incorporation do not currently provide for enough common and preferred stock to cover the shares we would be obligated to issue in the merger and in exchange for our outstanding preferred stock. We are therefore proposing to amend our articles of incorporation to authorize the issuance of 4 150,000,000 shares of common stock and 200,000,000 shares of preferred stock. We are also proposing to change our name to Radiant Energy, Inc. Election of Directors (Page 78) In connection with the merger, we will elect a new board of directors. These directors and their principal employment is described below: J.P. Bryan.--Senior Managing Director of Torch Energy Advisors Incorporated Douglas G. Manner--President and CEO of Bellwether Exploration Company and Carpatsky Dr. Jack Birks--Retired Patrick J. Duncan--President, Chief Financial Officer and Treasurer of Pease. B. Dee Davis--Director of International Business Development of Torch Energy Advisors Incorporated If the continuance and merger do not occur, our existing board of directors will continue in office. Recommendation to Shareholders (Page 23) To Pease Shareholders. Pease's board of directors has unanimously approved the merger agreement, the merger and the amendments to our articles of incorporation, and recommends that each Pease shareholder vote to adopt our restated articles of incorporation. To Carpatsky Shareholders. Carpatsky's board of directors has unanimously approved continuing the corporation in Delaware, the merger agreement and the merger, and recommends that Carpatsky shareholders vote to adopt and approve the continuation, the merger agreement and the merger. Opinions of Pease's Financial Advisors (Page 23) Pease has received an opinion from its financial advisor, Houlihan Smith & Company, that the proposed merger is fair, from a financial point of view, to the Pease shareholders. The full text of this opinion is attached as Appendix B, which you should read carefully. The opinion of Houlihan Smith & Company is directed to the Pease board of directors and does not constitute a recommendation to any shareholder with respect to matters relating to the Pease proposals. Carpatsky has not requested a fairness opinion regarding the continuance and the merger, relying instead on the business judgment of its board of directors. Comparative Market Price Information (Page 50) Pease common stock trades in the OTC Bulletin Board market. Until January 14, 1999, the common stock of Pease was traded on the Nasdaq Small Cap Market. The quoted bid price range for Pease common stock during 1999, and through July 31, 2000, ranged from a high bid of $1.00 to a low bid of $0.16. Carpatsky common shares are listed on the Canadian Venture Exchange in Canada. The quoted bid price range for Carpatsky common shares during 1999, and through January 21, 2000, ranged from a high bid of U.S.$0.16 to a low bid of U.S.$0.03. Trading in Carpatsky common shares on the Canadian Venture Exchange was suspended on January 22, for failure to file required financial statements. The bid prices have been converted from Canadian dollars based upon the exchange rate in effect on the applicable date. 5 On May 26, 1999, the last full trading day prior to the public announcement of the merger, the closing bid price for our stock was: Carpatsky . . . . . . $.14 Pease. . . . . . . . . $.625 Following the merger, our common stock will be listed on the Canadian Venture Exchange and traded on the OTC Bulletin Board. Approval by Pease Shareholders (Page 16) The affirmative vote of holders of a majority of the outstanding shares of our common stock and our preferred stock, voting separately, is required to adopt our amended and restated articles of incorporation. The election of our directors is by a plurality vote of our common stock. The holders of our preferred stock, who will exchange a portion of their preferred stock for 57% of our common stock prior to the record date, have advised us that they will vote their common stock and preferred stock in favor of the amendments to our articles of incorporation and the election of the director nominees. In addition, the officers and directors of Pease, who together beneficially will own approximately 1.8% of our outstanding common stock after the exchange by our preferred shareholders, have advised us that they intend to vote in favor of the amendments to our articles of incorporation. Adoption of the amended and restated articles of incorporation and the election of the director nominees is therefore assured. Approval by Carpatsky Shareholders (Page 16) The continuance must be approved by holders of two-thirds of the Carpatsky common and preferred shares, voting together as a class, represented at the meeting and voting on the special resolution. If the continuance is approved, the holders of a majority of the outstanding Carpatsky common and preferred shares, voting together as a class, must vote to approve the merger. The officers and directors of Carpatsky who together beneficially own common and preferred shares representing approximately 64% of the votes entitled to be cast have advised us that they intend to vote all shares which they beneficially own in favor of the matters to be presented to Carpatsky's shareholders. Shares beneficially owned by our officers and directors include shares owned by Bellwether Exploration Company, which owns all of the Carpatsky preferred shares and has agreed to vote in favor of the continuance and adoption of the merger agreement if the conditions to closing the merger are satisfied. Common and preferred shares held by Bellwether represent approximately 58% of the votes entitled to be cast at the special meeting. 6 Dissenters' Rights (Page 18) Carpatsky If you are a holder of record of Carpatsky common shares you will have the right to dissent to both the continuance and the merger. A detailed description of dissenters' rights is set forth under the caption "The Special Meetings--Carpatsky Dissenters' Rights." Pease Holders of Pease common stock and preferred stock will not have the right to dissent to the merger or related transactions. Termination Fees and Expenses (Page 34) The merger agreement provides for payment of a termination fee of $250,000 by a party that supports or enters into a competing transaction. Accounting Treatment (Page 31) The merger will be accounted for as a purchase transaction, with Carpatsky as the acquiror, in accordance with generally accepted accounting principles. Material United States Federal Income Tax Considerations (Page 26) The continuance and the merger will constitute a tax-free reorganization for United States income tax purposes. However, Carpatsky shareholders who are U.S. citizens or residents will be required to either elect to receive a deemed dividend or recognize gain as a result of the continuance. Shareholders of Carpatsky who are U.S. citizens or residents will not recognize a gain with respect to the shares of our common or preferred stock received by them in exchange for their Carpatsky common or preferred shares as a result of the merger. Pease shareholders will not recognize gain in connection with the merger. Material Canadian Income Tax Considerations (Page 29) Holders of Carpatsky common shares residing in, or subject to the income tax authority of, Canada, will not recognize taxable income or loss for Canadian federal income tax purposes in connection with continuance of Carpatsky as a Delaware corporation and the merger. Conditions of the Continuance and Merger (Page 33) The completion of the merger depends upon meeting a number of conditions, described in this proxy statement and prospectus, including: o approval by the shareholders of both Pease and Carpatsky; o the absence of any law or injunction that effectively prohibits the merger; o the absence of material adverse changes to the businesses or assets of Pease or Carpatsky; o the continued effectiveness of the registration statement filed with the SEC with respect to the shares of common and preferred stock to be issued to the Carpatsky shareholders in the merger; 7 o receipt of all necessary third party consents and all approvals from governmental authorities; and o the absence of demands for appraisal by holders of more than .625% of Carpatsky common shares. Regulatory Approvals (Page 31) The continuance of Carpatsky must be consented to by the Registrar of Corporations for Alberta, Canada. Both the continuance and the merger must be approved by the Canadian Venture Exchange. Recent Developments Bellwether Investment. In December 1999, Bellwether Exploration Company purchased 95.45 million shares of a newly issued class of Carpatsky preferred shares and warrants to purchase 12.5 million Carpatsky common shares for one year at an exercise price of U.S.$.20 per share. The purchase price for the preferred shares and warrants was U.S.$4.0 million. The preferred shares are convertible into 50 million common shares. The preferred shares vote as a class with the common shares on all matters submitted to Carpatsky shareholders, including the election of directors. The preferred shares issued to Bellwether constitute a majority of the total number of votes which may be cast by shareholders. Therefore, Bellwether controls all matters voted on by Carpatsky shareholders which require a majority vote and can veto any other matters voted on by Carpatsky shareholders. In connection with this investment, Bellwether appointed a majority of Carpatsky's directors and executive officers. In the continuance and merger, Bellwether's preferred shares will be converted into 102.41 million shares of our preferred stock. This preferred stock will vote as a class with our common stock, and will entitle Bellwether to cast a majority of the votes on all matters submitted to Radiant Energy shareholders, including the election of directors. Bellwether will therefore control all matters voted on by our shareholders after the merger. Bellwether is an independent oil and gas company based in Houston, Texas. Bellwether's common stock is traded on the Nasdaq stock market under the symbol "BELW." Fees and Expenses (Page 34) We anticipate approximately $350,000 of expenses will be incurred in connection with the merger. 8 In accordance with the terms of his employment agreement, Patrick J. Duncan, President of Pease, will receive a termination payment equal to approximately $220,000 upon completion of the merger. Summary of Risk Factors (Pages 8 to 14) Risks Relating to the Merger o Pease and Carpatsky have generated operating losses for each of the last two years. Both companies' auditors issued a qualified audit report. o The transaction may not close. o The value of the consideration to be received by shareholders in the merger could decrease. Risks Related to Our Business o We will require additional financing to effect our business plan, which may be unavailable on acceptable terms. o We will conduct most of our operations in Ukraine. There are risks in operating in Ukraine, including distributing and being paid for gas produced in Ukraine. o We do not have any direct rights in the licence for the RC field. o Bellwether will control us. o We are subject to the risk of volatile oil and natural gas prices. o We will not control operations on our oil and gas properties and will be dependent upon the operators of our properties. o We will experience drilling and operating risks. o We must continue to comply with significant amounts of governmental regulation. o We must comply with environmental regulations. o Our estimates of proved oil and gas reserves may be inaccurate and we may not ultimately realize the future net revenues stated in our reserve estimates. o We will face substantial competition. o Our corporate charter includes anti-takeover provisions. o Our corporate charter limits director's liability. o There will be no dividends on our common stock. o The market price for our common stock following the merger is likely to be volatile. o Our common stock is a "penny stock." 9 Summary Historical and Pro Forma Financial Data Set forth below are summary historical financial and unaudited pro forma consolidated data of Pease and Carpatsky. The summary historical financial data is based upon the historical financial statements of Pease and Carpatsky, including the notes to those financial statements, included at the end of this proxy statement and prospectus, and should be read in conjunction with those financial statements. The summary unaudited pro forma combined condensed financial data is presented for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been reported had the merger been in effect during the periods presented or that may be reported in the future. The summary pro forma combined condensed financial statements, including the notes to those pro forma financial statements, are included in this proxy statement and prospectus. Pease Oil and Gas Company Summary Financial Data
Three Months Ended March 31, Year Ended December 31, -------------------- ----------------------------------- 2000 1999 1999 1998 1997 ---- ---- ---- ---- ---- Statement of Operations Data: Revenue ........................................$ 799,000 $ 412,000 $ 2,144,000 $ 2,888,000 $ 4,567,000 Gross profit ................................... 636,000 328,000 1,739,000 1,268,000 2,040,000 Income (loss) from operations .................. 211,000 (153,000) (151,000) (10,400,000) (15,467,000) Net income (loss) .............................. 130,000 (232,000) (465,000) (10,627,000) (15,895,000) Net income (loss) available to common shareholders .......................... 64,000 (298,000) (731,000) (12,685,000) (15,985,000) Net income (loss) per common share ........................................ 0.04 (0.18 (0. 3) (7.99) (12.21) Weighted average number of common shares outstanding .................... 1,731,000 1,626,000 1,684,000 1,588,000 1,309,000 Balance Sheet Data: Current assets .................................$ 1,519,000 $ 1,428,000 $ 1,203,000 $ 1,741,000 $ 7,349,000 Current liabilities ............................ 317,000 558,000 281,000 639,000 2,054,000 Working capital ................................ 1,202,000 870,000 922,000 1,102,000 5,295,000 Total assets ................................... 7,362,000 7,557,000 7,141,000 7,913,000 21,294,000 Total liabilities .............................. 2,878,000 2,905,000 2,787,000 2,932,000 5,203,000 Shareholders' Equity ........................... 4,484,000 4,652,000 4,354,000 4,981,000 16,091,000 Carpatsky Petroleum Inc. Summary Financial Data Three Months Ended March 31, Year Ended December 31, -------------------- ----------------------------------- 2000 1999 1999 1998 1997 ---- ---- ---- ---- ---- Statement of Operations Data: Net Revenue ....................................$ 575,000 $ 111,000 $ 800,000 $ 226,000 $ 86,000 Gross profit (loss) ............................ 239,000 (59,000) (217,000) (83,000) 3,000 Income (loss) from operations .................. (1,040,000) (348,000) (6,018,000) (972,000) (831,000) Net income (loss) .............................. (1,066,000) (174,000) (5,754,000) (599,000) (976,000) Net income (loss) per share .................... (0.01) -- (0.12) (0.01) (0.03) Weighted average number of common shares outstanding .................... 77,728,000 40,796,000 49,471,000 40,796,000 31,691,000 Other Financial Data: Ratio of combined fixed charges and preference dividends to earnings(1) .................................. -- -- -- -- -- Balance Sheet Data: Current assets .................................$ 2,654,000 $ 226,000 $ 4,024,000 $ 208,000 $ 343,000 Current liabilities ............................ 3,142,000 5,033,000 3,645,000 4,850,000 3,170,000 Working capital (deficit) ...................... (488,000) (4,807,000) 379,000 (4,642,000) (2,827,000) Total assets ................................... 6,938,000 9,497,000 8,507,000 9,489,000 7,080,000 Total liabilities .............................. 3,142,000 7,040,000 3,645,000 6,858,000 3,893,000 Shareholders' Equity ........................... 3,796,000 2,457,000 4,862,000 2,631,000 3,187,000
- ------------ (1) Earnings were not sufficient to cover fixed charges and preference dividends by the amount of the net loss for each period. 10
Pease Oil and Gas Company and Carpatsky Petroleum Inc. Summary Pro Forma Combined Condensed Financial Data Year Ended December 31, 1999 ------------------------------------------------------- Pro Forma Carpatsky Pease Adjustments Combined --------- ----- ----------- --------- Statement of Operations Data: Net revenue .................................$ 800,000 $ 2,144,000 $ 2,944,000 Operating income (loss) ..................... (6,018,000) (151,000) 417,000 (5,752,000) Net income (loss) ........................... (5,754,000) (465,000) 775,000 (5,444,000) Income (loss) per share ..................... (0.12) (0.43) (0.10) Other Financial Data: Ratio of combined fixed charges and preference dividends to earnings Three Months Ended March 31, 2000 ------------------------------------------------------- Pro Forma Carpatsky Pease Adjustments Combined --------- ----- ----------- --------- Statement of Operations Data: Net revenue ................................. 575,000 799,000 1,374,000 Operating income (loss) ..................... (1,040,000) 211,000 94,000 (735,000) Net income (loss) ........................... (1,066,000) 130,000 183,000 (753,000) Income (loss) per share ..................... (0.01) 0.04 (0.01) Other Financial Data: Ratio of combined fixed charges and preference dividends to earnings Balance Sheet Data as of March 31, 2000: Working capital (deficit) ................... (488,000) 1,202,000 (386,000) 228,000 Current assets .............................. 2,654,000 1,519,000 (386,000) 3,787,000 Current liabilities ......................... 3,142,000 317,000 -- 3,459,000 Total assets ................................ 6,938,000 7,362,000 (2,721,000) 11,579,000 Total liabilities ........................... 3,142,000 2,878,000 238,000 6,258,000 Shareholders' equity ........................ 3,796,000 4,484,000 (2,959,000) 5,321,000
Combined Proved Oil and Natural Gas Reserves at December 31, 1999 Net Proved Reserves ------------------------ MBbls Bcf Bcfe ----- ---- ---- Pease....................... 334 1.4 3.4 Carpatsky................... 199 15.8 17.0 ----- ----- ------ Total....................... 533 17.2 20.4 ===== ===== ====== 11 RISK FACTORS In evaluating the merger, you should carefully consider the following risk factors, as well as the other information we have included or referenced in this proxy statement and prospectus. Pease and Carpatsky have each generated operating losses for each of the last two years and have retained deficits. Both companies' auditors issued a qualified audit report. Pease has incurred the following losses from operations: o $10,400,000 for the year ended December 31, 1998; and o $151,000 for the year ended December 31, 1999. Carpatsky has incurred the following losses from operations: o $972,000 for the year ended December 31, 1998; o $6,018,000 for the year ended December 31, 1999; and o $1,040,000 for the three months ended March 31, 2000. Our auditors' reports for the financial statements of both Pease and Carpatsky for our last fiscal years ending December 31, 1999 included an explanatory paragraph that there was substantial doubt as to whether each company has sufficient operating capital to enable us to continue as a going concern. The transaction may not close. The proposed merger transaction is subject to a number of conditions, including obtaining approval of our shareholders. Pease or Carpatsky may be unable to meet the applicable conditions or the transaction could be abandoned for other reasons. In any event, the transaction will not be completed until the fourth quarter of 2000. The value of the consideration to be received by Carpatsky shareholders in the merger could decrease, depending on the trading price of Pease common stock. Carpatsky shareholders will not receive consideration in the merger with a set market value or a minimum market value. The number of shares of Radiant Energy common stock that Carpatsky shareholders will receive in the merger is fixed. The value of these shares will depend on the trading price of Radiant Energy common stock. No adjustment will be made to the number of shares of Radiant Energy common stock to be received by Carpatsky shareholders in the event of any increase or decrease in the market price of Carpatsky common shares or Radiant Energy common stock. For historical and current market prices of Radiant Energy common stock and Carpatsky common shares, see "Comparative Per Share Market Price and Related Shareholder Matters." We will require additional financing. The terms may be unfavorable to present shareholders. Failure to receive financing will jeopardize the chances for future success. We will be required to make substantial capital expenditures to develop our existing reserves, and to discover new oil and gas reserves. Historically, we have financed these expenditures primarily with cash from operations and proceeds from the sale of debt and equity securities. See "Pease Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity, Capital Expenditures and Capital Resources" and "Carpatsky Management's Discussion and Analysis of Financial Conditions and Results of Operations--Liquidity, Capital Expenditures and Capital Resources" for a discussion of our capital budget. We cannot assure you that we will be able to raise capital in the future. 12 If we cannot obtain sufficient additional capital resources, our operations and financial condition will adversely affected. If we are unable to secure additional financing following the merger, we may sell assets and curtail drilling and exploration activities. We will conduct most of our operations in Ukraine. We expect that, following the merger, our primary focus will be on operations in Ukraine. The success of operations in Ukraine will depend on our ability to maintain our relationships with our local development partners in Ukraine, the political and economic stability of Ukraine, export and transportation tariffs, local and national tax requirements and exercise of foreign government sovereignty over the exploration area. No assurance can be given that our operations in Ukraine will be successful. See "Republic of Ukraine," and Note 1 of the Notes to Carpatsky's Consolidated Financial Statements. Ukraine is subject to political and economic instability. The form of government and economic institutions in Ukraine have been created relatively recently and may be subject to a greater risk of political and economic instability or change than in countries where such institutions have been in existence for longer periods of time. The government of Ukraine, through wholly or majority owned regional oil and gas companies, is an essential participant in the establishment of the arrangements defining each exploration and development project, including our projects. These arrangements may be subject to changes in the event of changes in government institutions, government personnel or political power and the development of new administrative policies and practices. We can give you no assurance that we will be able to take measures to provide adequate protection of our oil and gas interests against political instability or changes in government, policies or practices, institutions, personnel or shifts in political power. See "Republic of Ukraine." Ukraine's market economy is undeveloped. The infrastructures, labor pools, sources of supply and legal and social institutions in Ukraine are not equivalent to those found in connection with projects in North America. Moreover, the regulatory regime governing oil and gas operations (including environmental regulations) has been recently promulgated, so there may not be enforcement history or established practice that can aid us in evaluating how the regulatory regime will affect our operations. The procedures for obtaining permits and approvals may be cumbersome, and officials may have wide discretion in acting on applications and requests. Each of these factors may result in a lower level of predictability and a higher risk of frustration of expectations. See "Republic of Ukraine." Doing business in Ukraine subjects us to significant foreign currency risks. We may be exposed to the risk of foreign currency exchange losses in connection with our operations in Ukraine by holding cash and receivables denominated in foreign currencies during periods in which a strengthening United States dollar may be experienced or by having or incurring liabilities denominated in foreign currencies during periods in which a weakening United States dollar may be experienced. Generally, Carpatsky has paid for goods and services obtained locally in hryvna (UAH), the Ukrainian currency, and has paid for materials and equipment, expatriate employees and international contractors in United States dollars. We may receive hryvna from sales of oil and gas within Ukraine although the hryvna is presently readily convertible into United States dollars, we can give no assurance that such convertibility will continue. There are risks in producing and monetizing oil and gas produced in Ukraine. 13 To date, Carpatsky's gas production has been sold to state enterprises and private companies within Ukraine. Only partial payment for sales to state enterprises has been received. To address this situation, we will attempt to transport natural gas produced from our properties for sale in Western Europe which will help assure that full payment for gas is timely received. Following the merger we will continue to face risks in commercializing production of our natural gas reserves. These risks are based on a number of factors, including the following: o the political climate; o regulations applicable to the oil and gas business in Ukraine and to foreign companies; o competitors in Ukraine; o the limited access to pipelines and other transport needed to export natural gas; o the possibility that oil and natural gas prices in Ukraine will be substantially different from prevailing world prices for these commodities; o development of oil and natural gas reserves in Ukraine will require the use of local resources; o the possibility that Ukraine may require produced oil and natural gas to be sold domestically; o currency exchange fluctuations; o restriction on repatriation of capital and profits; o confiscatory changes in Ukraine's tax regime; and o non-payment for gas sold and lack of availability to seek redress. Dividends or distributions from Ukrainian ventures may be received in hryvna, and there is no assurance that we will be able to convert such currency into United States dollars. Even where convertibility is available, applicable exchange rates may not reflect a parity in purchasing power. Fluctuations of exchange rates could result in a devaluation of hryvna which we hold. See "Republic of Ukraine." Business disputes must be resolved in a foreign jurisdiction. If a dispute in connection with Ukraine operations occurs, we may be subject to the jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of the courts of the United States or enforcing U.S. judgments in such other jurisdictions. We may also be hindered or prevented from enforcing our rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. We do not have any direct rights in the license to extract gas and gas condensate from the RC field. Carpatsky has no direct rights in the license to extract gas and gas condensate from the RC field. Ukrnafta, the Ukrainian national oil company, is the sole licensee for the RC field. Carpatsky participates in the exploration and development of reserves in the RC field pursuant to a joint activity agreement between Carpatsky and Ukrnafta. Pursuant to the joint activity agreement, Carpatsky and Ukrnafta must annually agree on the budget and contributions from the parties. Carpatsky's recourse for disagreements regarding an inability to agree on the budget is to dissolve the joint activity. Since Ukrnafta is the sole licenseholder for the RC field, its mineral rights will not be diminished in any way by dissolution of the joint activity, but Carpatsky would lose all contractual rights and claims to the RC field if the joint activity is dissolved. This gives Ukrnafta substantial leverage in negotiating the annual budget and contributions from the parties. Carpatsky intends to convert the joint activity into a modern corporate entity with the cooperation of Ukrnafta. This process is expected to take place in the next six months pending initiation of direct negotiations. There can be no assurance that Carpatsky will be successful in converting to a modern corporate entity. 14 No assurances can be made that we will be able to acquire a development license covering the RC field. We may not be successful in converting our ownership of the RC field from a traditional license arrangement to a production sharing agreement. The joint activity agreement with Ukrnafta allows Carpatsky to participate in the exploration and development of reserves under an exploration license held by Ukrnafta covering the RC field. The exploration license expires in March 2003. In order for Carpatsky to continue developing and producing reserves upon expiration of the exploration license, Ukrnafta must acquire a development license. A development license is granted at the discretion of the Ukranian government, and neither Carpatsky nor Ukrnafta has a right to receive the development license. No assurances can be made that a development license to continue producing reserves in the RC field will be granted. Ukraine has recently passed legislation which would allow Carpatsky to own its reserves under a production sharing agreement. The production sharing agreement is a more favorable method of conducting operations in Ukraine than the current licensing arrangement, primarily because: o the production sharing agreement may be transferred, which would allow Ukrnafta to transfer a direct interest in the mineral rights in the RC field to Carpatsky and would make obtaining financing from commercial lenders easier; o the production sharing agreement has Ukrainian tax advantages over the existing licensing arrangements; and o the production sharing agreement does not require the acquisition of a development license to produce reserves. Carpatsky and Ukrnafta have verbally agreed to seek a production sharing agreement to cover operations in the RC field. Carpatsky can make no assurances, however, that it will be successful in attaining one. Carpatsky does not plan to invest additional funds in the RC field (other than the proceeds of the sale of oil and gas from the field) until Carpatsky receives a production sharing agreement. Bellwether will control us. Following the merger, Bellwether will own 102.41 million shares of our convertible preferred stock. These shares are entitled to vote as a class with our common stock. In addition, if we issue additional shares of voting stock, we must also make a dividend to Bellwether of a like number of additional shares of preferred stock. As a result, Bellwether will have the right to vote approximately 53.4% of the votes entitled to be voted by our shareholders. Following the merger, a majority of our board of directors will be appointed by Bellwether. Mr. J.P. Bryan and Dr. Jack Birks, who will be on our board of directors after the merger, also are directors of Bellwether. Bellwether has also appointed Douglas G. Manner and B. Dee Davis, who are proposed to be elected to our board of directors. Mr. Manner, the Chief Executive Officer of Bellwether and Carpatsky, will become our chief executive officer after the merger. Our activities following the merger will therefore be controlled by Bellwether. Carpatsky shareholders will be subject to the provisions of Nevada law. As a result of the continuance and merger, Carpatsky shareholders will become shareholders in Radiant Energy, a Nevada corporation, and, accordingly, your rights as shareholders will be governed by Nevada law. See "Comparison of Rights of Holders of Carpatsky, Pease and Radiant Energy Common Stock." We will be subject to the risk of volatile oil and natural gas prices. 15 Our success is highly dependent on prices for oil and gas, which are extremely volatile. Beginning in 1997 and continuing through late last year, the prices we received for our production generally declined, especially for oil. Oil prices have recently recovered, but remain volatile. Any additional substantial or extended decline in the price of oil or gas would have a material adverse effect on us. Oil and gas markets are both seasonal and cyclical. Prices of oil and gas affect the following aspects of our business: o our revenues, cash flows and earnings; o our ability to attract capital to finance our operations and the cost of the capital; o the amount we are allowed to borrow under our bank credit facility; o the value of our oil and gas properties; and o the profit or loss we incur in exploring for and developing our reserves. Various factors beyond our control will affect the prices of oil and natural gas, including: o the worldwide and domestic supplies of oil and natural gas; o the ability of members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; o political instability or armed conflict in oil or natural gas producing regions; o the price and level of foreign imports; o the level of consumer demand; o the price, availability and acceptance of alternative fuels; o the availability of pipeline capacity; o weather conditions; o domestic and foreign government regulations and taxes; and o the overall local and world economic environment. We will not control our oil and gas properties; therefore, we will continue to be dependent upon the various operators of our domestic properties and upon our joint venture partners in Ukraine to explore and develop those properties. Pease is not presently the operator of any of its oil or natural gas prospects in the Gulf Coast area. Carpatsky is involved in making operating and marketing decisions through its 50% participation in the management committees of each venture, although it is not the operator. These arrangements are expected to continue following the merger. Thus, we will be unable to control material aspects of commercialization of our principal domestic assets and we will be dependent upon the expertise, diligence and financial condition of the operators of those properties. Our financial ability to contribute capital to the budgets of both Ukrainian ventures will determine our level of authority on the management committees. We will experience drilling and operating risks. Oil and natural gas drilling activities are subject to many risks, including the risk that no commercially productive reservoirs will be encountered. We can make no assurance that wells in which we will have an interest will be productive or that we will recover all or any portion of our drilling or other exploratory costs. Drilling for oil or natural gas may involve unprofitable efforts, not only from dry wells but from wells that are productive but do not produce sufficient net revenue to return a profit after drilling, operating and other costs. The costs of drilling, completing and operating wells is often uncertain. Our drilling operations may be curtailed, delayed or canceled as a result of numerous factors, many of which are beyond our control, including by way of illustration the following: 16 o economic conditions; o title problems in the U.S.; o compliance with governmental requirements; o weather conditions; and o shortages and delays in labor, equipment, services or supplies. Our future drilling activities may not be successful and, if unsuccessful, such failure may have a material adverse effect on our future results of operations and ability to participate in other projects. Our operations are also subject to hazards and risks inherent in drilling for and producing and transporting oil and natural gas, including, by way of illustration, such hazards as: o fires; o natural disasters; o explosions; o encountering formations with abnormal pressures; o blowouts; o cratering; o pipeline ruptures; o spills; and o power shortages; o equipment failures. Any of these types of hazards and risks can result in the loss of hydrocarbons, environmental pollution, personal injury claims and other damages to property. As protection against such operating hazards, we intend to maintain insurance coverage against some, but not all of these potential risks. We also may elect to self insure in circumstances in which we believe that the cost of insurance, although available, is excessive relative to the risks presented. The occurrence of an event that is not covered, or not fully covered, by third party insurance could have a material adverse effect on our business, financial condition and results of operations. We must continue to comply with significant amounts of governmental regulation. Domestic oil and natural gas operations are subject to extensive federal, state and local laws and regulations relating to the exploration for, and development, production and transportation of, oil and natural gas, including safety matters, which may change from time to time in response to economic conditions. Matters subject to regulation by domestic federal, state and local authorities include: o permits for drilling operations; o road and pipeline construction; o reports concerning operations; o the spacing of wells; o unitization and pooling of properties; o taxation; 17 o environmental protection; o production rates; and o customs regulations; o worker safety regulations. o construction of processing facilities; We can give no assurance that delays will not be encountered in complying with such requirements or that such regulations will not require us to alter our drilling and development plans. Any delays in obtaining approvals or material alterations to our drilling and development plans could have a material adverse effect on our operations. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas below actual production capacity in order to conserve supplies of oil and natural gas. We believe that we are and will continue to be in substantial compliance with all applicable laws and regulations. We are unable to predict the ultimate cost of compliance with changes in these requirements or their effect on our operations. Significant expenditures may be required to comply with governmental laws and regulations and may have a material adverse effect on our financial condition and future results of operations. We must comply with environmental regulations. We must operate exploratory and other oil and natural gas wells in compliance with complex and changing environmental laws and regulations adopted by government authorities. The implementation of new, or the modification of existing, laws and regulations could have a material adverse effect on properties in which we may have an interest. Discharge of oil, natural gas or other pollutants in the air, soil or water may give rise to significant liabilities to governmental bodies and third parties and may require us to incur substantial costs of remediation. We may be required to agree to indemnify sellers of properties we purchase against certain liabilities for environmental claims associated with those properties. We can give no assurance that existing environmental laws or regulations, as currently interpreted, or as they may be reinterpreted in the future, or future laws or regulations will not materially adversely affect our results of operations and financial conditions. We must develop additional reserves to replace reserves depleted by production. Our future success will depend upon our ability to develop our proved undeveloped oil and natural gas reserves in the Gulf Coast area and in Ukraine and to find or acquire additional oil and natural gas reserves which are economically recoverable. Once production is established, proved reserves will decline as they are depleted by production. We must continue exploratory drilling or otherwise acquire proved reserves to continue to increase reserves and its production. Our strategic plan includes increasing our reserve base through exploratory drilling, development and exploitation of our existing properties and acquiring other producing properties if we have sufficient capital resources. We can give no assurance that our planned drilling, development and exploitation projects will result in significant additional reserves or that we will have success drilling productive wells with reserves that produce revenues exceeding finding, development and production costs. There is a risk that our estimates of proved reserves and future net revenue are inaccurate. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and the timing of development expenditures, including many factors beyond our control. The reserve data included in this proxy statement and prospectus represent only estimates. In addition, the historical and projected estimates of future net revenue from proved reserves and the present value thereof are based upon certain assumptions about future production levels, prices and costs that may prove to be incorrect over time. In particular, estimates of crude oil and natural gas reserves, future net revenue from proved reserves and the discounted present value thereof for our crude oil and natural gas properties described in this proxy statement and prospectus are based on the assumptions that such properties will be developed in accordance with their proposed development programs and that future crude oil prices will remain the same as crude oil prices at December 31, 1999, with respect to production attributable to our interests in our respective properties. 18 We will face substantial competition. We will be competing with both major and independent oil and natural gas and other companies, nearly all of which will have substantially larger financial resources, operations, staffs and facilities. We will continue to face intense competition from both major and independent oil and natural gas companies when we seek to acquire desirable properties and to market our production. These competitors have financial and other resources substantially in excess of those which will be available to us. The effects of this highly competitive environment could have a material adverse effect on us. Acquiring interests in other properties involves substantial risks. Following the merger, we intend to evaluate and acquire interests in oil and natural gas properties in Ukraine. To acquire producing properties or undeveloped exploratory acreage will require an assessment of a number of factors including: o the value of the oil or gas properties and the likelihood of future production; o recoverable reserves; o operating costs; o potential environmental and other liabilities; and o drilling and production difficulties. Such assessments will necessarily be inexact and uncertain. Our review of assets to be acquired may not reveal all existing or potential problems. Any unsuccessful acquisition could have a material adverse effect on us. Our corporate charter includes anti-takeover provisions. Following the merger, our amended and restated articles of incorporation will authorize 200 million shares of preferred stock, of which 102.41 million will be issued to Bellwether. Our board of directors may issue the balance of the unissued preferred stock without shareholder approval and may set the rights, preferences and other designations, including voting rights, of those shares as the board of directors may determine. In addition, our articles of incorporation provide for a classified board of directors. Directors serve staggered three-year terms and may only be removed for cause. These provisions may discourage transactions involving actual or potential changes of control, including transactions that otherwise could involve payment of a premium over prevailing market prices to holders of our common stock. We have no plans, arrangements, commitments or understandings relating to potential future issuances of preferred stock. We will not be subject to provisions of the Nevada General Corporation Law that would make some business combinations more difficult. See "Description of Capital Stock--Anti-Takeover Statutes" and "Comparison of Rights of Holders of Carpatsky, Pease and Radiant Energy Common Stock." Our corporate charter limits director liability. Our amended and restated articles of incorporation will provide, as permitted by Nevada law, that our directors shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, with certain exceptions. These provisions may discourage shareholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by shareholders on behalf of Radiant Energy against directors. In addition, the amended and restated articles of incorporation and our bylaws will provide for mandatory indemnification of directors and officers to the fullest extent permitted by Nevada law. 19 Absence of dividends on common stock. Neither Pease nor Capatsky have ever declared or paid cash dividends on common stock and we do not anticipate that we will pay dividends in the foreseeable future. We anticipate that future earnings, if any, will be retained for development of our business. The market price for our common stock following the merger is likely to be volatile and the market for our common stock may not be liquid. If our operating results should be below the expectations of investors or analysts in one or more future periods, it is likely that the price of the common stock would be materially adversely affected. In addition, the stock market has experienced significant price and volume fluctuations that have effected market prices of equity securities of many energy companies, particularly emerging and new companies. General market fluctuations may also adversely affect the market price of our common stock. Finally, upon consummation of the merger, the stock owned by Carpatsky shareholders will cease trading on the Canadian Venture Exchange. After the merger, our common stock will be traded on the OTC Bulletin Board and the Canadian Venture Exchange. Accordingly, our shareholders may experience different levels of spreads between bid and asked quotations as a result of deficiencies between such markets. The market price of our common stock could be adversely affected by sales of substantial amounts of common stock in the public market or the perception that such sales could occur. Upon completion of the merger we will have 55,556,620 shares of common stock outstanding. Trading in our common stock is sporadic and relatively infrequent. The sale of a material number of our shares of common stock in the public market or the perception that such sales could occur could have a material adverse effect on the trading price of our common stock. Because our common stock is a "penny stock," you may be unable to resell it in the secondary market. A "penny stock" is an equity security with a market price of less than $5 per share which is not listed on the Nasdaq or a national securities exchange. Due to the extra risks involved in an investment in penny stocks, federal securities laws and regulations require broker-dealers to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market prior to effecting transactions in penny stocks for a customer. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and associated persons received in the penny stock transactions and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations and the broker-dealer and associated person compensation information must be given to the customer orally or in writing prior to completing the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These additional penny stock disclosure requirements limit the ability of broker-dealers to sell penny stocks and may reduce the trading activity in the market for our common stock. Because of these extra requirements, many broker-dealers are unwilling to sell penny stocks at all. As a result, you may be unable to resell our stock and could lose your entire investment. 20 FORWARD-LOOKING STATEMENTS This proxy statement and prospectus contains forward-looking statements. We cannot assure you that the plans, intentions or expectations upon which our forward-looking statements are based will occur. Our forward- looking statements are subject to known and unknown risks, uncertainties and assumptions, including those discussed elsewhere in this proxy statement and prospectus and the documents that are incorporated by reference into this proxy statement and prospectus. These forward-looking statements include statements regarding: o the availability of capital resources; o our plans to develop our oil and gas properties in Ukraine; and o our plans to convert our ownership in the RC field from a joint activity agreement into a production sharing agreement. When used in this prospectus, forward-looking statements are often identified by the use of such terms and phrases as "anticipates," "believes," "intends," "estimates," "plans." "expects," "seeks," "scheduled," "foreseeable future" and similar expressions. Some of the risks that could affect our future results and could cause results to be materially different from those expressed or implied by these forward-looking statements include: o the contemplated merger not being consummated; o the volatility of oil and gas prices; o our ability to generate additional capital; o our ability to maintain and develop our oil and gas properties in Ukraine and to successfully market the oil and gas that is produced; o our success in exploring for oil and natural gas in other areas; o delays in planned drilling and exploration activities; o risks inherent in oil and gas acquisitions, exploration, drilling, development and production; o competition; o shortages of labor, equipment, services and supplies; o U.S. and foreign government regulation; o environmental matters; o political and geographical risks associated with operations in Ukraine; and o the financial condition of other companies participating in the exploration, development and production of oil and gas. Many of these risks are beyond our control. All of the prospects in the Gulf Coast and in Ukraine are currently operated by other parties; therefore, we may not be in a position to control costs, safety and timeliness of work as well as other critical factors affecting a producing well or exploration and development activities. The information contained in this proxy statement and prospectus, including the information set forth under "Risk Factors," identifies additional factors that could affect our operating results and performance. We urge you to carefully consider those factors. When you consider our forward-looking statements, you should keep in mind these risk factors and the other cautionary statements in this prospectus. Our forward-looking statements speak only as of the date made, and we do not have any obligation to update these forward-looking statements. 21 THE SPECIAL MEETINGS General This proxy statement and prospectus constitutes the Management Information Circular provided to shareholders of Carpatsky in connection with the solicitation of proxies from holders of Carpatsky common and preferred shares by Carpatsky's board of directors for use at the special meeting of Carpatsky shareholders. This proxy statement and prospectus is being furnished to holders of Pease common and preferred stock in connection with the solicitation of proxies by Pease's board of directors for use at the special meeting of Pease shareholders. This proxy statement and prospectus and the accompanying forms of proxy are first being mailed to Pease and Carpatsky shareholders on or about ________ __, 2000. Matters to Be Voted on at the Pease Special Meeting The Pease special meeting will be held to consider and vote upon the following proposals: o A proposal to adopt amended and restated articles of incorporation, pursuant to which our corporate name will be changed to "Radiant Energy, Inc." o A proposal to adopt amended and restated articles of incorporation pursuant to which our authorized common stock will be increased to 150,000,000 shares and our authorized preferred stock will be increased to 200,000,000 shares. o The election of a board of five directors as follows: Term ending: ----------- o Class I: B. Dee Davis 2001 o Class II: Dr. Jack Birks and Patrick J. Duncan 2002 o Class III: J.P. Bryan and Douglas G. Manner 2003 o To transact any other business which may properly come before the special meeting or any adjournments or postponements of the special meeting. Matters to Be Voted on at the Carpatsky Special Meeting The Carpatsky special meeting will be held for the following purposes; o To consider and vote upon the following proposal under Alberta law to continue Carpatsky in the state of Delaware as a Delaware corporation: BE IT RESOLVED as a special resolution that: 1. Carpatsky Petroleum Inc. make application to be continued and domesticated into the State of Delaware, United States of America, and to be governed by the Delaware General Corporation Law, by filing with the Secretary of State of Delaware, a certificate of domestication and certificate of incorporation of Carpatsky Petroleum Inc., a Delaware Corporation pursuant to which each outstanding common share of Carpatsky Petroleum Inc., an Alberta corporation, will be converted into one share of common stock representing Carpatsky Petroleum Inc., a Delaware 22 corporation (other than shares for which holders have exercised their right to dissent with respect to this special resolution and to be paid the fair value of their shares), and each outstanding preferred share of Carpatsky Petroleum, Inc., an Alberta corporation, will be converted into one share of preferred stock representing Carpatsky Petroleum Inc., a Delaware corporation (other than shares for which holders have exercised their right to dissent with respect to this special resolution and to be paid the fair value of their shares); 2. Carpatsky Petroleum Inc. make application to the Registrar of Corporations under the Business Corporations Act (Alberta) for a Certificate of Discontinuance discontinuing the Corporation under the Business Corporations Act (Alberta); 3. the board of directors of Carpatsky Petroleum Inc. may in its discretion abandon the application for domestication under the Delaware General Corporation Law without further approval of the shareholders; and 4. any director or officer of Carpatsky Petroleum Inc. is hereby authorized to do, sign and execute, under seal or otherwise, all things, deeds and documents necessary or desirable for the due carrying out of the foregoing, the execution of such documents or doing of any such act or thing by any director or officer of Carpatsky Petroleum Inc. being conclusive evidence of such authorization. o To consider and vote upon a proposal under Delaware law to approve and adopt the merger and the merger agreement. o To transact any other business which may properly come before the special meeting or any adjournments or postponements of the special meeting. Votes Required for Approval Pease. The proposal to adopt amended and restated articles of incorporation must be approved by the holders of a majority of the outstanding shares of our common stock and our preferred stock, voting separately. Directors are elected by a plurality of the votes cast by the holders of our common stock. Holders of Pease preferred stock have advised us that they will, prior to the record date, exchange a portion of their preferred stock for approximately 2.3 million shares of common stock, representing 57% of our current outstanding common stock. These shareholders have also advised us of their intent to vote for the amendments to the articles of incorporation and election of the director nominees. In addition, our officers and directors, who together will own approximately 1.8% of our outstanding common stock after the exchange by our preferred shareholders, have advised us that they intend to vote in favor of the amendment to our articles of incorporation and the election of the director nominees. Approval of these matters is therefore assured. Carpatsky. The special resolution approving the continuance of Carpatsky as a Delaware corporation must be approved by holders of two-thirds of the Carpatsky common shares and preferred shares, voting together as a single class, represented at the meeting and voting on the special resolution. The merger must be approved by the affirmative vote of the holders of a majority of the outstanding Carpatsky common and preferred shares, voting together as a single class. Directors and executive officers of Carpatsky, who beneficially own common and preferred stock representing 64% of the votes entitled to be cast at 23 the special meeting, have agreed to vote in favor of the continuance and merger. Shares beneficially owned by our officers and directors include shares owned by Bellwether Exploration Company, which owns all of the Carpatsky preferred shares and has agreed to vote in favor of the continuance and adoption of the merger agreement if the conditions to closing the merger are satisfied. Bellwether's common and preferred shares represent approximately 58% of the votes entitled to be cast at the special meeting. Voting and Quorum at the Special Meetings The boards of directors of Pease and of Carpatsky have each fixed __________, 2000 as the record date for the determination of shareholders entitled to notice of and to vote at the special meetings of Pease and Carpatsky. Accordingly, only holders of record of Pease common and preferred stock or Carpatsky common and preferred shares on the record date will be entitled to notice of and to vote at the respective special meetings. As of the record date, there were 3,867,894 shares of Pease common stock outstanding, held by approximately 1,100 holders of record, and 80,325 shares of Pease series B preferred stock held by 8 persons. At Pease's special meeting, each record holder of common stock will be entitled to one vote per share and each record holder of preferred stock will be entitled to one vote per share. Carpatsky had 77,728,263 outstanding common shares held by approximately 150 holders of record and 95.45 million preferred shares held by Bellwether, on the record date. Each holder of record of Carpatsky common and preferred shares will be entitled to one vote per share on each proposal at Carpatsky's special meeting. The presence, in person or by properly executed proxy, of the holders of a majority of the outstanding common and preferred shares is necessary to constitute a quorum at each of the special meetings. Treatment of Abstentions and Broker Non-Votes Abstentions and broker non-votes will be counted as shares present for purposes of determining the presence or absence of a quorum at the Pease and Carpatsky special meetings. Broker non-votes are shares held by brokers or nominees that are represented at a meeting but with respect to which the broker or nominee is not empowered to vote on a particular matter. Under Nevada law, abstentions and broker non-votes are not counted as voting for or against the proposal. Abstentions and broker non-votes are not treated as voting under Alberta law. Under Delaware law, abstentions are treated as shares entitled to vote, but broker non-votes are not. Abstentions and broker non-votes will have the following effects at the special meetings: Carpatsky. The special resolution approving the continuance of Carpatsky as a Delaware corporation must be approved by holders of two-thirds of the Carpatsky common shares and preferred shares, voting together as a single class, represented at the meeting and voting on the special resolution. The merger must be approved by the affirmative vote of the holders of a majority of the outstanding Carpatsky common and preferred shares, voting together as a single class. Directors and executive officers of Carpatsky, who own common stock representing 9.8% of the votes entitled to be cast at the special meeting, have agreed to vote in favor of the continuance and merger. Bellwether Exploration o Abstentions and broker non-votes will have the same practical effect as no votes with respect to the proposal to adopt amended and restated articles of incorporation. o Abstentions and broker non-votes will have no effect on the election of directors. o For purposes of the continuance of Carpatsky into Delaware, abstentions and broker non-votes will have no effect. o At the Carpatsky special meeting, abstentions and broker non-votes will have the same practical effect as no votes with respect to the proposal to approve and adopt the merger and merger agreement. 24 Adjournment In the event that a quorum is not present at the time the Pease meeting is convened, or, if for any other reason we believe that additional time should be allowed for the solicitation of proxies, we may adjourn the Pease meeting with or without a vote of the shareholders. If we propose to adjourn the Pease meeting by a vote of the shareholders, the persons named in the enclosed form of proxy will vote all shares of Pease common stock for which they have voting authority in favor of an adjournment. If shareholders of Carpatsky approve the continuance, the Carpatsky special meeting will be adjourned until 3:00 p.m., Calgary time, on ________, 2000 so that a certificate of continuance may be filed in Alberta and Delaware. If the Pease shareholders approve all proposals at the Pease special meeting, it is anticipated that the Carpatsky special meeting will be reconvened and all other proposals will be voted on at that time. The special meeting may be adjourned to a later date if Carpatsky is unable to file the certificates required for continuance in Alberta and Delaware prior to reconvening, the Pease special meeting is adjourned or material conditions to the merger other than the filing of the required certificates in Alberta and Delaware and approval by Carpatsky shareholders have not been satisfied. Proxies - Pease The Pease proxy accompanying this proxy statement and prospectus is solicited on behalf of the Pease board of directors for use at the special meeting. You are requested to complete, date, and sign the accompanying proxy and promptly return it in the accompanying envelope to Pease's transfer agent, Computershare Trust Company, Inc. or otherwise mail it to Pease. Pease shareholders, who hold their Pease common stock in the name of a bank, broker or other nominee should follow the instructions provided by their bank, broker or nominee on voting their shares. All shares of Pease common stock entitled to vote and represented at the special meeting by a properly executed proxy received prior to or at the special meeting will be voted at the special meeting in accordance with the instructions indicated on the proxy. If no instructions are indicated, the proxy will be voted for adoption of the amended and restated articles of incorporation and for election of the five nominated directors. Pease's board of directors is not presently aware of other proposals that may be brought before the special meeting. In the event that other proposals are brought before the special meeting, the persons named in the Pease proxy will vote in accordance with what they consider to be in the best interests of Pease and its shareholders. Proxies - Carpatsky The Carpatsky proxy accompanying this proxy statement and prospectus is solicited by the management of Carpatsky for use at the special meeting. Please complete, date and sign the accompanying proxy and promptly return it in the accompanying envelope to Carpatsky's transfer agent, CIBC Mellon Trust Company. The address of CIBC Mellon Trust Company is 600 The Dome Tower, 333-7th Avenue S.W., Calgary AB T2P 2Z1. Messrs. J. P. Bryan and Robert Bensh are the persons named in the form of proxy enclosed with this proxy statement and prospectus, Mr. Bryan is the Chairman of the board of directors of Carpatsky and Mr. Bensh is the Chief Operating Officer of Carpatsky. If appointed proxy, Messrs. Bryan and Bensh will vote the shares or withhold from voting the shares as specified in the Carpatsky proxy. Carpatsky shares represented by a properly executed proxy will be voted in favor of approval of each matter for which no specification has been given. The form of proxy enclosed with this proxy statement and prospectus confers discretionary authority upon the persons appointed proxy to vote on amendments or variations to matters identified in this proxy statement and prospectus, and on other matters which may properly come before the meeting. At the date hereof, management of Carpatsky knows of no such amendment, variation or other matter which may come before the special meeting. 25 Under Alberta law, Carpatsky shareholders have the right to appoint some other person, who does not need to be a shareholder of Carpatsky, to represent him at the special meeting. To exercise that right, a shareholder may either insert the name of the desired representative in the blank space provided in the form of proxy enclosed with this proxy statement and prospectus or submit another form of proxy appointing the desired representative. Proxies will not be valid unless received by CIBC Mellon Trust Company before 4:00 p.m. (Calgary time) on _____________. The Carpatsky proxy must be in writing and must be signed by the Carpatsky shareholder or his attorney that has been authorized in writing. If the Carpatsky shareholder is a corporation, the proxy must be signed under its corporate seal by a duly authorized officer or by an attorney of the corporation that has been authorized in writing. Procedures for Revocation of Proxies Carpatsky and Pease shareholders may revoke proxies by: o delivering a written notice to the corporate secretary stating that the proxy is revoked; o submitting a proxy with a later date; o attending the special meeting and voting in person. In addition, prior to the vote on the continuance, Carpatsky shareholders may revoke a proxy by delivering a notice of revocation signed in the same manner as required for proxies to Carpatsky's registered office or CIBC Mellon Trust Company on or before the last business day preceding the date of the special meeting or any adjournment. Such revocation may be delivered to the chairman of the meeting on the day of the meeting. If you attend the meeting and do not vote, you will not automatically revoke a proxy given previously. Any revocation during the meeting will not affect votes previously taken. Shareholders who hold their common or preferred stock in the name of a bank, broker or other nominee should follow the instructions provided by their bank, broker or nominee to revoke a proxy. Pease Dissenters' Rights Holders of Pease common or preferred stock do not have a right to dissent to the merger and receive compensation for their shares. Carpatsky Dissenters' Rights Carpatsky shareholders have the right to dissent to the continuance under Alberta, Canada law and the right to dissent to the merger under Delaware law. The Continuance A holder of Carpatsky common and preferred shares is entitled to dissent and be paid the fair value of such shares if the continuance of Carpatsky as a Delaware corporation is completed and such shareholder provides Carpatsky with written objection to the continuance at or before the special meeting, does not vote in favor of the continuance and otherwise complies with the procedure set out in section 184 of the Business Corporations Act (Alberta). A written objection must be in addition to and separate from any proxy or vote against the merger. Section 184 requires adherence to procedures and failure to do so may result in the loss of all rights to dissent. Accordingly, each holder of Carpatsky common and preferred shares who might desire to exercise the right of dissent and appraisal should carefully consider and comply with the provisions of that section, the full text of which is set out in Appendix C. 26 The Merger Shareholders of Carpatsky objecting to the merger have appraisal rights. Each shareholder electing to demand appraisal of his shares is required to deliver to Carpatsky, before the taking of the vote on the merger, a written demand for appraisal. A demand for appraisal must identify the shareholder and state that the shareholder intends to demand appraisal. A demand must be in addition to and separate from any proxy or vote against the merger. Within ten days after the effective date of the merger, Carpatsky will notify each shareholder who has demanded appraisal and has not voted for or consented to the merger of the date that the merger has become effective. Within 120 days after the effective date of the merger, Carpatsky or any shareholder who is entitled to appraisal rights may file a petition in the Court of Chancery demanding a determination of the value of the shares of all shareholders with appraisal rights. If a petition is not filed with the Court of Chancery within 120 days after the effective date of the merger, the right to an appraisal terminates. At any time within 60 days after the effective date of the merger, any shareholder shall have the right to withdraw his demand for appraisal and to accept the terms offered under the merger. A copy of the sections of Delaware law which discuss the rights of shareholders to dissent from the transaction are attached as Appendix D. Because of the complexities of these provisions of Alberta and Delaware law, Carpatsky shareholders who are considering pursuing dissenters' rights may wish to consult legal counsel. The foregoing discussion of such provisions should not be deemed to constitute legal advice and is qualified in its entirety by reference to such provisions attached as Appendices C and D to this proxy statement and prospectus. Expenses of Solicitation Pease and Carpatsky will share the cost of solicitation of proxies from our shareholders, estimated to be $350,000. In addition to solicitation by mail, our directors, officers, and employees may solicit proxies from shareholders by telephone, facsimile, or in person, following the original mailing of the proxies and other soliciting materials. We will also make arrangements with custodians, nominees, and fiduciaries for forwarding of proxy solicitation materials to beneficial owners of shares held of record by them, and we will reimburse those holders for their reasonable expenses. Shareholders' Proposals For Pease's 2001 Annual Meeting Proposals of our shareholders that are intended to be presented at the 2001 annual meeting of shareholders must be received by our secretary no later than , 2001. If the date of the 2001 annual meeting is changed by more than 30 days from the date of the meeting described by this proxy statement and prospectus, the deadline for submitting proposals is a reasonable time before we begin to print and mail proxy materials for our 2001 annual meeting. The persons named in our form of proxy for our 2001 annual meeting will have discretionary authority to vote any proxies they hold at such meeting on any matter for which we do not receive notice by , 2001. If the date of our 2001 annual meeting is changed by more than 30days from the date of the meeting described by this proxy statement and prospectus, such persons will be able to exercise discretionary authority if notice of the matter has not been received in a reasonable time before we mail our proxy materials for the 2001 annual meeting. If the date of the 2001 annual meeting of shareholders is advanced or delayed by more than 30 calender days from the date of the meeting described by this proxy statement and prospectus, we will, in a timely manner, inform shareholders of such change by including a notice under Item 5, in our earliest possible quarterly report on Form 10-Q. The notice will include the new deadline for submitting proposals to be included in our proxy statement and the new date for determining whether we may exercise discretionary voting authority because we have not received timely notice of a matter. In order to avoid controversy as to the date on which any such proposal is received by us, it is suggested that shareholders submit their proposals by certified mail, return receipt requested, or other means that permit them to prove the date of delivery. 27 THE CONTINUANCE AND MERGER Background of the Merger On March 18, 1998 one of Pease's directors, Steve A. Antry, wrote a letter to the then-President of Pease, Willard H. Pease, Jr., and Patrick J. Duncan, then Secretary and CFO, suggesting ways to improve the financial position of Pease. This followed 18 months of low oil prices, a disappointing drilling program resulting in 10 dry holes and a private placement of nonvoting series B preferred stock which became hyper-dilutive to the common stock, all of which resulted in declining trading prices for Pease common stock. One of the suggestions was to consider a merger. On March 24, 1998 Steve A. Antry, Stephen L. Fischer and R. Thomas Fetters, Jr., all directors of Pease, sent a second letter to the board with a list of suggestions for the board to consider to strengthen Pease and reinforce shareholder confidence. One of their key points was that the board should discuss entertaining a possible merger or sale of Pease. At a meeting held on July 10, 1998 in Salt Lake City, Utah, the directors voted to restructure Pease's management and formed an Executive Committee to assist in the day-to-day management of Pease. William F. Warnick was elected Chairman of the board of directors to replace Willard H. Pease, Jr., who retained his position as President. Subsequently, Mr. Antry wrote to Mr. Warnick on August 10, 1998 requesting that the Executive Committee discuss a possible merger of Pease at their next meeting. On August 12, 1998 Pease received an unsolicited preliminary proposal to merge from Texoil, Inc., a small public oil and gas company. Chairman Warnick met with Kenneth Etheredge of San Jacinto Securities of Dallas, Texas on August 13, 1998 to discuss the company's financing efforts and the possibility of merging Pease. Etheredge proposed that San Jacinto Securities be engaged as the exclusive investment banker to pursue possible merger candidates for Pease. On August 24, 1998 the directors met in Phoenix, Arizona and determined that it may be in the interest of the shareholders to merge with another company to give Pease shareholders a greater opportunity for increased value. That decision was based upon assessment of Pease's limited base of oil and gas reserves and lack of access to the capital required to undertake substantial additional exploration and development activities. To advance its plan, the board retained the services of San Jacinto Securities to search for appropriate merger candidates and to assist the board in evaluating those candidates to determine which would offer Pease the greatest potential for increasing its reserve base and growth opportunities. Mr. Warnick next met on August 27, 1998 with a Denver law firm retained to advise Pease to discuss, among other things, the possibility of merging and the terms for San Jacinto Securities to act as investment banker for such a transaction. Mr. Warnick also met during the period with the CFO of Benz Oil Company who wished to discuss a possible transaction focused on buying out the outstanding nonvoting series B preferred stock, converting it to common stock at a predetermined price and holding Pease as a separate entity. Warnick advised the board that he did not feel that this transaction was in the best interests of Pease. An Executive Committee meeting was held on August 31, 1998 to discuss merger possibilities, details of the engagement of San Jacinto Securities to initiate a merger and pursuing a third party "white knight" to assist Pease in financing and restructuring its capital, particularly the outstanding nonvoting series B preferred stock. 28 The board of directors met again on October 22, 1998 in Phoenix, Arizona and was informed by the investment banker that indications of interest had been expressed and that confidentiality agreements had been submitted to a number of inquiring candidates. Many recipients had objected to the proposed amount of liquidated damages for breach and the nondisclosure terms requested in the confidentiality agreements. The board approved modifying the agreement. The board also elected Patrick J. Duncan as interim President of Pease. Willard H. Pease, Jr., Pease's former president, remained as a director and employee. The board had a telephone conference meeting on November 16, 1998 to update the directors on the status of the merger selection process. They were informed that meetings had been scheduled by then director F. Allan Wise and representatives of San Jacinto Securities for the following week with several interested companies in Texas. At this meeting the board voted to accept the resignation of Mr. Pease as an employee of Pease. On November 19, 1998 Cheniere Energy, Inc., a small public oil and gas company, submitted a proposal to merge the two companies which was not accepted. The board met on November 30, 1998 by telephone conference call and Mr. Wise reviewed the meetings he had attended with several candidates in Texas. The directors were advised that Pease, through the Executive Committee of the board, intended to continue discussions with Fortune Natural Resources Corporation, Browning Oil Company, Inc., Goodrich Petroleum, Inc., North Coast Energy, Inc. and other similar companies regarding a potential merger with Pease. During December 1998 Pease received unsolicited proposals from MJM Oil & Gas, Inc., Fortune Natural Resources Corporation and Aviva Petroleum, Inc. On December 21, 1998 an Executive Committee meeting was held and the committee determined that none of the proposals which had been received were in the best interests of Pease and its shareholders. The board of directors met in Phoenix, Arizona on January 11, 1998 and received a detailed report from San Jacinto Securities. Thirty-eight confidentiality agreements had been mailed to prospective companies who had indicated a potential interest in acquiring or merging with Pease. Twenty-one companies signed confidentiality agreements and were sent information memos and oil and gas reserve reports. Directors Wise and Fetters and Bruce Lazier from San Jacinto Securities had met with Texoil, Inc., Xplor Energy, Inc., Centas Technical Services and Edge Petroleum Corp. Messrs. Wise and Fetters and Kenneth Etheredge of San Jacinto Securities also had met with Venus Exploration. San Jacinto Securities had additional meetings with Benz Oil & Gas, Fortune Natural Resources, Aviva Petroleum, Fieldpoint Petroleum, Sandefer Oil and Gas, Bellwether Exploration Company, Cheniere Energy, MJM Oil and Gas and Southern Minerals Corp. According to Etheredge's records, five companies had made written proposals: Cheniere Energy, MJM Oil and Gas, PetroQuest Energy Inc., Fortune Natural Resources Corp. and Venus Exploration, Inc. Centas Technical Services had expressed an interest in providing management services for Pease if Pease continued to operate and Aviva Petroleum had expressed interest in an acquisition but had not made a written proposal. Mr. Etheredge advised the board that Pease should meet with Venus Exploration and MJM Oil and Gas Company, the two companies who had proposed the best offers, and attempt to structure an acceptable transaction. He further advised that the board should seek input and guidance from Robert V. Sinnott of Kayne Anderson Investment Management, representing a majority of the 10 holders of the series B preferred stock, to determine whether the holders would be likely to agree to restructure the preferred stock in connection with an acceptable offer. In November 1998 Mr. Fetters, then a director of Pease, advised David A. Melman, a former business associate of Fetters and a consultant to Carpatsky, that the Pease directors had determined to seek a merger as its primary corporate objective. He informed Melman that Pease had retained San Jacinto Securities to assist in locating an appropriate candidate and to negotiate a transaction. Mr. Fetters described the Pease corporate structure and its producing properties to Melman who then approached Fred Hofheinz and Leslie C. 29 Texas, both then directors of Carpatsky, with this information. They agreed that Pease appeared to satisfy Carpatsky's objectives. Later in November, Mr. Melman contacted Mr. Etheredge of San Jacinto Securities and discussed the potential for a merger of the companies. Mr. Etheredge then informed the Pease board of Carpatsky's interest and San Jacinto Securities delivered a confidentiality agreement to Carpatsky which was signed by Mr. Hofheinz and returned to Pease. Later that month, Pease forwarded copies of Pease's publicly filed annual and quarterly reports, as well as oil and gas reserve reports, cash flow projections and a description of Pease's properties and potential. After evaluating Pease, Carpatsky, by letter to Mr. Etheredge dated February 15, 1999, proposed the basis of a merger, subject to satisfactory due diligence and other conditions. On February 17, 1999, Carpatsky delivered to Pease an oil and gas volumetric evaluation for Carpatsky as of June 30, 1997, and other information. On March 3, 1999, Messrs. Duncan and Fetters met with Messrs. Texas, Hofheinz and Melman in Houston, Texas to further refine Carpatsky's initial proposal and discuss Carpatsky's operations and corporate objectives. On March 11, 1999, Carpatsky responded by memorandum to questions raised during the meeting held the previous week. On March 19, 1999, Messrs. Texas and Melman, met in Newport Beach, California with Steve Antry and in Century City, California with Mr. Sinnott. Discussion at both meetings centered on Carpatsky's ability to produce, sell and receive payment for its gas reserves in Ukraine. These meetings were followed by delivery of a Carpatsky memorandum to Pease proposing procedures for asset valuation of both companies. At a March 29, 1999 board of directors meeting held by telephone conference call, Patrick J. Duncan explained that he had met with several potential merger candidates during the first week of February 1999, including Carpatsky, Venus Exploration, Texoil, Fortune Natural Resources and Moose Exploration. On March 9, 1999, Pease received an offer to purchase Pease from Pan Western Energy Corporation. On the date of the meeting, the Executive Committee of the board and Mr. Etheredge were still evaluating the candidates and awaiting written proposals from them. A revised verbal offer was received on April 13, 1999 from Texoil, Inc. Mr. Duncan faxed a counterproposal to Texoil, Inc. that was declined. On April 15, 1999 Pease suggested that Carpatsky address the Pease directors at a meeting to be held in Beverly Hills, California. Messrs. Hofheinz and Melman represented Carpatsky at the meeting which was held on April 26. They described Carpatsky's properties and objectives and responded to questions raised by the directors, legal counsel and Mr. Etheredge. Subsequent to the meeting, representatives of Pease requested that Carpatsky engage a petroleum engineering firm to produce a current valuation of its reserves as of December 31, 1998. By letters dated April 29 and May 5, Carpatsky responded to the Pease requests, advising that Carpatsky had retained Ryder Scott Company, L.P., independent petroleum consultants, to undertake a study of Carpatsky's oil and gas reserves in Ukraine and the discounted present value of those reserves. Ryder Scott was also engaged to estimate the capital required to develop the fields and product pricing. On May 12, a committee of the Pease board of directors consisting of Messrs. Osborne, Walker, Warnick and Duncan met with representatives of Carpatsky and with B. Dee Davis and Roland Sledge of Torch Energy Advisors in Houston, Texas, a major creditor of Carpatsky, to assess the Torch commitment to Carpatsky and its assessment of the political and economic climate of Ukraine. At the April 26, 1999 meeting of directors, potential merger candidates suggested by San Jacinto Securities also made presentations. Representatives of EnCap Investments L.C., Alliance Resources Plc., Virgin Oil Company, Inc. and Pecos Operating Co. described proposals to acquire Pease. The board agreed to review and further discuss these proposals. 30 Virgin Oil submitted a definitive proposal to merge with Pease on May 5, 1999. On May 20, 1999, Virgin Oil withdrew its May 5, 1999 offer and submitted a revised offer. Pease also received a proposed letter of intent on May 20, 1999 from Carpatsky. At a directors meeting held on that date in Dallas, Texas, the Pease directors reviewed the proposals from Virgin Oil and Carpatsky. During the course of the meeting, a telephone discussion was held with Mr. Sinnott to inform him of the latest offers. Mr. Sinnott advised the board that while the board should determine the proposal most beneficial to Pease, the holders of the series B preferred stock would be unlikely to approve the transaction proposed by Virgin Oil. The Virgin Oil offer was subsequently withdrawn. On May 20, the boards of directors of Pease and Carpatsky approved a letter of intent regarding the merger which was signed by Mr. Warnick, the Chairman of Pease, and Mr. Hofheinz, the Chairman of Carpatsky. The directors of Pease met by telephone conference call on June 30, 1999 to be updated on the status of the due diligence process, which was to include a fact finding trip to Ukraine by Mr. Duncan and several consultants, and to review a draft of the merger agreement. On July 9, a Pease contingent including Patrick Duncan and Ms. Karen Ostrander-Krug, an attorney and petroleum engineer with extensive experience in Eastern European oil and gas ventures, joined Messrs. Texas and Melman of Carpatsky and James Doran of Hein + Associates LLP, a Denver, Colorado based accounting firm, to review Carpatsky's assets and operations in Ukraine and to conduct further due diligence. During the fact finding mission, which ended on July 15, the group was joined from time to time by additional individuals to issue reports on Carpatsky's title to its properties and to estimate revenue to be generated therefrom. Also joining the group were Alexey Kolkov, a partner in a Kyiv-based law firm, and several members of Carpatsky's Kyiv staff. The group traveled to both oil and gas fields in which Carpatsky has interests and met with local management. The group also met in Kyiv with oil and gas industry officials and others from governmental agencies. Upon returning to the U.S., Ms. Ostrander-Krug prepared a written report which was submitted to the Pease directors along with a report of Mr. Wise, who had been retained as a petroleum engineer to independently evaluate Carpatsky's reserves and review the assumptions and calculations that supported the Ryder Scott reserve report prepared for Carpatsky. On July 27-29, Mr. Melman and counsel for Carpatsky conducted a due diligence review of Pease at its offices in Grand Junction, Colorado. The share exchange ratio originally described in the letter of intent that had been previously established was slightly modified to take into account the opinions of Pease's consultants. On September 1, 1999, the boards of directors of both companies held meetings during which the definitive merger agreement was approved. Counterpart documents were signed that same day. Bellwether Transaction In December 1997, Torch Energy Advisors Incorporated loaned $500,000 to Carpatsky. The loan was convertible into common shares of Carpatsky at a conversion rate of $0.20 per share. During 1998, Torch loaned an additional $700,000 to Carpatsky and Bellwether agreed to guarantee the first loan of $500,000. The guarantee by Bellwether was negotiated during the summer of 1998 when Bellwether and Carpatsky had extensive negotiations regarding Bellwether acquiring either a significant equity interest or the entire equity interest in Carpatsky. At that time, Bellwether declined to pursue the transaction because of uncertainties regarding the investment environment in Ukraine. In September 1999, at the request of Carpatsky in connection with the Pease merger, Torch transferred the $500,000 note to Bellwether and both Torch and Bellwether converted their loans into an aggregate of 11,130,944 common shares of Carpatsky. In connection with this conversion, Torch and Bellwether received warrants to purchase 1,407,808 and 967,296 Carpatsky common shares for $0.20 per share. The warrants expire on December 31, 2000. 31 In November 1999, Mr. Texas, the President of Carpatsky at the time, informed Mr. Davis of Torch that Carpatsky required additional financing to satisfy its obligations under the joint activity agreement for the RC field and to continue development of the field. Mr. Davis was advised that without an additional infusion of cash, Carpatsky could forfeit a portion of its interest under the joint activity account covering the RC field in Ukraine. Although the joint activity agreement could be read to provide for a reinstatement of the interest if the amounts owed were ultimately paid, the ability to enforce the reinstatement provision was uncertain. After reviewing the status of Carpatsky's operations in Ukraine and negotiations with Carpatsky's management, Bellwether agreed to acquire 95.45 million Carpatsky preferred shares and warrants to purchase 12.5 million common shares. The preferred shares are convertible into 50 million common shares of Carpatsky. For a description of the terms of the preferred shares, see "Description of Capital Stock--Class A Preferred Stock." The Carpatsky preferred shares will be converted into our preferred stock in the merger. Following the merger, Bellwether will control us. In connection with the Bellwether financing and with the approval of the Canadian Venture Exchange, Mr. Melman, Carpatsky's Chief Corporate Officer, was issued 2,000,000 common shares of Carpatsky which previously had been contingent upon the completion of the Pease merger. These shares were valued at $200,000 for financial reporting purposes. Reasons for the Merger Carpatsky's Reasons for the Merger Carpatsky's board of directors considered a number of factors in unanimously approving the continuance and merger, including the following: Additional Cash Flow and Proceeds of Asset Sales. Carpatsky will require additional capital to finance its drilling programs in Ukraine. The oil and gas properties owned by Pease provide additional cash flow to finance these operations. In addition, the Pease properties are located in active producing areas in the United States, and Carpatsky believes that there will be a ready market for the sale of these properties, should we decide to sell these properties to finance our operations in the Ukraine following the merger. Cost Savings. The combined entity will be able to reduce its general and administrative overhead expenses by an estimated $1.0 million per year. U.S. Domicile. Carpatsky's principal executive offices have been located in the United States since [ ]. The board of directors believes that changing the domicile of incorporation of Carpatsky to the United States will provide better access to the larger U.S. capital markets. In addition, under Alberta law, at least half of Carpatsky's directors must be Canadian residents, while Nevada law places no restriction on the residency of directors. This residency requirement does not reflect the current majority ownership of Carpatsky's stockholders. Recommendation to Shareholders. Carpatsky's board of directors has unanimously approved continuing the corporation in Delaware, the merger agreement and the merger, and recommends that Carpatsky shareholders vote to adopt and approve the continuation, the merger agreement and the merger. Pease's Reasons for the Merger As described above, our directors considered a number of alternatives in the search for a merger candidate. The directors recognized that we only have three principal producing properties, we do not control the operations of any of these properties and there is only a limited opportunity to significantly increase shareholder value from the existing asset base. In addition, our limited liquid resources and ability to raise additional capital made it unlikely that we would be able to acquire new properties or participate in new opportunities. As a result of the merger, our shareholders will have an 32 opportunity to participate in Carpatsky's rights to explore and develop oil and gas reserves in Ukraine, an area where there is the potential for the development of significant natural gas reserves. Further, the increased size of the combined entity is expected to simplify future financings of our various properties, both within the United States and in Ukraine, while reducing overhead expenses as a result of combining our offices with those of Carpatsky in Houston that are nearer to our producing properties. Recommendation to Shareholders. Pease's board of directors has unanimously approved the merger agreement, the merger and the amendments to our articles of incorporation, and recommends that each Pease shareholder vote to adopt our restated articles of incorporation. Opinion of Financial Advisor Pease retained Houlihan Smith & Company, Inc. as a financial advisor and to render an independent opinion to the board of directors of Pease in connection with the merger. The merger consideration resulted from the negotiations between Pease and Carpatsky and was not initially determined by Houlihan. On January 7, 2000, Houlihan gave its written opinion to the Pease board of directors that the merger is fair, from a financial point of view, to the shareholders of Pease. Houlihan updated its January 7, 2000 opinion in its written opinion to Pease's board on June 27, 2000. The full text of Houlihan's opinion, dated June 27, 2000, is attached as Appendix B. The opinion contains a description of the matters considered by Houlihan and the limits of its review. Pease shareholders are encouraged to read the opinion carefully and in its entirety. Houlihan's opinion was provided to the Pease board for its information and only addresses the fairness, from a financial point of view, of the exchange ratio to Pease's shareholders. The Houlihan opinion does not address the merits of the underlying decision by Pease to engage in the merger and does not constitute a recommendation to any holder of Pease common stock as to how that holder should vote. Houlihan expressed no opinion as to the price at which Pease common stock will actually trade at any time. Houlihan also expressed no opinion as to the income tax consequences of the merger. Houlihan's opinion was among many factors taken into consideration by Pease's board in making its determination to approve the merger and recommend the stock issuance and merger as contemplated in the merger agreement. This summary of Houlihan's opinion is qualified in its entirety by references to the full text of the opinion that is included in this document with Houlihan's consent. In connection with rendering its opinion, Houlihan, among other things: o Reviewed the financial terms of the transaction as provided in the merger agreement, as amended. o Reviewed the Pease and Carpatsky disclosure schedules to the merger agreement. o Reviewed the financial terms of the securities purchase agreement between Carpatsky and Bellwether. o Reviewed the SEC filings of Pease, including the most recent annual and quarterly reports, and the current reports announcing the planned merger. o Reviewed financial statements of Pease and Carpatsky audited by Hein + Associates. o Reviewed internal financial and capitalization schedules describing the operations of Pease prepared by Pease management. 33 o Reviewed reserve reports prepared by Netherland, Sewell & Associates, Inc. for Pease's oil and gas reserves as of January 1, 2000 and 1999. Additionally, Houlihan was provided with a pricing sensitivity analysis prepared by Netherland, Sewell & Associates, Inc. dated March 18, 1999. o Reviewed reserve reports prepared by Ryder Scott Company, L.P. for certain leasehold interests of Carpatsky as of December 31, 1999, 1998 and 1997 and June 30, 1999. These reports represent the full contractual interest reserves as well as the paid-in interest reserves. Houlihan also reviewed various reserve sensitivity analyses prepared by Ryder Scott. o Reviewed a report of Wise & Treece Petroleum Management, Inc. dated August 23, 1999 which reviews the Ryder Scott reserve report and calculates an estimated engineered value of the reserves in the Carpatsky interest in the RC field based upon the Ryder Scott data and other assumptions provided by Wise & Treece and Pease management. o Reviewed other due diligence documents and letters, including document summaries, due diligence memos and opinions from Pease management and Ostrander-Krug & Sobel, LLC. o Reviewed several other proposals for mergers, acquisitions or proposed financings as well as various memos from advisors to Pease evaluating several of these offers. o Reviewed the exchange agreement with Pease's series B preferred shareholders agreeing to convert all of the preferred stock to common stock. o Reviewed the resolutions of Pease's board of directors and the amended and restated articles of incorporation proposed to facilitate the merger. o Analyzed the historical trading prices and volumes of Pease common stock quoted on the NASDAQ Small Cap Market and OTC Bulletin Board and Carpatsky common shares quoted on the Canadian Venture Exchange. o Analyzed the risk adjusted valuation of Pease's assets and the various assets of Carpatsky and the share exchange ratio calculation that determined the number of shares of Pease common stock to be issued in the merger. o Compared Pease and Carpatsky from a financial point of view with certain other companies in the oil and gas exploration and production industry that were deemed to be relevant. Houlihan focused on general financial ratios as well as equity and asset valuation ratios. o Conducted such other studies, analyses, inquiries and investigations as Houlihan deemed appropriate. In arriving at its opinion, Houlihan considered such factors as it deemed relevant including, but not limited to: o the reserve and engineering values as calculated by Pease's advisors; o revised reserves booked for accounting purposes in response to SEC comments; o the allocation between preferred and common shareholders of Pease as negotiated by Pease and documented in the exchange agreement with Pease's series B preferred shareholders; 34 o the historical cash flows of Pease and Carpatsky; o the conditions of closing of the merger; o the risks associated with the merger; o the upside potential of the merger, as described in the due diligence conducted by Pease's management; and o other due diligence findings of Pease related to the merger. Houlihan relied upon and assumed, without independent verification, the accuracy, completeness and fairness of the financial and other information provided to Houlihan. Houlihan relied upon the assurances of Pease management that they are unaware of any facts that would make the information provided to Houlihan to be incomplete or misleading for the purposes of Houlihan's opinion. Houlihan has not assumed responsibility for any independent verification of this information or undertaken any obligation to verify this information. The management of Pease and Carpatsky informed Houlihan that the forecasts and reserve reports provided represent their best current judgment, at the date of the opinion, as to the future financial performance of Pease and Carpatsky, each on a stand-alone basis. Houlihan assumed reserve reports had been reasonably prepared based on the current judgment of Pease's and Carpatsky's management. Houlihan assumed no responsibility for and expressed no view as to the forecasts and reserves or the assumptions on which they were based. Houlihan did not perform an independent evaluation or appraisal of the assets of either Pease or Carpatsky. Houlihan's opinion is necessarily based on the economic, market, financial and other conditions existing on, and the information made available to Houlihan as of, the date of its opinion letter. Houlihan has disclaimed any obligation to advise the board of directors of Pease or any person of any change in any fact or matter affecting the opinion, which may come or be brought to Houlihan's attention after the date of the opinion. The following is a summary of the principal financial analyses performed by Houlihan in connection with providing its written opinion on January 7, 2000 as updated by its opinion on June 27, 2000. Relative Reserve Value Analysis Houlihan prepared an analysis of the relative enterprise and equity value of both Pease and Carpatsky by adjusting the discounted present value of future net cash flows, or PV10 value, of the estimated proved reserves of each company to an estimate of what a buyer may pay in a typical acquisition transaction. For Carpatsky, Houlihan considered the paid in interest case, which assumes that Carpatsky's net revenue interest in the RC field is 20%, and the full contractual interest case, which assumes that Carpatsky's net revenue interest in the RC field is 45%. Houlihan utilized the PV10 value calculated using the SEC's rules for Pease, but not for Carpatsky, because of the likelihood that Carpatsky's reserves will continue to be economically viable for Carpatsky for longer than the current concession that terminates in March 2003. The PV10 value of each company was then multiplied by an adjustment factor estimated using Houlihan's business judgment and a consultation of the 1999 Survey of Economic Parameters Used in Property Evaluation prepared by the Society of Petroleum Evaluation Engineers. This developed an acquisition value for both Pease and Carpatsky. An acquiror would likely use a discount rate higher than 10%. This analysis is only intended to determine relative values, not an estimate of fair market value. The debt of each company was then subtracted from the respective enterprise values to determine a relative equity value. These equity values were then used to calculate a total equity value post merger, and the respective percentage of the total equity value allocated to the shareholders of Pease and Carpatsky. The percentage of equity value was compared to the ownership percentage implied by the merger. The following tables illustrate this analysis. 35
Pease Carpatsky ------------------------------ ------------------------------------------------------------- Full Contractual Paid In Interest Case Interest Case ($ in 000s) ($ in 000s) ($ in 000s) ------------------------------ ------------------------------------ --------------------- PV10 Adjustment Discounted PV10 Adjustment Discounted PV10 Adjustment Discounted ---- ---------- ---------- ---- ---------- ---------- ---- ---------- ---------- Proved Producing ................. $ 2,194 100% $ 2,194 $ 7,105 100% $ 7,105 11,831 100% $ 11,831 Behind Pipe ............... 2,844 75% 2,133 1,305 75% 979 1,798 75% 1,349 Undeveloped ............... 1,231 55% 677 20,350 55% 11,193 43,294 55% 23,812 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Proved .............. 6,270 5,005 28,761 19,277 56,923 36,992 Probable Producing ................. 3,644 23% 820 457 25% 114 1,043 25% 261 Behind Pipe ............... 0 0% 0 2,589 25% 647 3,253 25% 813 Undeveloped ............... 0 0% 0 25,885 20% 5,177 57,702 20% 11,540 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Probable ............ 3,644 820 28,474 5,824 60,955 12,354 Total Reserves ............... 9,914 5,824 57,236 25,101 117,879 49,345 ======= ======= ======= ======= ======= ======= Less Debt .................... 2,566 663 663 ------- ------- ------- Equity Value ................. 3,258 24,438 48,682 ======= ======= =======
Relative Value Analysis Based on Adjusted PV10 Values Full Contractual Paid In Interest Case Interest Case --------------------- ---------------- Carpatsky Equity Value ........... 24,438 48,682 Pease Equity Value ............... 3,258 3,258 Total Equity Value ............... 27,697 51,941 Pease Equity Percentage .......... 11.8% 6.3% Carpatsky Equity Percentage ...... 88.2% 93.7% Relative Publicly Traded Stock Valuation Analysis Houlihan calculated the market value of the publicly traded stock outstanding, assuming that all preferred stock was converted to common stock. The last closing share price of Carpatsky was from January 21, 2000 of $.17 per share. Because of the long time period Carpatsky shares have not been trading, Houlihan performed a second calculation using a weighted average share price from the trading period under review of $.126 per share. The price for Pease was the closing price as of June 27, 2000 of $.1875 per share. The market value of each company was then added to calculate the pro forma market value post merger. The relative percentages of market value for both Pease and Carpatsky were calculated and compared to the ownership percentage implied by the Merger.
Shares Price Per Outstanding Share Value Percentage ----------- --------- ----- ---------- Carpatsky common shareholders.................. 77,728,263 $0.1260 $ 9,793,761 Carpatsky preferred shareholders............... 50,000,000 $0.1260 6,300,000 ----------- Total Equity Value........................ $ 16,093,761 89.0% Pease common shareholders...................... 1,731,398 $0.1875 $ 324,637 Pease preferred shareholders................... 8,865,665 $0.1875 1,662,312 ----------- Total Equity Value........................ $ 1,986,949 11.0% Total Combined Equity Value........... $ 18,080,710 100.0%
36 Each of the analyses conducted by Houlihan was carried out to provide a different perspective on the merger, and to enhance the total mix of information. Houlihan did not form a conclusion as to whether any individual analysis, considered in isolation, supported or failed to support an opinion as to the fairness, from a financial point of view, of the merger to the Pease shareholders. Houlihan did not place any specific reliance or weight on any individual analysis but instead concluded that its analyses, taken as a whole, supported its determination. Accordingly, Houlihan believes that its analyses must be considered as a whole and that selecting portions of its analyses or the factors it considered, without considering all analyses and factors collectively, could create an incomplete view of the process underlying the analyses performed by Houlihan in connection with the preparation of its opinion. Houlihan, a member of the National Association of Securities Dealers, as part of its investment banking services, is regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Houlihan was selected by Pease on the basis of this experience. Houlihan received a non- contingent fee of $32,500 plus reimbursement for all reasonable out-of-pocket expenses from Pease relating to its services in providing the opinion. In addition, Pease has agreed to indemnify, defend and hold Houlihan harmless if Houlihan becomes involved in any way in any legal or administrative proceeding related to the services Houlihan provided in rendering the opinion. Carpatsky neither solicited nor obtained a third party opinion on the fairness of the merger to the Carpatsky shareholders, from a financial point of view, relying instead on the business judgment of the board of directors. Federal Income Tax Considerations in the United States Consequences of the Continuance and Merger to Carpatsky Shareholders The following discussion summarizes the material United States federal income tax considerations relevant to the exchange of Carpatsky common and preferred shares for common and preferred stock of the Delaware corporation created in the continuance and the subsequent exchange of that common and preferred stock for Pease common and preferred stock in the merger. This discussion is based on currently existing provisions of the Internal Revenue Code of 1986, existing and proposed Treasury Regulations under the IRC, and current administrative rulings and court decisions, all of which are subject to change. Any change in the IRC and Treasury Regulations, which may or may not be retroactive, could alter the tax consequences to Pease, Carpatsky, or Carpatsky's shareholders as described in this discussion. Carpatsky shareholders should be aware that this discussion does not deal with all United States federal income tax considerations that may be relevant to particular Carpatsky shareholders in light of their particular circumstances, like shareholders who own 10% or more of the voting power of all classes of Carpatsky stock, who are not U.S. citizens, residents or domestic entities, who are dealers in securities, who are subject to the alternative minimum tax provisions of the IRC,, who do not hold their Carpatsky stock as capital assets or who acquired their shares in connection with stock option or stock purchase plans or in other compensatory transactions. In addition, the following discussion does not address the tax consequences of the continuance or the merger under foreign, state, or local tax laws. Nor does the following discussion address the tax consequences of transactions effectuated prior or subsequent to, or concurrently with, the merger. This is so whether or not any of those transactions are undertaken in connection with the merger, including without limitation any transaction in which shares of Carpatsky common or preferred stock are acquired or in which shares of Radiant Energy common or preferred stock are disposed after the merger. Accordingly, Carpatsky shareholders are urged to consult their own tax advisors as to the specific tax consequences to them of the continuance and the merger, including the applicable federal, state, local, and foreign tax consequences. 37 With some exceptions, transactions that constitute reorganizations do not require any of the participating corporations or their shareholders to pay any federal income taxes. Reorganizations involving foreign corporations, such as Carpatsky, sometimes fall within these exceptions and require certain shareholders to include an amount in income or recognize gain on the transaction. Both the continuance and the merger are intended to constitute reorganizations. If the continuance and the merger qualify as reorganizations, then, subject to the limitations and qualifications referred to in this discussion, they will generally result in the following federal income tax consequences: o No amount will be included in income, and no gain or loss will be recognized by, any Carpatsky shareholder who owns less than 10% of the voting power of all classes of shares of Carpatsky and whose shares of Carpatsky have a fair market value of less than $50,000 on the date of the continuance. The aggregate tax basis of such shareholder's Carpatsky shares will be unchanged, and the holding period applicable to such shareholder's Carpatsky shares will include the period for which such shares were held prior to the continuance. o Each Carpatsky shareholder who owns less than 10% of the voting power of all classes of shares of Carpatsky but whose shares of Carpatsky have a fair market value of $50,000 or more on the date of the continuance will recognize gain to the extent the fair market value of such shares exceeds the aggregate tax basis of such shares, but will not recognize any loss. Rather than recognize gain, the Carpatsky shareholder may elect to include in income all the earnings and profits attributable to such shareholder's shares in Carpatsky. The amount of earnings and profits attributable to a shareholder's shares is generally equal to the positive amount, if any, of Carpatsky's undistributed net profits, whenever earned, after excluding any income previously taxed in the United States. The aggregate tax basis of the shareholder's Carpatsky shares will be increased by the amount of the recognized gain or deemed dividend, and the holding period applicable to such shareholder's Carpatsky shares will include the period for which such shares were held prior to the continuance. o No gain or loss will be recognized by Carpatsky shareholders solely upon their receipt of Radiant Energy common and preferred stock in exchange for Carpatsky common and preferred shares in the merger except to the extent of cash received instead of a fractional share of Radiant Energy common or preferred stock. o The aggregate tax basis of the Radiant Energy common and preferred stock received by Carpatsky shareholders in the merger, reduced by any tax bases attributable to fractional shares deemed to be disposed of, will be the same as the aggregate tax basis of the Carpatsky common and preferred shares exchanged for Carpatsky common and preferred stock in the continuance. o The holding period applicable to the Radiant Energy common and preferred stock received by each Carpatsky shareholder in the merger will include the period for which the Carpatsky common and preferred shares were considered to be held, provided that the Carpatsky common and preferred shares are held as a capital asset at the time of the merger. o Cash payments received by Carpatsky's shareholders instead of a fractional share will be treated as if the fractional share of Radiant Energy common or preferred stock had been issued in the merger and then redeemed by Radiant Energy. A Carpatsky shareholder receiving cash will recognize gain or loss upon the payment of the cash, measured by the difference, if any, between the amount of cash received and the basis in the fractional share. 38 o Neither Pease, CPI Acquisition Corp. nor Carpatsky will recognize material amounts of gain solely as a result of the continuance and merger. The parties are not requesting and will not request a ruling from the Internal Revenue Service in connection with the continuance or the merger. The consummation of the merger is conditioned on the receipt by Pease and Carpatsky of a legal opinion to the effect that the merger will qualify as a should be aware that the tax opinion does not bind the Internal Revenue Service and the IRS is therefore not precluded from successfully asserting a contrary opinion. A successful IRS challenge to the reorganization status of the merger would result in Carpatsky shareholders recognizing taxable gain or loss with respect to each Carpatsky common or preferred share surrendered equal to the difference between the shareholder's basis in his/her shares and the fair market value, as of the effective date of the merger, of the Radiant Energy common or preferred stock received in exchange for the Carpatsky common or preferred shares. In an event like this, a shareholder's aggregate basis in the Radiant Energy common and preferred stock received in the merger would equal its fair market value, and the shareholder's holding period applicable to the stock would begin the day after the merger. Tax Consequences of Ownership and Disposition of Our Stock by Canadian Holders Dividends with respect to Our Stock In general, the gross amount of dividends paid to a Canadian shareholder after the merger with respect to our stock will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable tax treaty. Under the U.S.--Canada income tax treaty, withholding tax rates are reduced to 15%, or 5% in the case of corporate shareholders owning at least 10% of the stock of the payor corporation. Dividends received by a Canadian shareholder that are effectively connected with a U.S. trade or business conducted by the Canadian shareholder are exempt from such withholding tax. However, those effectively connected dividends, net of certain deductions and credits, are taxed at the same graduated rates applicable to U.S. citizens, residents or domestic entities. In addition to the graduated tax described above, dividends received by a corporate Canadian shareholder that are effectively connected with a U.S. trade or business of the corporate Canadian shareholder may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty. Under the U.S.--Canada income tax treaty, the amount of such tax is limited to 5%. A Canadian shareholder of our stock that is eligible for a reduced rate withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the IRS. Gain on Disposition of Our Stock A Canadian shareholder generally will not be subject to U.S. Federal income tax on any gain realized upon the sale or other disposition of our stock unless: o the gain is effectively connected with a U.S. trade or business of the Canadian shareholder, which gain, in the case of a corporate Canadian shareholder, must also be taken into account for branch profits tax purposes; o the Canadian shareholder is an individual who holds his or her shares as a capital asset, which is generally an asset held for investment purposes, and who is present in the U.S. for a period or periods aggregating 183 days or more during the taxable year in which the sale or disposition occurs and certain other conditions are met; or 39 o we are or have been a "U.S. real property holding corporation" for U.S. Federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the holder's holding period for our stock. We are not currently, have not been within the last five years, and do not believe that we will become a "U.S. real property holding corporation" for U.S. Federal income tax purposes. Backup Withholding and Information Reporting Generally, we will report annually to the IRS the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in the recipient's country of residence. Dividends paid to a Canadian shareholder at an address within the U.S. may be subject to backup withholding at a rate of 31% if the Canadian shareholder fails to establish that it is entitled to an exemption or to provide a correct taxpayer identification number and other information to the payer. Backup withholding will generally not apply to dividends paid to Canadian shareholders at an address outside the U.S. on or prior to December 31, 2000, unless the payer has knowledge that the payee is a U.S. citizen, resident or domestic entity. Under recently finalized Treasury Regulations regarding withholding and information reporting, payment of dividends to Canadian shareholders at an address outside the U.S. after December 31, 2000 may be subject to backup withholding at a rate of 31% unless such Canadian shareholder satisfies various certification requirements. Under current Treasury Regulations, the payment of the proceeds of the disposition by a Canadian shareholder of our stock to or through the U.S. office of a broker is subject to information reporting and backup withholding at a rate of 31% unless the Canadian shareholder certifies its non-U.S. status under penalties of perjury or otherwise establishes an exemption. Generally, the payment of the proceeds of the disposition by a Canadian shareholder of our stock outside the U.S. to or through a foreign office of a broker will not be subject to backup withholding but will be subject to information reporting requirements if the broker is: o a U.S. person; o a "controlled foreign corporation" for U.S. Federal income tax purposes; or o a foreign person, 50% or more of whose gross income for certain periods is from the conduct of a U.S. trade or business, unless the broker has documentary evidence in its files of the Canadian shareholder's non-U.S. status and certain other conditions are met, or the Canadian shareholder otherwise establishes an exemption. Neither backup withholding nor information reporting applies to a payment of the proceeds of a disposition by a Canadian shareholder of our stock by or through a foreign office of a foreign broker not subject to the preceding sentence. In general, the recently promulgated final Treasury Regulations, described above, do not significantly alter the substantive withholding and information reporting requirements but would alter the procedures for claiming benefits of an income tax treaty and change the certification procedures relating to the receipt by intermediaries of payments on behalf of the beneficial owner of our stock. Canadian shareholders should consult their tax advisors regarding the effect, if any, of those final Treasury Regulations on the ownership and disposition of our stock. 40 Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained, provided that the required information is furnished to the IRS. Each Canadian shareholder who receives our stock pursuant to the merger is urged to consult his or her advisor to determine the impact of such Canadian shareholder's personal tax situation on the anticipated tax consequences under state, local, foreign or other tax laws, of the receipt, ownership and disposition of our stock. Income Tax Considerations in Canada General The following discussion summarizes the material Canadian federal income tax considerations that are generally applicable to holders of Carpatsky's common shares in connection with the continuance of Carpatsky in the state of Delaware and the concurrent merger of Carpatsky with CPI Acquisition Corp., a wholly-owned subsidiary of Pease. This discussion is based on the provisions of the Income Tax Act (Canada) (ITA) and the regulations thereunder, the Canada-United States Income Tax Convention, 1980, and counsel's understanding of the current administrative practices and policies of the Canada Customs and Revenue Agency. This discussion takes into account all proposed amendments to the ITA and the regulations thereunder that have been publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date of this proxy statement and prospectus and assumes that all the proposed amendments will be enacted in their present form. No assurances can be given that the proposed amendments will be enacted in the form proposed, if at all. However, the Canadian federal income tax considerations generally applicable to a common shareholder of Carpatsky with respect to the transactions will not be different in a materially adverse way if such proposed amendments are not enacted. Except for the foregoing, this discussion does not take into account or anticipate any changes in law, whether by legislative, administrative or judicial decision or action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations which may differ from the Canadian federal income tax considerations described herein. This discussion is applicable to those who hold their Carpatsky common shares as capital property and deal at arm's length with each of Carpatsky and Pease for the purposes of the ITA. This discussion does not apply to financial institutions which are subject to the mark-to-market provisions of the ITA. For purposes of the ITA, all amounts relating to the acquisition, holding or disposition of Carpatsky's common shares and shares of Pease common stock, including dividends, adjusted cost base and proceeds of disposition must be converted into Canadian dollars based on the prevailing United States dollar exchange rate at the time such amounts arise. All references herein to sections, subsections, etc. are to the ITA unless otherwise stated. Neither Carpatsky nor Pease is or will be requesting an advance income tax ruling from the Canada Customs and Revenue Agency in connection with any of the transactions contemplated herein. Carpatsky's common shareholders should be aware that this summary does not bind the Canada Customs and Revenue Agency and it is therefore not precluded from asserting a contrary position. This discussion is of a general nature only. Carpatsky's common shareholders should consult their own tax advisors with respect to their own particular circumstances. 41 Consequences of the Continuance The domestication, or continuance as it is known in Canada, of Carpatsky under the laws of the state of Delaware will not constitute a taxable event under the ITA for holders of Carpatsky common shares, whether or not they are resident in Canada. Holders of Carpatsky common shares who receive the domesticated Carpatsky common stock in replacement will continue to hold their Carpatsky common stock at the same adjusted cost base as their Carpatsky common shares immediately before the continuance. Consequences of the Merger The merger of Carpatsky and CPI Acquisition Corp. will qualify as a foreign merger pursuant to the provisions of subsection 87(8.1). Pursuant to subsection 87(8), the merger will be a tax-deferred event to holders of Carpatsky common shares, whether or not they are resident in Canada, unless the holder otherwise elects in the holder's Canadian return of income for the taxation year in which the merger takes place. Unless the election is made, a holder of Carpatsky common shares will be deemed to have disposed of such common shares for proceeds of disposition equal to the total of the adjusted cost base to the holder of such common shares immediately before the merger and will be deemed to have acquired the shares of Radiant Energy common stock at a cost to the holder of an equal amount. Disposition of Our Common Stock Shareholders Resident in Canada. A disposition or deemed disposition by a holder of our common stock who is resident in Canada will generally result in a capital gain (or a capital loss) equal to the amount by which the proceeds of disposition, net of any reasonable costs of disposition, exceed (or are less than) the adjusted cost base to the holder of such shares. Three-quarters of any capital gain must be included in the holder's income for the year of disposition. Three-quarters of any capital loss must be deducted by the holder from the capital gains in the year of disposition. Any capital losses in excess of capital gains in the year of disposition generally may be carried back up to three taxation years or carried forward indefinitely and deducted against net capital gains (capital gains less capital losses) in such other years. Shareholders Not Resident in Canada. Carpatsky common shares will not be "taxable Canadian property" as defined in the ITA, provided that such shares are listed on a prescribed stock exchange, which includes the Canadian Venture Exchange, and the holder, persons with whom such holder does not deal at arm's length or the holder and such persons has not owned, or had under option, 25% or more of the issued shares of any class of the capital stock of Carpatsky at any time in the last five years preceding the distribution. A non-resident holder of Carpatsky common shares that are not taxable Canadian property to such holder will not be subject to tax under the ITA on the future sale or other disposition of our common stock which such holder receives in the merger. A non-resident holder of Carpatsky common shares that are taxable Canadian property to such holder will be subject to tax under the ITA on the future sale or other disposition of our common stock which such holder receives in the merger, as such shares will be deemed to continue to be taxable Canadian property to the holder thereof for the purposes of the ITA. Dividends on Our Common Stock Shareholders Resident in Canada. Dividends on our common stock received by a shareholder resident in Canada will be included in the recipient's income for the purposes of the ITA. Such dividends received by an individual shareholder will not be subject to the gross-up and dividend tax credit rules in the ITA. A shareholder that is a corporation will include such dividends in computing its income and generally will not be entitled to deduct the amount of such dividends in computing its income. A shareholder that is throughout the relevant taxation year a "Canadian-controlled private corporation," as defined in the ITA, may be liable to pay an additional refundable tax of 6 2/3% on its "aggregate investment income" for the year which will include such dividends. United States non-resident withholding tax on such dividends received by Canadian residents will be generally eligible for foreign tax credit or deduction treatment, where applicable under the ITA. 42 Shareholders Not Resident in Canada. Dividends on shares of our common stock received by a shareholder not resident in Canada will not be subject to tax under the ITA. Foreign Property Information Reporting A holder of shares of our common stock who is a "specified Canadian entity" for a taxation year or fiscal period and whose total cost amount of "specified foreign property," at any time in the year or fiscal period exceeds Cdn.$100,000 will be required to file an information return for the year or period disclosing prescribed information. The information required to be disclosed includes the shareholder's cost amount, any dividends received in the year and any gains or losses realized in the year in respect of such property. With some exceptions, a taxpayer resident in Canada in the year will be a specified Canadian entity. A holder of our common stock should consult such holder's own advisors about whether such holder must comply with these rules. Dissenting Carpatsky Common Shareholders Shareholders Resident in Canada. The receipt by a dissenting shareholder of Carpatsky resident in Canada of a cash payment from Carpatsky before the continuance will generally be treated as a dividend by such shareholder to the extent that the payment exceeds the paid-up capital of the shares. This deemed dividend will be taxed in the manner described above. The amount equal to the paid-up capital of such shares will be treated as proceeds of disposition for the purposes of calculating the shareholder's capital gain (or capital loss) from the disposition of such shares in the manner described above. Dividend treatment will not arise if the cash payment is made after the domestication and merger has occurred. The receipt by a dissenting shareholder of Carpatsky of a cash payment after the continuance and merger will be treated under the ITA as proceeds of disposition and any capital gain (or capital loss) will be determined by reference to the full amount of such proceeds. Shareholders Not Resident in Canada. A cash payment received from Carpatsky before the continuance by a dissenting shareholder of Carpatsky not resident in Canada will be treated as a dividend to the extent that the payment exceeds the paid-up capital of the shares, while an amount equal to the paid-up capital of the shares will be treated as proceeds of disposition. Dividends deemed to be paid to a shareholder not resident in Canada will be subject to non- resident withholding tax under the ITA at the rate of 25%, although such rate may be reduced under the provisions of an applicable income tax treaty or convention. Under the Canada-United States Income Tax Convention, 1980, the rate is generally reduced to 15% in respect of dividends paid to a resident of the United States. The receipt by a non-resident common shareholder of Carpatsky of a cash payment after the continuance and merger will be treated under the ITA as proceeds of disposition equal to the redemption proceeds. Any capital gain realized by a dissenting Carpatsky shareholder would not be taxed under the ITA if the common shares of Carpatsky in respect of which the dissent is exercised are not taxable Canadian property to the holder as described above. Eligibility for Investment of Our Common Stock Provided that our common stock is listed on a prescribed stock exchange, it will be a "qualified investment" for trusts governed by registered retirement savings plans, registered retirement income funds and deferred profit sharing plans, all within the meaning of the ITA. However, under the ITA, our common stock will constitute "foreign property" to such plans. Generally, where the cost of foreign property of such a plan or fund exceeds 20% of the cost of all of its property at the end of any month, it will be subject to a tax of 1% on the excess amount. 43 Interests of Persons in the Merger One member of the Pease board of directors has an interest in the merger that is in addition to his interest as a shareholder. Our board of directors was aware of this interest and considered it in approving the merger agreement and the transactions contemplated in the merger agreement. If and when the merger is consummated, Patrick J. Duncan, our current President and CFO, will receive $220,000 under the provisions in his existing employment agreement with us. This amount consists of a termination payment of $195,000 and the repurchase by us of 1,564 shares of our common stock from Mr. Duncan for $25,000. Accounting Treatment The merger will be accounted for as a purchase, with Carpatsky as the acquiror, in accordance with generally accepted accounting principles. Under this method of accounting, the purchase price will be allocated to assets acquired and liabilities assumed based on their estimated fair values. The income or loss of Radiant Energy will not include the income or loss of Pease prior to completion of the mergers. See "Pro Forma Combined Financial Information." Regulatory Approval The continuance of Carpatsky must be consented to by the Registrar of Corporations for British Columbia and Alberta, Canada. Both the continuance and the merger must be approved by the Canadian Venture Exchange. 44 THE MERGER AGREEMENT The description of the merger agreement set forth in this section is a summary of the material provisions of the merger agreement and is qualified in its entirety by reference to the merger agreement included in this proxy statement and prospectus as Appendix A which we intend to sign before this proxy statement and prospectus is mailed. General Pease, CPI Acquisition Corp., which is a wholly-owned subsidiary of Pease, and Carpatsky have entered into a merger agreement which provides that: o Carpatsky will continue into the State of Delaware and thereby become a Delaware corporation. o Following the continuance, the wholly-owned subsidiary of Pease will be merged with and into Carpatsky. o Carpatsky common shareholders will receive an estimated 44,959,557 shares of Radiant Energy common stock and 102,410,000 shares of Radiant Energy preferred stock in exchange for all outstanding Carpatsky shares. This number will be reduced to reflect the number of shares, if any, for which shareholders seek appraisal rights. o Each outstanding Carpatsky common share, except for shares held by shareholders who dissent, will be exchanged for .57842 shares of our common stock and each outstanding Carpatsky preferred share will be converted into 1.07292 shares of our preferred stock. o Warrants and options entitling holders to purchase Carpatsky shares shall be adjusted to permit holders to acquire 17,563,947 shares of Radiant Energy common stock, exercisable at $0.35 per share. o We will change our name to "Radiant Energy, Inc." o We will amend our articles of incorporation to increase the number of shares of common stock and preferred stock we are allowed to issue. The Continuance The Business Corporations Act (Alberta) which governs Carpatsky does not contain provisions allowing the direct merger of Carpatsky with a U.S. corporation such as Pease's subsidiary. Carpatsky may, however, "continue" into the U.S. In accordance with Delaware law, following the continuance, Carpatsky will become subject to the law of Delaware and its existence as a corporation will be deemed to have commenced on the date of its original incorporation under the laws of Alberta, Canada. In addition, under Delaware law, Carpatsky shareholders will be deemed to have been shareholders of the Delaware corporation since the date they initially acquired their shares of Carpatsky. The continuance will not affect any obligations or liabilities of Carpatsky issued prior to the continuance, nor will it affect the ownership interests of any of Carpatsky's shareholders. The sole effect on Carpatsky will be that the corporation will become subject to Delaware law commencing on the effective date of the continuance as if it had been incorporated in such state on such date. Effective Time of the Merger The closing will occur, and the merger will become effective, upon: o the approval by Carpatsky shareholders of the continuance of Carpatsky into Delaware and the merger; o the adoption of amended and restated articles of incorporation by our shareholders; o the election of our new board of directors by our shareholders; and o the satisfaction or waiver of the other conditions set forth in the merger agreement. 45 It is anticipated that the merger will become effective soon after Carpatsky's and Pease's special meetings upon satisfaction or waiver of all conditions to the merger. Exchange of Certificates Computershare Trust Company, Inc. will act as exchange agent in the United States and CIBC Mellon Trust Company will act as exchange agent in Canada in connection with the merger. As soon as practicable after the effective date of the merger, the exchange agents will send a notice and transmittal form to Carpatsky shareholders to be used in forwarding their certificates for surrender and exchange for certificates representing our common stock. Carpatsky shareholders should not send any stock certificate with their proxy cards. You should not surrender your Carpatsky certificate for exchange until you receive the transmittal form and instructions. The instructions will include procedures concerning lost certificates and securities held in broker's or nominee's names. Each holder of Carpatsky common shares will be entitled, upon surrender to the exchange agent, to receive in exchange for his shares of Carpatsky a common stock certificate representing the number of our whole shares of common stock into which his Carpatsky common shares were converted in the merger, together with any cash payable in lieu of fractional shares. Until a holder of Carpatsky common shares surrenders his Carpatsky common share certificate to the exchange agent, the certificate representing Carpatsky common shares will be deemed to represent the number of whole shares of our common stock into which the Carpatsky common shares were converted. Fractional Shares Certificates representing fractional shares of our common stock will not be issued in the merger. Fractional share interests will not entitle you to vote or to any other rights of a shareholder. Instead of the issuance of any fractional share, each holder of Carpatsky common shares who otherwise would be entitled to receive a fractional share of our common stock in the merger will receive, upon surrender for exchange, an amount in cash determined by multiplying the last sales price of our common stock on the OTC Bulletin Board before the effective date of the merger, by the fraction of a share to which that holder would otherwise be entitled. Representations The parties make various representations and warranties in the merger agreement, including representations and warranties by each of Carpatsky and Pease as to: o organization and good standing; o capitalization; o authorization of the merger agreement and the absence, except as specified, of the need for governmental or third party consents to the merger; o compliance with applicable law; o accuracy of financial statements; o absence of material undisclosed liabilities and the absence of material adverse changes in the financial or other condition, operations or business of Carpatsky and Pease, taken as a whole; o absence of pending or threatened material litigation; o material compliance with applicable environmental laws and regulations; o absence of brokers or finders; and o other customary matters. Conduct of Business Pending the Merger Pease and Carpatsky have agreed to conduct their operations, except as otherwise provided in the merger agreement, according to their normal course of business until completion of the merger. Further, Pease and Carpatsky have each agreed that until the consummation of the merger, unless the other agrees in writing or as otherwise required or permitted by the merger agreement, it will not: 46 o declare or pay any dividend; o repurchase or issue any capital stock or securities convertible into capital stock; o effect any reorganization, liquidation, recapitalization, stock split or reclassification; o acquire, or purchase the assets of, any other business; o sell or encumber any assets, except in the ordinary course of business; o take any actions that could reasonably be expected to result in a competing transaction; o amend its articles of incorporation; o change its method of accounting or any tax election or settle any material claim; o incur any indebtedness in excess of $10,000; or o enter into any agreements or transactions with affiliates. Conditions to Consummation of the Merger The obligations of Pease and Carpatsky to complete the merger are subject to the following conditions: o Carpatsky shareholders must approve the continuance and merger. o Pease shareholders must adopt the amended and restated articles of incorporation. o All of the issued and outstanding shares of our preferred stock shall have been exchanged for shares of our common stock. o The relevant governmental authorities must grant all required authorizations, consents, orders or approvals. o The registration statement that contains this proxy statement and prospectus shall have become effective under the Securities Act. o There must be no law, order, injunction or other legal restraint or prohibition enjoining or preventing the consummation of the merger. o The representations and warranties of the parties contained in the merger agreement must be true and correct in all material aspects as of the closing. o Neither Pease nor Carpatsky shall have suffered any material adverse change to its business or financial condition. o Each party to the merger agreement shall have performed all obligations required to be performed under the merger agreement. o Pease and Carpatsky shall have each furnished to the other an opinion of its counsel regarding due incorporation, authority to do business, issuances of stock and other routine matters. o Holders of no more than .625% of the issued and outstanding common shares of Carpatsky have exercised their dissenters' rights. o We shall not have determined to withhold any amounts in respect of the shares of our common stock or preferred stock issuable in the merger. Termination The merger agreement may be terminated at any time prior to effectiveness of the merger, whether before or after shareholder approval of the merger, by the mutual consent of Pease and Carpatsky or by either Pease or Carpatsky if: o the other party material breaches any representation, warranty or covenant; o any representation or warranty of the other party becoming incapable of being satisfied. o there is a judgement, injunction or other order preventing the consummation of the continuance, exchange of Pease preferred stock or merger, unless the party seeking to terminate has not fulfilled its obligations under the agreement to obtain or vacate such order; o the merger is not consummated by October 31, 2000; 47 o either party fails to obtain the required shareholder approval; o the other party's board of directors withdraws or changes its recommendation of the merger agreement and the transactions contemplated thereby or has recommended a competing transaction; o a tender or exchange offer is commenced for 20% or more of the other party's outstanding stock and its board of directors fails to recommend to its shareholders not tender or exchange their shares in such offer; or o any person other than Pease or Carpatsky or their affiliates has acquired 20% or more of the outstanding shares of capital stock of the other party. If the merger agreement is terminated, neither party nor their affiliates, directors, officers, or shareholders will be subject to any continuing obligations with respect to the merger agreement, except with respect to confidentiality obligations or liquidated damages provisions. The other party shall be entitled to receive a $250,000 payment, which amount shall be inclusive of all of such party's expenses, if the merger agreement is terminated as a result of: o a willful breach of any representation, warranty, covenant or agreement by a party that had entered into negotiations prior to termination regarding a competing transaction that is completed within one year of termination; o a party failing to secure the requisite vote of its shareholders or its board of directors withdrawing its recommendation to shareholders and at the time there exists a competing transaction; o a party's board of directors recommends a competing transaction; or o a party's board of directors failing to recommend that its shareholders not tender or exchange their shares in connection with a tender or exchange offer for 20% or more of its outstanding capital stock. Expenses and Fees Except as set forth above, if the merger is not consummated, all expenses other than costs associated with this proxy statement and prospects incurred in connection with the merger agreement and the transactions contemplated by the merger agreement will be paid by the party incurring such costs and expenses. The printing, mailing and other costs associated with this proxy statement and prospectus, excluding legal and accounting fees which shall be borne by the party incurring such expenses, shall be borne equally by Pease and Carpatsky. If the merger is completed, all such expenses will be borne by us. Costs and expenses incurred in connection with the merger agreement are expected to consist primarily of legal and accounting fees, petroleum engineering fees and filing fees under federal and state regulatory laws and are estimated to be $350,000. 48 SELECTED FINANCIAL DATA OF PEASE The selected balance sheet data as of December 31, 1999, 1998 and 1997 and the selected statement of operations data for the years ended December 31, 1999, 1998 and 1997 have been derived from our audited financial statements. The selected unaudited financial data for the three months ended March 31, 2000 and 1999 have been prepared on a basis consistent with the consolidated financial statements. In our opinion, the selected unaudited financial data include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at the date presented and results of operations for the periods presented. Operating results for the three months ended March 31, 2000 are not necessarily indicative of results for the full fiscal year. This data should be read in conjunction with our consolidated financial statements, the notes to the consolidated financial statements and the management's discussion and analysis of financial condition and results of operations, all of which are included in this proxy statement and prospectus. Pease Selected Financial Data Table
Three Months Ended March 31, Year Ended December 31, --------------------- ------------------------------------ 2000 1999 1999 1998 1997 ---- ---- ---- ---- ---- Statement of Operations Data: Revenue ............................ $ 799,000 $ 412,000 $ 2,144,000 $ 2,888,000 $ 4,567,000 Cost of operations ................. (163,000) (84,000) (405,000) (1,620,000) (2,527,000) ----------- ------------ ------------ ------------ ------------ Gross profit .................... 636,000 328,000 1,739,000 1,268,000 2,040,000 ----------- ------------ ------------ ------------ ------------ Other costs and expenses: Consulting arrangement- related party ................ -- 38,000 38,000 247,000 437,000 General and administrative ...... 173,000 180,000 845,000 1,587,000 1,487,000 Depreciation, depletion and amortization ................. 252,000 263,000 1,007,000 2,241,000 2,670,000 Impairment expense .............. -- -- -- 7,593,000 12,913,000 ----------- ------------ ------------ ------------ ------------ Total other costs and expenses 425,000 481,000 1,890,000 11,668,000 17,507,000 ----------- ------------ ------------ ------------ ------------ Income(loss) from operations ....... 211,000 (153,000) (151,000) (10,400,000) (15,467,000) Other income and (expense): Interest and other income ....... 9,000 11,000 46,000 172,000 273,000 Interest expense ................ (90,000) (90,000) (360,000) (399,000) (701,000) ----------- ------------ ------------ ------------ ------------ Net income (loss) .................. $ 130,000 $ (232,000) $ (465,000) $(10,627,000) $ (15,895,000) =========== ============ ============ ============ ============ Net income (loss) available to common shareholders ............. $ 64,000 $ (298,000) $ (731,000) $(12,695,000) $ (15,985,000) =========== ============ ============ ============ ============ Net income (loss) per common stock: Basic ........................... $ 0.04 $ (0.18) $ (0.43) $ (7.99) (12.21) Diluted ......................... $ 0.01 $ (0.18) $ (0.43) $ (7.99) (12.21) Weighted Avg Shares Outstanding Basic ........................... 1,731,000 1,626,000 1,684,000 1,588,000 1,309,000 Diluted ......................... 18,326,000 1,626,000 1,684,000 1,588,000 1,309,000 Balance Sheet Data: Current assets ..................... $ 1,519,000 $ 1,428,000 $ 1,203,000 $ 1,741,000 $ 7,349,000 Current liabilities ................ 317,000 558,000 281,000 639,000 2,054,000 Working capital .................... 1,202,000 870,000 922,000 1,102,000 5,295,000 Total assets ....................... 7,362,000 7,557,000 7,141,000 7,913,000 21,294,000 Total liabilities .................. 2,878,000 2,905,000 2,787,000 2,932,000 5,202,000 Stockholders' Equity ............... 4,484,000 4,652,000 4,354,000 4,981,000 16,092,000
49 PEASE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Liquidity, Capital Expenditures and Capital Resources At March 31, 2000, our cash balance was $909,000 with a positive working capital position of $1,202,000, compared with $724,000 in cash and working capital of $922,000 at December 31, 1999 and a cash balance of $1,050,000 and positive working capital position of $1,102,000 at December 31, 1998. The changes in our cash balance on those dates are summarized as follows: Cash balance at December 31, 1998 ............................... $ 1,050,000 Sources of Cash: Cash provided by operating activities ................ 739,000 Proceeds from the sale of property and equipment ..... 101,000 Proceeds from the redemption of certificate of deposit 70,000 ----------- Total Sources of Cash .......................... 910,000 Uses of Cash: Capital expenditures for oil and gas activities ...... (932,000) Series B preferred stock dividends ................... (245,000) Purchase and retirement of series B preferred stock .. (51,000) Repayment of long term debt .......................... (6,000) Capital expenditure for office equipment ............. (2,000) ----------- Total uses of cash ............................. (1,236,000) ----------- Cash balance at December 31, 1999 ............................... 724,000 Sources of Cash: Cash provided by operating activities ................ 322,000 Proceeds from the redemption of certificate of deposit 15,000 ----------- Total Sources of Cash .......................... 337,000 Uses of Cash: Capital expenditures for oil and gas activities ...... (150,000) Repayment of long term debt .......................... (1,000) ----------- Total uses of cash ............................. (152,000) ----------- Cash balance at March 31, 2000 .................................. $ 909,000 =========== As a result of higher commodity prices and maintaining low overhead expenses, we were able to generate positive cash flows from operations in 1999 and through the first quarter of 2000. As far as our uses of cash, the following table illustrates the costs incurred for our exploration activities during 1999. The difference between the total incurred, as illustrated in the following table, and the total amount of cash used in 1999, relates to the changes in accounts payable at December 31, 1999 and December 31, 1998.
Program Operator ----------------------------------------------- NEGX Beta AHC Other Total % ---- ---- --- ----- ----- ----- Category: Exploratory Dry Holes ............ $ -- $164,000 $ -- $ -- $164,000 18% Land, G&G Costs on Seismic Programs ................. 2,000 130,000 -- -- 132,000 15% Successful efforts .................... -- 59,000 251,000 1,000 311,000 34% Capitalized Interest .................. -- 278,000 -- -- 278,000 30% Other Exploration Costs ............... -- -- -- 24,000 24,000 3% -------- -------- -------- -------- -------- -------- Total Exploration Costs ........ $ 2,000 $631,000 $251,000 $ 25,000 $909,000 100% ======== ======== ======== ======== ======== ======== Percent ........................ -- 69% 28% 3% 100%
50 The following table illustrates the costs incurred for our exploration activities during the first quarter of 2000. The difference between the total cash paid for exploration activities in the above table and the amount illustrated below, relates to the net increase in accounts payable for those activities between December 31, 1999 and March 31, 2000.
Program Operator ----------------------------------------------- Internal NEGX Beta AHC Costs Total % ---- ---- --- -------- ----- ----- Category: Productive Efforts ............... $ -- $ 1,000 $ 61,000 $ -- $ 62,000 32% Exploratory Dry Holes ............ -- 32,000 -- -- 32,000 17% Land, G&G Costs on Seismic Programs ............... 6,000 20,000 -- -- 26,000 13% Capitalized Interest ................. -- 69,000 -- -- 69,000 36% Other Exploration Costs .............. -- -- -- 5,000 5,000 2% -------- -------- -------- -------- -------- -------- Total Exploration Costs ........ $ 6,000 $122,000 $ 61,000 $ 5,000 $194,000 100% ======== ======== ======== ======== ======== ======== Percent ........................ 3% 63% 31% 3% 100%
Our current oil and gas assets consist of the following: o the East Bayou Sorrel Area in Iberville Parish, Louisiana, operated by National Energy Group, Inc.; o the Maurice Prospect in Fayetteville Parish, Louisiana, operated by Amerada Hess Corporation; and o the Formosa, Texana and Ganado 3-D prospects encompassing 130,000 acres in and around Jackson County, Texas, operated by Beta Oil and Gas, Inc. In December 1998, National Energy Group filed an involuntary Chapter 11 bankruptcy petition in United States Bankruptcy Court for the Northern District of Texas, Dallas Division. As operator of the East Bayou Sorrel field, which represents a majority of our current production, the bankruptcy petition might adversely effect future development or operation of the field; however, we do not expect that our interest in the field or production from currently existing wells will be affected. We have an unsecured claim in the bankruptcy proceeding for various amounts which we believe were overpaid to National Energy Group as operator in connection with the drilling and operating of certain wells. Collection of these amounts may be delayed or may not occur, pending disposition of National Energy Group's reorganization proceeding. The total claim is approximately $60,000. However, no amount has been recorded in the financial statements as of December 31, 1999 or March 31, 2000. 51 Since we are a non-operator in all of the areas in which we hold an oil and gas interest, we do not necessarily control the timing of any development or exploration activities and therefore have little control over the corresponding required cash outlays. However, we currently expect the expenditures that will be proposed by the respective operators of our core areas to be within the following ranges through the first quarter of 2001: Estimated Investment ----------------------- Area Minimum Maximum ---- ------- ------- East Bayou Sorrel Area ......................... $ 50,000 $ 400,000 Formosa, Texana, and Ganado Prospects .......... 250,000 1,100,000 Maurice Prospect ............................... 350,000 500,000 ---------- ---------- Total .................................... $ 650,000 $2,000,000 ========== ========== In addition to the potential capital necessary for our exploration activities, in April 2001 our convertible debentures with a current outstanding balance of $2,782,500 will become due and payable. Accordingly, given the range of potential capital requirements through the first quarter of 2001, our current and anticipated cash position may not be sufficient to cover future working capital and exploration obligations. We have vigorously explored various alternatives for additional sources of capital. However, with the hyper-dilutive potential of the outstanding series B preferred stock should the holders elect to convert into common stock, we have been unable to attract additional equity capital. For example, using our recent common stock price on July 31, 2000 of $0.32, should all the holders of the series B preferred stock elect to convert into common stock, we would be required to issue approximately 22 million shares in the conversion. This would represent approximately 93% of the then outstanding common stock. Presently, we have only 4.0 million shares of common stock authorized and are obligated under the terms of our agreements with our preferred shareholders to seek approval of additional authorized shares at our next meeting of shareholders to allow for conversion should the preferred shareholders choose to do so. However, it cannot be determined at this time whether or not additional common stock will be authorized by the common shareholders and if not, what the consequences may be. In September 1998, we engaged San Jacinto Securities, Inc., an investment banking firm located in Dallas, Texas, to assist us in pursuing various strategic alternatives. Their efforts have focused primarily on seeking a potential merger candidate for us. In exchange for their services, San Jacinto Securities was paid a $150,000 non- refundable cash fee in 1999 that was expensed for financial statement reporting purposes and will receive an additional 3% of the merger value in excess of $5.0 million should it close. On September 1, 1999, we entered into a merger agreement with Carpatsky. Carpatsky's primary oil and gas assets are located in the Republic of Ukraine. We entered into the merger agreement with Carpatsky in order to, among other things, increase and diversify our asset base and improve the chances of financing future opportunities. If the contemplated merger with Carpatsky cannot be consummated within a reasonable period of time, or is otherwise abandoned, then we may have to seek additional financing. However, our common stock was delisted from the Nasdaq SmallCap electronic market system on January 14, 1999 for failure to maintain an average bid price of at least $1.00 per share. The stock is now listed on the over-the-counter market on the NASD Bulletin Board. It is believed that this delisting will have a material negative impact on our ability to raise additional equity capital. Therefore, it is unclear at this time what alternatives for future working capital will be available, or the extent of any dilution that existing shareholders may experience as a result of obtaining such working capital. If additional sources of financing are not ultimately available, we may have to consider other alternatives, including the sale of existing assets, cancellation of existing exploration agreements, farmouts, joint ventures, restructuring under the protection of Federal bankruptcy laws or liquidation. 52 Results of Operations Overview Our largest source of operating revenue is from the sale of produced oil, natural gas, and natural gas liquids. The level of our revenues and earnings are affected by prices at which oil, gas and natural gas liquids are sold. Therefore, our operating results for any prior period are not necessarily indicative of future operating results because of the fluctuations in oil, gas and natural gas liquid prices and the lack of predictability of those fluctuations as well as changes in production levels. During 1998, we completed the sale of all our Rocky Mountain assets, which consisted of operated oil and gas properties, a gas plant and a service and supply business. The disposition of these assets has had a material negative impact on our total revenue subsequent to that date. The decrease in total revenue, along with any known trends or changes that effect revenue on a line-by-line basis, are discussed in the following paragraphs under their respective captions. 53 Oil and Gas Operating statistics for oil and gas production for the periods presented are as follows:
For the Three Months For the Year Ended Ended march 31, December 31, ------------------------- ------------------------- 2000 1999 1999 1998 ---- ---- ---- ---- Production: Oil (Bbls) Rocky Mtns ......................... -- -- -- 51,000 Gulf Coast ......................... 23,000 18,000 74,000 58,000 Gas (Mcf) Rocky Mtns ......................... -- -- -- 230,000 Gulf Coast ......................... 52,000 107,000 337,000 320,000 BOE (6:1) Rocky Mtns ......................... -- -- -- 89,000 Gulf Coast ......................... 32,000 36,000 130,000 112,000 Average Collected Price: Oil (Bbls) Rocky Mtns ......................... $ -- $ -- $ -- $ 12.11 Gulf Coast ......................... 27.93 10.87 17.80 12.19 Gas (Mcf) Rocky Mtns ......................... -- -- -- 1.39 Gulf Coast ......................... 2.95 2.00 2.46 2.22 BOE (6:1) Rocky Mtns ......................... -- -- -- 10.50 Gulf Coast ......................... 25.12 11.47 16.48 12.73 Operating Margins: Rocky Mtns: Revenue - Rocky Mtns. - Oil ............... $ -- $ -- $ -- $ 612,000 Rocky Mtns. - Gas ............... -- -- -- 321,000 ----------- ----------- ----------- ----------- 933,000 Costs .............................. -- -- -- (806,000) ----------- ----------- ----------- ----------- Operating Margin ................... $ -- $ -- $ -- $ 127,000 =========== =========== =========== =========== Operating Margin Percent ........... -- -- -- 14% Gulf Coast: Revenue - Gulf Coast - Oil ................ $ 644,000 $ 198,000 $ 1,316,000 $ 716,000 Gulf Coast - Gas ................ 155,000 214,000 828,000 710,000 ----------- ----------- ----------- ----------- 799,000 412,000 2,144,000 1,426,000 Costs .............................. (163,000) (85,000) (405,000) (243,000) ----------- ----------- ----------- ----------- Operating Margin ................... $ 636,000 $ 327,000 $ 1,739,000 $ 1,183,000 =========== =========== =========== =========== Operating Margin Percent ........... 80% 79% 81% 83%
54
For the Three Months For the Year Ended Ended March 31, December 31, ----------------------- ----------------- 2000 1999 1999 1998 ---- ---- ---- ---- Production Costs per BOE before Depreciation, Depletion and Amortization: Rocky Mtn Region ...................... $ -- $ -- $ -- $ 9.04 Gulf Coast Region ..................... 5.13 2.34 3.11 2.17 Change in Revenue Attributable to Total Revenue: Production ............................ $ (56,000) $(832,000) Price ................................. 443,000 614,000 -------- -------- Total Increase (Decrease) in Revenue $ 387,000 $(218,000) ======== ======== Change in Revenue for Gulf Coast Only: Production ............................ $ (56,000) $ 224,000 Price ................................. 443,000 494,000 -------- -------- Total Increase in Gulf Coast Revenue $ 387,000 $ 718,000 ======== ========
The decrease in gas production between the periods presented for March 31, 2000 and 1999 is primarily attributed to the Maurice Field operations where we have experienced the natural decline of production inherent in oil and gas operations. In addition to this natural decline of production, we lost a well in this field in September 1999 due to down-hole mechanical problems. Absent any unforeseen negative circumstances or additional discoveries, we expect gas production for the remainder of 2000 to be approximately 50% of what it was in 1999. Production costs per BOE have increased during the periods presented because a substantial portion of the production taxes are based on revenue instead of volume produced and water production increases at the East Bayou Sorrel facility have significantly increased the lifting costs for the three wells currently producing there. We expect the production costs to remain at approximately $5.00 per BOE for the remainder of 2000. Substantially all of our current oil and gas production is now generated from four of the ten wells in which we hold a working interest. Of the four main producing wells, three are operated by National Energy Group and the other one is operated by Amerada Hess. All these wells are deep, high pressure, water driven reservoirs that are inherently laden with geologic, geophysical and mechanical risks and uncertainties. The unexpected loss of any one of these wells would have a material negative impact on our estimated reserves, future production and future cash flows. Gas Plant, Service and Supply As previously discussed, we sold these assets in 1998. However, the historical operating results for 1998, excluding depreciation and amortization, are as follows: Amount ------ Revenue ......................... $ 272,000 Costs ........................... (296,000) --------- Net Operating Loss ........... $ (24,000) ========= 55 Consulting Arrangement - Related Party In March 1996, we entered into a three-year consulting agreement with Beta Capital Group, Inc. located in Newport Beach, California. Beta Capital's chairman, Steve Antry, has been a director of Pease since August 1996. The consulting agreement, which ended in February 1999, provided for minimum monthly cash payments of $17,500 plus reimbursement for out-of-pocket expenses. Stephen Fischer, an independent contractor for Beta Capital, is also a member of our board of directors. Mr. Antry is the president, and Mr. Fischer is the Vice President of Capital Markets, of Beta Oil and Gas, Inc., a publicly held oil and gas company which is the operator of our Formosa, Texana and Ganado prospects. General and Administrative General and administrative expenses decreased $741,000 in 1999 when compared to 1998 as summarized below: $ 397,000 Reduction of payroll as a result of eliminating executive and administrative positions 150,000 Fee paid in 1998 to San Jacinto Securities 144,000 Legal and accounting 110,000 Consulting 44,000 Travel 31,000 All other, net (135,000) Costs associated with pursuing the merger with Carpatsky --------- $ 741,000 Net decrease between the periods presented ========= General and administrative expenses decreased only $6,000 during the first quarter of 2000 when compared to the same period in 1999. However, the costs in 2000 include $47,000 incurred in connection with the merger. Pease capitalized $24,000 and $237,000 of costs associated with Gulf Coast exploration activities in 1999 and 1998, respectively, and an additional $5,000 during the first quarter of 2000 that would have been expensed as general and administrative costs under the successful efforts method of accounting for oil and gas activities. Since 1998, we have taken steps to significantly reduce future general and administrative costs, and we expect "core" general and administrative costs in 2000 to be between $40,000 to $50,000 per month. However, we expect to incur between $50,000 and $75,000 in connection with the efforts to consummate the merger transaction with Carpatsky. Depreciation, depletion and amortization Depreciation, depletion and amortization for the periods presented by cost center consisted of the following:
For the Three Months For the Year Ended Ended March 31, December 31, -------------------- -------------------- 2000 1999 1999 1998 ---- ---- ---- ---- Oil and Gas Properties - Gulf Coast ................ $ 247,000 $ 257,000 $ 985,000 $1,639,000 Oil and Gas Properties - Rocky Mountains ........... -- -- -- 275,000 Gas Plant, Service and Supply Operations ........... -- -- -- 273,000 Furniture and Fixtures ............................. 5,000 6,000 22,000 54,000 ---------- ---------- ---------- ---------- Total ...................................... $ 252,000 $ 263,000 $1,007,000 $ 2,241,000 ========== ========== ========== ========== Depreciation, Depletion and Amortization per BOE for oil and gas properties ............. $ 7.76 $ 7.13 $ 7.57 $ 9.52 ========== ========== ========== ==========
56 Depreciation, depletion and amortization for the oil and gas properties is computed based on one full cost pool using the total estimated reserves at the end of each period presented and prior to applying the ceiling test discussed below under "Impairment Expense." The estimated portion of depreciation, depletion and amortization for the Rocky Mountains and the Gulf Coast are illustrated here for analysis purposes only. Total depreciation, depletion and amortization for the oil and gas properties decreased in 1999 when compared to 1998 principally as a result of the impairment charges recognized in 1998 that significantly reduced the net value of the full cost pool being amortized in 1999. Interest Expense Total interest incurred, and its allocation, for the periods presented is as follows:
For the Three Months For the Year Ended Ended March 31, December 31, -------------------- ------------------- 2000 1999 1999 1998 ---- ---- ---- ---- Interest paid or accrued .................... $ 70,000 $ 69,000 $ 281,000 $ 370,000 Amortization of debt discount ............... 55,000 55,000 138,000 342,000 Amortization of debt issuance costs ......... 34,000 35,000 219,000 540,000 ---------- ---------- --------- ---------- Total interest incurred ..................... 159,000 159,000 638,000 1,252,000 Interest capitalized ........................ (69,000) (69,000) (278,000) (853,000) ---------- ---------- --------- ---------- Interest expense ............................ $ 90,000 $ 90,000 $ 360,000 $ 399,000 ========== ========== ========= ==========
The lower interest incurred in 1999 is substantially attributable to the reduction of outstanding debt during the third quarter of 1998. In connection with the sale of the Rocky Mountain assets, we paid down $1.2 million of the outstanding convertible debentures in September 1998, thereby reducing the outstanding principal from $4.0 million to $2.8 million. At the same time, we charged to interest expense $397,000, representing 30% of the unamortized debt discount and debt issuance costs associated with that debt. Impairment - Oil and Gas Properties We use the full cost method of accounting for our oil and gas activities. The full cost method regards all costs of acquisition, exploration and development activities as being necessary for the ultimate production of reserves. All of those costs are incurred with the knowledge that many of them relate to activities that do not result directly in finding and developing reserves. However, the benefits obtained from the prospects that do prove successful, together with benefits from past discoveries, may ultimately recover the costs of all activities, both successful and unsuccessful. Thus, all costs incurred in those activities are regarded as integral to the acquisition, discovery and development of reserves that ultimately result from the efforts as a whole and are thereby associated with our proved reserves. Establishing a direct cause-and-effect relationship between costs incurred and specific reserves discovered, which is the premise under the successful efforts accounting method, is not relevant to the full cost concept. However, the costs accumulated in our full cost pool are subject to a "ceiling," as defined by SEC rules. 57 As prescribed by the accounting standards for the full cost method, all the accumulated costs in excess of the ceiling are to be expensed periodically by a charge to impairment. No impairment charge was incurred in 1999 or through the first quarter of 2000 since our ceiling was in excess of the costs accumulated in our full cost pool. In 1998 we incurred an impairment charge of $7,279,000 which can be attributed to: o $3,292,000 in dry holes; o $2,972,000 related to the expiration of leases in the acreage associated with Parallel Petroleum's 3-D program in South Texas; and o $1,015,000 to the continuing decline of oil prices. A declining commodity price has the effect of lowering the "ceiling" of the full cost pool. Dividends and Net Loss Per Common Share We have adopted SFAS No. 128 titled "Earnings Per Share." Accordingly, basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the periods presented. The net income (loss) available to common shareholders is determined by including any dividends accruing to the benefit of the preferred shareholders to the net income (loss). The dividends included for this calculation include paid dividends, accrued but unpaid dividends and any dividends in arrears. Accordingly, the net loss available to common shareholders includes the following charges associated with the series B preferred stock.
For the Three Months For the Year Ended Ended March 31, December 31, ----------------------- ----------------------- 2000 1999 1999 1998 ---- ---- ---- ---- Dividends declared and paid .............. $ -- $ 66,000 $ 178,000 $ 278,000 Dividends in arrears ..................... 66,000 -- 88,000 -- Non-cash imputed dividend charge ......... -- -- -- 1,789,000 ---------- ---------- ---------- ---------- Total .................................... $ 66,000 $ 66,000 $ 266,000 $2,067,000 ========== ========== ========== ==========
In connection with an agreement signed by our preferred shareholders and associated with the contemplated merger with Carpatsky, we have not accrued or paid any dividends to the series B preferred stockholders subsequent to September 1, 1999. However, should the merger be abandoned the amount that we would be obligated to pay for the periods presented has been included in the calculation of net income per share as "dividends in arrears." Computing the diluted earnings per share for the three months ended March 31, 2000 is similar to the basic earnings per share except that income (loss) available to common shareholders is adjusted to add back the $66,000 of convertible preferred stock dividends in arrears and the weighted-average number of shares of common stock outstanding is increased to include the number of additional shares of common stock that would have been outstanding assuming the preferred stock had been converted into 16,594,493 shares of common stock on January 1, 2000. This assumption presumes the preferred stock would have been converted into common stock in accordance with its original terms of a 25% discount to the reported closing market price. The market price used for 58 purposes of this calculation was as of March 31, 2000. Our articles of incorporation only authorize the issuance of up to four million shares, of which 1,731,398 are currently issued and outstanding. Accordingly, the diluted earnings per share is only a hypothetical computation since we would be required to obtain shareholder approval for any shares to be issued beyond four million. Pursuant to the terms of our proposed merger with Carpatsky, our preferred shareholders have agreed to exchange all the outstanding preferred stock for 8,865,665 shares of common stock when and if the merger is ultimately consummated. Diluted earnings per share for the three months ended March 31, 1999 and for the years ending December 31, 1999 and 1998, is identical to the basic earnings per share for the same period since the effects of including any potential issuances of common stock would have been antidilutive. SELECTED FINANCIAL DATA OF CARPATSKY The following table sets forth Carpatsky's selected financial data for the three years ended December 31, 1999, and for the three-month periods ended March 31, 2000 and 1999. The financial data for each of the years in the three-year period ended December 31, 1999 has been derived from the audited financial statements of Carpatsky that were prepared on a consolidated basis. Financial information for the years ended December 3, 1996 and 1995 is not presented because oil and gas operations did not commenced until 1997 when the first gas well in the RC field was completed. Prior to 1997 Carpatsky was in the development stage, and its activities were principally raising capital. Furthermore, Carpatsky's financial records prior to 1997 were maintained under Canadian accounting standards. Conversion of such information to U.S. accounting standards would require significant costs and effort and the information is not believed to be material to a shareholder's evaluation of the continuance and merger. The selected unaudited financial data for each of the three-month periods ended March 31, 2000 and 1999 have been prepared on a basis consistent 59 with the consolidated financial statements of Carpatsky. In the opinion of Carpatsky, the selected unaudited financial data include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at the date presented and results of operations for the periods presented Operating results for the three months ended March 31, 2000 are not necessarily indicative of results for the full fiscal year. This data should be read in conjunction with the consolidated financial statements of Carpatsky, the notes to the consolidated financial statements of Carpatsky and Carpatsky's management's discussion and analysis of financial condition and results of operations, all of which are included in this proxy statement and prospectus. Carpatsky Selected Financial Data Table
Three Months Ended March 31, Year Ended December 31, -------------------- ------------------------------------ 2000 1999 1999 1998 1997 ---- ---- ---- ---- ---- Statement of Operations Data: Revenue ............................................ $ 638,000 $ 434,000 $ 2,430,000 $ 769,000 $ 99,000 Less allowance for doubtful accounts ............... (63,000) (323,000) (1,630,000) (543,000) (13,000) ------------ ------------ ------------ ------------ ------------ Net revenue ..................................... 575,000 111,000 800,000 226,000 86,000 Cost of operations ................................. (336,000) (170,000) (1,017,000) (309,000) (83,000) ------------ ------------ ------------ ------------ ------------ Gross profit (loss) ............................. 239,000 (59,000) (217,000) (83,000) 3,000 Other costs and expenses: General and administrative ...................... 333,000 104,000 1,385,000 552,000 805,000 Depreciation, depletion and amortization .................................. 446,000 185,000 1,366,000 337,000 29,000 Impairment ...................................... 500,000 -- 3,050,000 -- -- ------------ ------------ ------------ ------------ ------------ Total other costs and expenses ................ 1,279,000 289,000 2,751,000 889,000 834,000 ------------ ------------ ------------ ------------ ------------ Income (loss) from operations ................... (1,040,000) (348,000) (6,018,000) (972,000) (831,000) Other income and (expense): Interest and other income ..................... 16,000 16,000 35,000 4,000 40,000 Gain on net monetary position ................. 63,000 297,000 936,000 1,477,000 44,000 Amortization of debt discount ................. -- -- -- (658,000) (139,000) Interest expense .............................. (23,000) (84,000) (260,000) (318,000) (90,000) ------------ ------------ ------------ ------------ ------------ Loss before taxes ............................... (984,000) (119,000) (5,307,000) (467,000) (976,000) Provision for income taxes ...................... (82,000) (55,000) (447,000) (132,000) -- ------------ ------------ ------------ ------------ ------------ Net loss ........................................ (1,066,000) (174,000) (5,754,000) (599,000) (976,000) Imputed preferred stock dividend ................ -- -- (336,000) -- -- ------------ ------------ ------------ ------------ ------------ Net loss available to common shares ............. $ (1,066,000) $ (174,000) $ (6,090,000) $ (599,000) $ (976,000) ============ ============ ============ ============ ============ Net loss per share .............................. $ (0.01) $ -- $ (0.12) $ (0.01) $ (0.03) ============ ============ ============ ============ ============ Weighted average number of common shares outstanding ..................... 77,728,263 40,796,246 49,471,164 40,796,246 31,691,266 ============ ============ ============ ============ ============ Statement of Cash Flows Data: Net cash provided by (used in) operating activities ............................ $ (791,000) $ (7,000) $ (676,000) $ (469,000) $ (916,000) Net cash provided by (used in) investing activities ............................ $ (1,024,000) $ (539,000) $ (1,553,000) $ (1,666,000) $ (3,499,000) Net cash provided by (used in) financing activities ............................ $ -- $ 250,000 $ (4,994,000) $ 600,000 $ 4,444,000 Other Financial Data: Ratio of combined fixed charges and preference dividends to earnings(1) ............. -- -- -- -- -- Balance Sheet Data: Current assets ..................................... $ 2,654,000 $ 226,000 $ 4,024,000 $ 208,000 $ 343,000 Current liabilities ................................ 3,142,000 5,033,000 3,645,000 4,850,000 3,170,000 Working capital (deficit) .......................... (488,000) (4,807,000) 379,000 (4,642,000) (2,827,000) Total assets ....................................... 6,938,000 9,497,000 8,507,000 9,489,000 7,080,000 Total liabilities .................................. 3,142,000 7,040,000 3,645,000 6,858,000 3,893,000 Stockholders' Equity ............................... 3,796,000 2,457,000 4,862,000 2,631,000 3,187,000
- ------------ (1) Earnings were not sufficient to cover fixed charges and preference dividends by the amount of the net loss for each period. 60 CARPATSKY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Liquidity, Capital Expenditures and Capital Resources In October 1999, Carpatsky completed a private placement of common shares which raised $1.0 million. The proceeds of this private placement of common shares were used to satisfy general overhead obligations and to further fund its operational activities in Ukraine. Effective September 30, 1999 Carpatsky also converted $2.676 million of debt and payables into common shares and warrants. The conversions were negotiated by Carpatsky in order to improve its overall financial condition and to free up working capital to further its Ukrainian operations. In December 1999, Bellwether Exploration Company purchased 95.45 million shares of a newly issued class of Carpatsky preferred shares that are convertible into 50 million common shares and warrants to purchase 12.5 million Carpatsky common shares for one year at an exercise price of U.S.$0.20 per share. The purchase price for the preferred shares and warrants was U.S.$4.0 million. A portion of the proceeds from this offering were used for general corporate obligations but most of the proceeds were used to fund or otherwise satisfy obligations associated with the Ukrainian ventures. Until recently, our cash flow from operations has not been sufficient to fund any meaningful development in our Ukrainian assets nor cover our corporate overhead. Therefore, our primary sources of capital have historically been from the sale of debt and equity securities. Although we are starting to realize cash flows from our Ukranian assets, we expect all of these funds to be reinvested in the Ukranian ventures, at least for the foreseeable future. Carpatsky's oil and gas assets consist of interests in the Rudovsko-Chervonozavodskoye natural gas and gas condensate field (RC field) and the Bitkov-Babchensky oil field (Bitkov field) located in Ukraine. Carpatsky holds its interests in the RC field pursuant to a joint activity agreement with Ukrnafta and in the Bitkov field pursuant to a joint venture with Ukrnafta. Most of Carpatsky's current oil and gas reserve value is attributable to the RC field. Carpatsky expects drilling to be completed, or at least started, on two to seven additional development wells in this field during 2000. Under the existing commitments related to the two ventures in Ukraine, the following table summarizes the range of expected capital requirements through the end of the first quarter 2001: Etimated Investment Requirements Venture Minimum Maximum The RC venture ............................ $ 2,800,000 $ 7,840,000 The Bitkov venture ........................ 54,000 414,000 ---------- ---------- Totals ................................ $ 2,854,000 $ 8,254,000 The estimated capital requirements for the RC field as presented above assume Carpatsky's share of net revenues under the joint activity agreement in the RC field is 45%, its maximum potential interest. Carpatsky's share of net revenues is based on capital contributions to the joint activity's account and is computed on a quarterly basis. Based on a recent review of the payments to and withdrawals from the joint activity's account, Carpatsky notified Ukrnafta 61 that Carpatsky disagreed with certain of the charges to and withdrawals from the account. Ukrnafta and Carpatsky are currently negotiating an agreement to adjust the relative ownership interest of Carpatsky in the joint activity's account. Carpatsky has proposed to Ukrnafta that the relative net revenue interest of Carpatsky be set at 45%. Carpatsky believes that these negotiations will be completed during September 2000. No assurances can be made that Carpatsky will be successful in these negotiations or the timing of a resolution of this disagreement. Should Carpatsky be unable to maintain its net revenue interest in the RC field, the future capital requirements would be adjusted down on a pro-rata basis. Carpatsky expects that the Ukrainian projects will develop cash flow sufficient to fund Carpatsky's operations sometime in late 2000 or early 2001, but exactly when, or if, this will occur cannot be accurately projected. Therefore, the amount of future capital that will be required cannot be accurately determined at this time. If additional capital is required, there can be no assurance given that the necessary capital can or will be raised under terms acceptable to Carpatsky. If additional sources of financing are not ultimately available, Carpatsky may have to consider other alternatives, including selling a portion of its interest in the Ukrainian assets. The most significant item affecting Carpatsky's operations is the receipt of payment for the sale of its oil and gas in Ukraine. Historically, payment for oil or condensate has not been an issue. Until September 1999, substantially all of the company's gas was sold to Naftogazukrainy, a Ukrainian national joint stock company. Naftogazukrainy was formed to meet the natural gas needs of Ukraine. Naftogazukrainy's responsibilities are similar to those of a U.S. public utility. Many of the country's natural gas consumers have been unable to meet their financial obligations in hard currency on a timely basis. With Naftogazukrainy not being paid by the country's consumers, it is not in a position to pay producers such as Carpatsky. Accordingly, Carpatsky has provided a substantial allowance for doubtful accounts for its historical operations and consequently incurred substantial operating losses arising from the non-payment for gas sold. To circumvent this payment problem with Naftogazukrainy, in September 1999 Carpatsky began selling a portion of its gas through a public auction market directly to end-users. This process is similar to the spot market nominating auctions that take place in the United States and provides a viable alternative to Naftogazukrainy. In addition, this process enables Carpatsky to set the specific terms and assess the creditworthiness of each of its prospective customers prior to any sale. Since participating in the auction market, Carpatsky has been receiving payment for approximately 90% of its natural gas deliveries. Carpatsky is vigorously exploring the possibility of exporting its natural gas for sale to foreign companies. Carpatsky believes that an export contract with one or more large creditworthy customers could virtually eliminate its historical problems with receiving payments. It is not known at this time whether or not an export contract will successfully be negotiated or if the appropriate authorizations to transport the gas outside of Ukraine can be obtained on a long-term basis. In any case, Carpatsky believes that either the continued success of the public auction market or an export contract will significantly improve future payments and results of operation. Results of Operations Overview Carpatsky's largest source of operating revenue is from the sale of produced oil, natural gas, and natural gas liquids in Ukraine. Therefore, the level of Carpatsky's revenues and earnings are affected by prices at which oil, 62 gas and natural gas liquids are sold. As previously discussed, Carpatsky historically has not been paid for a substantial portion of its natural gas sold. Accordingly, Carpatsky's operating results for any prior period are not necessarily indicative of future operating results because of the fluctuations in oil, gas and natural gas liquid prices, the lack of predictability of those price fluctuations, changes in production levels and the amount of payment received, or expected to be received, for the hydrocarbons sold. Oil and Gas Operating statistics for oil and gas production for the periods presented are as follows:
For the Three Months For the Year End Ended March 31, Ended December 31, ---------------------- -------------------------------------- 2000 1999 1999 1998 1997 ---- ---- ---- ---- ---- Production: Oil (Bbls) ........................ 6,000 3,000 26,000 12,000 5,000 Gas (Mcf) ......................... 763,000 333,000 2,456,000 472,000 11,000 Average Sales Price: Oil (per Bbl) ..................... 14.15 8.85 10.36 11.41 14.62 Gas (per Mcf) ..................... 0.72 1.24 0.88 1.35 1.84 Costs Per Mcfe: Operating Costs: .................. $ .44 $ .49 $ .39 $ .57 $ 1.92 Depreciation, depletion and amortization ................... $ 0.55 $ 0.52 $ 0.52 $ 0.62 $ 0.44 Change in revenue attributable to: Price ............................. $ (418,000) $(1,286,000) $ (465,000) Production ........................ 622,000 2,947,000 1,135,000 ----------- ----------- ---------- Net Increase ................... $ 204,000 $ 1,661,000 $ 670,000 =========== =========== ==========
The increased production and decreasing operating costs (per Mcfe) between the periods presented can be substantially attributed to Carpatsky's overall increase in production from new wells in the RC field. Currently there are three wells producing in the RC field which commenced production in August 1998, March 1999 and May 1999. Comparison of Three Months Ended March 31, 2000 and 1999 Allowance for Doubtful Accounts. Substantially all of Carpatsky's gas was sold to Naftogazukrainy, until September 1999. Based on historical receipts from Naftogazukrainy, Carpatsky provided a substantial allowance for doubtful accounts of almost 75% of total sales for the quarter ended March 31, 1999. In September 1999, Carpatsky began selling natural gas on a newly developed "spot market" in Ukraine. The company is generally able to assess creditworthiness of potential customers before making sales and often requires substantial prepayments. For the quarter ended March 31, 2000 the results of this new marketing approach are evident in the increased collections and in the decrease in the allowance for doubtful accounts to only 10% of total sales. Operating Costs. On an absolute dollar basis operating costs, including oil and gas production costs and production taxes have increased 50% to $336,000 in the quarter ended March 31, 2000 from $170,000 in the same quarter of the previous year. The increase is small when compared to the greater than 100% increase in production on a Mcfe basis. Production taxes mimicked the volume 63 increase with a 107% increase in the three months ended March 31, 2000 over the $70,000 reported for the quarter ended March 31, 1999. Carpatsky's greatest savings have been in the area of oil and gas production costs which were $0.24 per Mcfe and $0.28 per Mcfe for the quarters ended March 31, 2000 and 1999, respectively. The decline is primarily due to the significant increases in production experienced as new wells come on line in the RC field. General and Administrative. General and Administrative expenses have increased for the three months ended March 31, 2000 over the same period in 1999 primarily as a result of legal, accounting and consulting fees associated with Carpatsky's legal rights and operational activities in Ukraine. Carpatsky is expending substantial time, effort and money to attempt to extend their legal rights to the oil and gas reserves in the RC field beyond March 2003. Accordingly, future general and administrative expenses are expected to be at least equal to the amount incurred in the first quarter of 2000. Depreciation, Depletion and Amortization. The large absolute increases in depreciation, depletion and amortization from $185,000 in the quarter ended March 31, 1999 to $446,000 in the same period of the next year are directly related to increased production. Depletion is calculated on a units-of-production basis. The increase in the depletion rate from $0.52 per Mcfe to $0.55 per Mcfe for the quarters ended March 31, 1999 and 2000 relates to decreases in the reserve base. Reserves are impacted by realized prices and, although sales on the spot market are more collectible, they are at lower prices. Therefore, realized prices in 2000 declined causing a decline in reserves and a corresponding increase in the depletion rate. Impairment. Carpatsky uses the full-cost method of accounting. As a result of declining commodity prices, Carpatsky's full cost pool exceeded the "ceiling" by approximately $500,000 using natural gas prices being received at March 31, 2000 of about $0.68 per Mcf. Realized prices subsequent to March 31 have not increased. Accordingly, Carpatsky recognized an impairment charge of $500,000 in the first quarter of 2000 Gain on Net Monetary Position. As a result of Ukraine's inflationary economy, adjustments resulting from foreign currency translations, particularly monetary assets, which consists of current assets and liabilities, resulted in a substantial gain during the three month period ended March 31, 1999 due to current liabilities being significantly greater than current assets during this period. The increase in current assets and decrease in current liabilities during the three month period ended March 31, 2000 is the primary reason for the decline in these gains. Comparison of Years Ended December 31, 1999, 1998 and 1997 Allowance for Doubtful Accounts. As discussed previously, until September 1999, substantially all of the company's gas was sold to Naftogazukrainy, a Ukrainian national company similar to a public utility. Naftogazukrainy paid Carpatsky for gas only as its customers were able to pay it. Carpatsky recorded an allowance for doubtful accounts in 1999, 1998 and 1997 based upon historical collection experiences with Naftogazukrainy. The allowance became an increasingly larger portion of current sales as a pattern of significant non-payment became evident. Operating Costs. Production costs have increased each year from 1997 until 1999, but the cost increases have been at a much slower rate than production increases. When production costs are analyzed on a Mcfe basis, they decline annually from $1.92 per Mcfe in 1997 to $0.57 per Mcfe in 1998 and finally to $0.39 in 1999. The decline in production costs per Mcfe is primarily due to the significant increases in production experienced as new wells come on line in the RC field. To a lesser extent, the decline is attributable to more efficient operations as the Ukrainian ventures move from start-ups to more firmly established enterprises. 64 General and Administrative. General and Administrative expenses have increased for the year ended December 31, 1999 from previous periods primarily as a result of the efforts initiated in 1999 and continuing into 2000 which included: o restructuring Carpatsky's capital; o raising additional funds for its Ukrainian operations; and o legal, accounting and consulting fees associated with Carpatsky's legal rights and operational activities in Ukraine. In addition, 1999 includes non-cash charges of $477,000 for stock based compensation. These changes were attributable to: o stock issued for services to officers and directors; o stock issued for services from a third party; o the issuance of stock in lieu of commission; and o the estimated fair value of options issued. General and Administrative expenses decreased for the year ended December 31, 1998, when compared to the same period in 1997, primarily because approximately $250,000 of consulting related expenses were incurred in 1997 that were associated with evaluating the potential of the RC field and pursuing additional capital. These costs were not replicated in 1998. Depreciation, Depletion and Amortization. Production increases in 1999 resulted in a significant increase in depreciation, depletion and amortization from 1998. Because production in 1997 was primarily related to the smaller Bitkov field, comparison to 1997 is not meaningful due to relatively low production. Impairment - Oil and Gas Properties. Under the full-cost method of accounting, the net capitalized costs of proved oil and gas properties are subject to a "ceiling test," which limits such costs to the discounted present value, net of related tax effects, of proved reserves. If capitalized costs exceed this limit, the excess is charged to expense. In 1999 Carpatsky incurred an impairment charge of $3,050,000 which can be substantially attributed to the deteriorating price of natural gas from $1.42 per Mcf in December 1998 to $0.82 per Mcf in December 1999. A declining commodity price has the effect of lowering the "ceiling" of the full cost pool. Barter Income. As is customary in most cash poor countries, Carpatsky routinely enters into bartered transactions in Ukraine in order to monetize certain assets. These transactions principally consist of exchanging goods in satisfaction of accounts receivable and then selling those goods for hard currency to another party. The following is a summary of the bartered transactions for the periods presented:
For the Three Months For the Years Ended Ended March 31, December 31, -------------------- -------------------------------------- 2000 1999 1999 1998 1997 ---- ---- ---- ---- Gross barter income.................. $ 9,000 $ 36,000 $ 91,000 $ 104,000 $ 40,000 Costs of bartered goods.............. (2,000) (20,000) (56,000) (100,000) (6,000) ----------- ----------- ----------- ----------- ----------- Net barter income.............. $ 7,000 $ 16,000 $ 35,000 $ 4,000 $ 34,000 =========== =========== =========== =========== ===========
65 The total amount of bartered transaction have decreased in 2000 since Carpatsky is getting paid in hard currency for most of its oil and gas sales. Gain on Net Monetary Position. Ukraine is transitioning from a socialistic state to a market economy. During this transition, Ukraine has suffered from a highly inflationary economy. Even though inflation rates in the last few years have declined significantly, political, social and economic instability leaves future inflation rates unpredictable. Accordingly, for accounting purposes, the functional currency of Carpatsky's Ukrainian operations is the U.S. dollar. Adjustments resulting from foreign currency translations are made in the following manner: o Monetary assets and liabilities in Ukrainian ventures, such as cash, receivables and payables are translated using the exchange rate at the end of the respective reporting period. o Nonmonetary assets and liabilities, such as inventory, fixed assets and deferred income, are translated using the historical exchange rates in effect on the date of the transaction. Capital accounts are also translated using historical exchange rates. o Revenues and expenses from Ukrainian operations are translated using average exchange rates for the period presented, except for items related to nonmonetary assets and liabilities, such as cost of sales and depreciation, which are translated using historical exchange rates. o All translation gains and losses are reflected as a separate line item in the statement of operations which is included in determining the income or (loss) for the period presented. Historically, this translation has resulted in a substantial gain to Carpatsky due to the deterioration of the Ukraine's local currency. Most of the monetary gain reported by Carpatsky for the periods presented is a result of fewer US dollars being required to satisfy the payables of the Ukrainian operations because of the deterioration of the local Ukrainian currency. The increase in current liabilities in 1998 over the prior period increased these foreign currency gains. The subsequent decline in current liabilities in 1999 compared to 1998 resulted in a reduced gain on net monetary position. Amortization of Debt Discount. In connection with the debt issued in 1998 and 1997, Carpatsky issued warrants to purchase 8.8 million common shares at $0.25 per share. For financial statement reporting purposes, the estimated fair value of these warrants which was amortized, using the interest method, over the original term of the loans was $797,000. Accordingly, Carpatsky recognized a charge of $658,000 and $139,000 for the years ended December 31, 1998 and 1997, respectively, in connection with this amortization. Interest Expense. Interest expense decreased for the year ended December 31, 1999 when compared to the year ended December 31, 19998 due to the conversion of $2,007,706 of debt and $448,557 of accrued interest into common stock on September 30, 1999 at $0.125 per share. The converted notes, which were issued in late 1997 and early 1998, carried an interest rate of 12% per annum. Income Taxes. Carpatsky incurred a Ukrainian corporate profits tax of $447,000 and $132,000 for the years ended December 31, 1999 and 1998, respectively, and an additional $82,000 during the first three months of 2000. These were incurred despite a reported loss under U.S. generally accepted accounting principals primarily because the corporate profits tax is computed using Ukraine's statutory records which gives no consideration to the provision for doubtful accounts. In addition, depletion under U.S. generally accepted accounting principals is substantially higher than that allowed by Ukraine's statutory records policy. Imputed Dividends. In connection with the issuance of the preferred stock and warrants to Bellwether in December 1999, Carpatsky recognized a non-cash charge of $336,000. This charge represents the estimated intrinsic value of the warrants associated with that financing. 66 COMPARATIVE PER SHARE DATA The following table presents historical per share data for Pease and Carpatsky individually and pro forma per share data after giving effect to the merger. The combined company pro forma per share data was derived by combining information from the historical consolidated financial statements of Pease and Carpatsky accounting for the merger as a purchase by Carpatsky. You should read this table in conjunction with the historical consolidated financial statements of Pease and Carpatsky that are included in this document. You should not rely on the pro forma per share data as being necessarily indicative of actual results had the merger occurred in the past, or of future results.
Pease Carpatsky ------------------------- ----------------------------- Combined Company Equivalent Historical ProForma(1) Historical(2) Pro Forma(2) ---------- ---------- ------------ ----------- Income (loss) from operations per share--basic: Three months ended March 31, 2000 ...................... $ 0.04 $ (0.01) $ (0.01) $ (0.01) Year ended December 31, 1999 ........................... (0.43) (0.10) (0.12) (0.06) Income (loss) from operations per share--diluted: Three months ended March 31, 2000 ...................... 0.01 (0.01) (0.01) (0.01) Year ended December 31, 1999 ........................... (0.43) (0.10) (0.12) (0.06) Cash dividends per share: Three months ended march 31, 2000 ...................... -- -- -- -- Year ended December 31, 1999 ........................... -- -- -- -- Book value per share: As of March 31, 2000 ................................... 0.42(3) 0.20 0.03(4) 0.12 As of December 31, 1999 ................................ 0.41(3) N/A(6) 0.04(4) N/A6) Market value per share: As of May 26, 1999 (5) ................................. 0.625 N/A .14 N/A
- ------------------- (1) The combined company's pro forma data include the effect of the merger on the basis described in the notes to the unaudited pro forma combined financial statements included elsewhere in this document. (2) Carpatsky's equivalent pro forma amounts have been calculated by multiplying the combined company's pro forma net earnings (loss), cash dividends and book value per share amounts by the exchange ratio of .57842 shares of our common stock for each Carpatsky common share, so that the Carpatsky equivalent pro forma per share amounts are comparable to the respective values presented with respect to one Carpatsky common share. (3) Assumes that all of Pease's outstanding preferred stock is converted into 8,865,665 shares of common stock (representing the number of shares they will receive upon completion of the merger). (4) Assumes that all of Carpatsky's outstanding preferred stock is converted into 50 million shares of common stock. (5) Based on the closing bid price for our common stock and Carpatsky common shares on the last full trading day prior to the public announcement of the merger. (6) Pro-forma combined balance sheet as of December 31, 1999 has not been prepared. 67 COMPARATIVE PER SHARE MARKET PRICE AND RELATED SHAREHOLDER MATTERS Market Price Information Pease common stock is traded on the OTC Bulletin Board market under the symbol "WPOG." Until January 14, 1999, the Pease common stock was traded in the Nasdaq Small Cap Market. Carpatsky stock is listed for trading on the Canadian Venture Exchange under the symbol "KPY." Trading in Carpatsky common shares on the Canadian Venture Exchange was suspended on January 22, 2000 for failure to file required financial statements. The following table sets forth the high and low reported bid prices per share of Pease common stock and the high and low reported sales prices for Carpatsky common shares for the quarterly periods indicated, which correspond to the fiscal quarters for financial reporting purposes. The bid price information for Pease common stock reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Pease Carpatsky Common Stock(1) Common Shares(2) --------------------- -------------------- High Low High Low 1998: First quarter................................... 19.69 8.44 0.25 0.14 Second quarter.................................. 13.75 6.56 0.24 0.1 Third quarter................................... 7.5 1.25 0.17 0.04 Fourth quarter.................................. 3.13 0.81 0.14 0.04 1999: First quarter................................... 1 0.41 0.07 0.03 Second quarter.................................. 0.7 0.41 0.14 0.03 Third quarter................................... 0.63 0.44 0.14 0.03 Fourth quarter.................................. 0.45 0.25 0.14 0.03 2000: First quarter (3)............................... 0.75 0.28 0.16 0.07 Second quarter.................................. 0.44 0.17 -- --
- ---------------- (1) Adjusted to give effect to a 10 into 1 reverse stock split in the fourth quarter of 1998. (2) Adjusted to reflect U.S. dollars using the applicable exchange rate in effect at the end of each quarter. (3) Reflects trading prices for Carpatsky common shares for the period from January 1, 2000 until January 21, 2000. May 26, 1999 was the last full trading day prior to the public announcement of the proposed merger. The last reported sales price on the OTC Bulletin Board of shares of our common stock was $0.625. The last reported sales price of Carpatsky common shares on the Canadian Venture Exchange on the same day was $0.14. On July 31, 2000, the last reported sales price was $0.31 for Pease common stock on the OTC Bulletin Board. Neither Pease nor Carpatsky has paid dividends, nor is there any intention to pay dividends in the foreseeable future. As of January 1, 2000, Pease had approximately 1,100 registered holders of its common stock and Carpatsky had 164 registered holders of its common shares. 68 PRO FORMA COMBINED FINANCIAL INFORMATION Pursuant to the terms of the merger agreement, we will acquire all the outstanding stock of Carpatsky in exchange for approximately 44,959,557 shares of our common stock plus 102,410,000 shares of our newly designated preferred stock that will be convertible into 28,921,000 shares of our common stock subject to future anti-dilution adjustments. The preferred stock will not have a preferential dividend but will have provisions that provide for majority voting rights in the surviving entity. For accounting purposes, the acquisition of Carpatsky will be accounted for as a "reverse acquisition" of Pease by Carpatsky. Carpatsky will be considered to be the acquiring entity for financial reporting purposes. However, Pease will be the surviving legal entity after the merger. Carpatsky's board of directors, shareholders and management will have control of the surviving entity after the merger. Therefore, the assets and liabilities of Pease will be recorded at their estimated fair values in the merger. The fair values of the oil and gas properties of Pease are lower than their adjusted historical cost bases. The lower valuation for Pease's oil and gas properties is based on the valuation of common stock to be issued in the merger. This valuation was the same per share amount paid in the recent capital infusion in Carpatsky, assuming such preferred shares issued were converted into Pease common stock. The accompanying unaudited pro forma balance sheet combines the March 31, 2000 balance sheet of Pease and Carpatsky as if the transaction had occurred on that date. The accompanying unaudited pro forma statements of operations combine the operations of Pease and Carpatsky for the year ended December 31, 1999 and the three months ended March 31, 2000, as if the merger had occurred as of the beginning of the periods presented. These statements are not necessarily indicative of future operations or the actual results that would have occurred had the transaction been consummated at the beginning of the periods indicated. The unaudited pro forma combined financial statements should be read in conjunction with the historical financial statements and notes thereto, included elsewhere in this document. 69
PEASE OIL AND GAS COMPANY/CARPATSKY PETROLEUM, INC. PRO FORMA COMBINED BALANCE SHEET March 31, 2000 (Unaudited) Pro Forma Carpatsky Pease Adjustments Combined --------- ----- ----------- --------- Current Assets: Cash and equivalents................ $ 1,976,000 $ 909,000 $ (269,000)(a) $ 2,399,000 (217,000)(b) Trade receivable.................... 296,000 538,000 834,000 Other receivables................... 7,000 -- 7,000 Inventories......................... 120,000 -- 120,000 VAT refundable...................... 50,000 -- 50,000 Prepaid expenses and other.......... 205,000 72,000 277,000 ----------- ----------- ------------ Total current assets.............. 2,654,000 1,519,000 3,687,000 ------------ ----------- ------------ Oil and Gas Properties, at cost using the full cost method.......... 9,723,000 20,754,000 (17,417,000)(c) 13,410,000 350,000 (b) Less accumulated amortization....... (5,768,000) (15,115,000) 15,115,000 (c) (5,768,000) ------------ ----------- ------------ Net oil and gas properties........ 3,955,000 5,639,000 7,642,000 ------------ ----------- ------------ Other Assets: VAT refundable...................... 87,000 -- 87,000 Deferred acquisition costs.......... 133,000 -- (133,000)(b) -- Loan to Ukrainian JV partner........ 72,000 -- 72,000 Office equipment and vehicles....... 37,000 49,000 86,000 Debt issuance costs, net............ -- 150,000 (150,000)(c) -- Deposits and other.................. -- 5,000 5,000 ------------ ----------- ------------ Total other assets................ 329,000 204,000 250,000 ------------ ----------- ------------ Total Assets............................. $ 6,938,000 $ 7,362,000 $ 11,579,000 ============ =========== ============ Current Liabilities: Current maturities of debt.......... $ 663,000 $ 5,000 $ 668,000 Accounts payable.................... 1,846,000 207,000 2,053,000 Taxes payable....................... 409,000 -- 409,000 Accrued expenses.................... 54,000 105,000 159,000 Due to officers and directors....... -- -- -- Advances received................... 170,000 -- 170,000 ------------ ----------- ------------ Total current liabilities......... 3,142,000 317,000 3,459,000 ------------ ----------- ------------ Long-Term Debt, less current maturities.................. -- 2,561,000 238,000 (c) 2,799,000 ------------ ----------- ------------ Shareholders' Equity Preferred Stock-- Series B.......... 4,000,000 1,000 (1,000)(d) 4,000,000 Common Stock........................ 9,395,000 173,000 (4,012,000)(d) 5,556,000 Additional paid-in capital.......... -- 37,636,000 (32,004,000)(d) 5,632,000 Accumulated deficit................. (9,599,000) (33,326,000) 33,327,000 (d) (9,367,000) ------------ ----------- ------------ (269,000)(a) Total shareholders' equity.......... 3,796,000 4,484,000 5,321,000 ------------ ----------- ------------ Total Liabilities and Shareholders' Equity..................... $ 6,938,000 $ 7,362,000 $ 11,579,000 ============ =========== =============
See accompanying notes to these pro forma financial statements. 70
PEASE OIL AND GAS COMPANY/CARPATSKY PETROLEUM, INC. PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 (Unaudited) Pro Forma Carpatsky Pease Adjustments Combined --------- ----- ----------- --------- Revenues, net ................................... $ 575,000 $ 799,000 $ 1,374,000 ------------ ------------ ------------ Operating Costs and Expenses: Oil and gas production and production taxes .......................... 336,000 163,000 499,000 General and administrative ................... 333,000 173,000 506,000 Depreciation, depletion, amortization and impairment . .............................. 946,000 252,000 (94,000)(e) 1,104,000 ------------ ------------ ------------ Total operating costs and expenses ............................. 1,615,000 588,000 2,109,000 ------------ ------------ ------------ Income (Loss) from Operations ................... (1,040,000) 211,000 (735,000) Other Income (Expense): Interest expense ............................. (23,000) (90,000) 89,000 (f) (24,000) Interest income .............................. 9,000 9,000 18,000 Net barter income ............................ 7,000 -- 7,000 Gain on net monetary position ................ 63,000 -- 63,000 ------------ ------------ ------------ Total other income (expense) ............ 56,000 (81,000) 64,000 ------------ ------------ ------------ Income (Loss) Before Taxes ...................... (984,000) 130,000 (671,000) ------------ Income Tax ...................................... (82,000) -- (82,000) ------------ ------------ ------------ Net Income (Loss) ............................... (1,066,000) 130,000 (753,000) Preferred Stock Dividends ....................... -- (66,000) 66,000 (g) -- ------------ ------------ ------------ Net Income (Loss) Applicable to Common Shareholders .......................... $ (1,066,000) $ 64,000 $ (753,000) ============ ============ ============ Net Income (Loss) Per Share ..................... $ (0.01) $ (0.04) $ (0.01) ============ ============ ============ Weighted Average Number of Shares Outstanding ........................... 77,728,263 1,731,000 55,557,000 ============ ============ ============
See accompanying notes to these pro forma financial statements. 71
PEASE OIL AND GAS COMPANY/CARPATSKY PETROLEUM, INC. PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (Unaudited) Pro Forma Carpatsky Pease Adjustments Combined --------- ----- ----------- --------- Revenues, net ....................................... $ 800,000 $ 2,144,000 $ 2,944,000 ------------ ------------ ------------ Operating Costs and Expenses: Oil and gas production and production taxes .............................. 1,017,000 405,000 1,422,000 General administrative ........................... 1,385,000 845,000 2,230,000 Depreciation, depletion, amortization and impairment . .................................. 4,416,000 1,007,000 $ (417,000)(e) 5,006,000 Consulting expenses--related party ............... -- 38,000 38,000 ------------ ------------ ------------ Total operating costs and expenses .......... 6,818,000 2,295,000 8,696,000 ------------ ------------ ------------ Income (Loss) from Operations ....................... (6,018,000) (151,000) (5,752,000) Other Income (Expense): Interest expense ................................. (260,000) (360,000) 358,000 (f) (262,000) Interest income .................................. -- 46,000 46,000 Net barter income ................................ 35,000 -- 35,000 Gain on net monetary position .................... 936,000 -- 936,000 ------------ ------------ ------------ Total other income (expense) ................ 711,000 (314,000) 755,000 ------------ ------------ ------------ Income (Loss) Before Taxes .......................... (5,307,000) (465,000) (4,997,000) Income Tax .......................................... (447,000) -- (447,000) ------------ ------------ ------------ Net Income (Loss) ................................... (5,754,000) (465,000) (5,444,000) Preferred Stock Dividends ........................... (336,000) (266,000) 266,000 (g) (336,000) ------------ ------------ ------------ Net Income (Loss) Applicable to Common Shareholders ..................................... $ (6,090,000) $ (731,000) $ (5,780,000) ============ ============ ============ Net Income (Loss) Per Share ......................... $ (0.12) $ (0.43) $ (0.10) ============ ============ ============ Weighted Average Number of Shares Outstanding ............................... 49,471,000 1,684,000 55,510,000 ============ ============ ============
See accompanying notes to these pro forma financial statements. 72 PEASE OIL AND GAS COMPANY PRO FORMA ADJUSTMENTS (a) To reflect the accrual and payment of the severance due Pease's employees, including amounts due to its President and CFO. (b) To reflect the accrual and payment of the external costs associated with the Pease acquisition estimated to be incurred after March 31, 2000. (c) To reflect the transaction as a reverse acquisition whereby Pease's assets and liabilities are adjusted to their estimated fair value based on the value of the shares exchanged. (d) To reflect the exchange of 44,959,557 common shares of Pease for 100% of the outstanding common shares of Carpatsky; 8,865,665 common shares for conversion of the Pease preferred stock and 102,410,000 shares of Pease preferred shares for Carpatsky preferred shares. (e) To reflect the reduction in depletion and amortization expense associated with Pease's oil and gas properties that are attributable to a lower valuation that will be assigned to those assets upon consummation of the merger transaction. (f) To reflect the reduction in interest expense related to historical amortization of Pease's deferred loan costs. The related debt will be recorded at its fair value, which equals its face amount in the acquisition. The debt discount and other deferred loan costs will not be assigned a value in the acquisition, resulting in lower pro forma interest expense. (g) To reflect the reduction of series B preferred stock dividends that would not have been incurred had the transaction occurred at the beginning of the period presented. 73 BUSINESS OF PEASE History and Overview We were incorporated in the state of Nevada on September 11, 1968 to engage in the oil and gas acquisition, development and production business. Prior to 1993, we conducted business primarily in Western Colorado and Eastern Utah. In August 1993, we commenced operating in the Denver-Julesburg Basin of northeastern Colorado through an acquisition which substantially expanded our operations. In the years following the acquisition, we invested several million dollars in an effort to exploit the assets acquired and experienced marginal success. We initiated efforts in 1996 and 1997 to expand our resource base through the acquisition and exploration of properties located in the Gulf Coast region of southern Louisiana and Texas. During 1998, we sold substantially all of our Rocky Mountain oil and gas assets for approximately $3.2 million. Accordingly, we now maintain only non-operated interests in three core areas in southern Louisiana and Texas. Business Strategy Since 1997, we have generally participated as a minority, non-operating interest holder in oil and gas drilling projects with industry partners. Although we have not operated our properties or originated any exploration prospects, we have actively participated in evaluating opportunities presented by our industry partners. Our current and future business strategy will focus on expanding our reserve base and future cash flows by continuing to develop proven properties, nurturing strategic alliances and exploiting exploration opportunities in the Gulf Coast Region. We plan to execute this strategy by focusing our immediate exploration efforts and resources on what we consider our three core areas in the Gulf Coast, which are: o the East Bayou Sorrel Field in Iberville Parish, Louisiana, operated by National Energy Group, Inc.; o the Maurice Field in Vermillion Parish, Louisiana, operated by Amerada Hess; and o the Formosa, Texana and Ganado 3-D seismic exploration prospects, encompassing 130,000 acres in and around Jackson County, Texas, operated by Beta Oil and Gas, Inc. In addition, we have emphasized the following precepts in seeking to implement our strategy: o making disciplined use of advanced exploration technologies such as 3-D seismic and computer- aided exploration technology; o developing alliances with experienced and competent technical personnel that have been trained by major oil companies and can demonstrate a successful track record; o reinvesting future operating cash flows into development drilling and recompletion activities; and o pursuing the acquisition of properties and evaluating potential merger candidates that could build upon and enhance our existing asset base. We have recognized that our ability to implement our business strategies has been largely dependent upon finding a suitable merger candidate and raising additional debt or equity capital to fund acquisitions, exploration, drilling and development activities. 74 Operations As of December 31, 1999, we had varying ownership interests in 10 gross (1 net) non-operated wells located in Southern Louisiana and Texas. We are a non-operator in the oil and gas prospects we pursue in the Gulf Coast region. The following table presents oil and gas reserve information within our major operating area as of December 31, 1999: Net Proved Reserves -------------------------------------- Region Bbls Mcf BOE (6:1) - -------------------------------------- ----- --- -------- Gulf Coast ........................... 334,000 1,359,000 561,000 principally in S. Louisiana Principal Oil and Gas Interests Developed Acreage. Substantially all of our producing oil and gas properties are located on leases which we hold for as long as production is maintained. Our producing properties as of December 31, 1999 are located in the areas shown in the following table:
Oil Gas Developed ---------------------- ---------------------- Acreage Gross Net Gross Net ---------------- Fields State Wells(1) Wells(2) Wells(1) Wells(2) Gross Net(2) ----- ----- ------- ------- ------- ------- ----- ----- East Bayou Sorrel......... Louisiana 3 0.47 -- -- 368 33 South Lake Arthur......... Louisiana -- -- 1 0.2 349 73 Maurice................... Louisiana -- -- 2 0.14 196 14 Austin Bayou.............. Louisiana -- -- 3 0.06 505 11 Ganado.................... Texas -- -- 1 0.13 116 15 ------ ------ ------ ------- ------ ------ Total................ 3 0.47 7 0.53 1,534 146 ====== ======= ====== ======= ====== ======
75 - --------------------- (1) Wells which produce both oil and gas in commercial quantities are classified as oil wells for disclosure purposes. (2) Net wells and net acres refer to our fractional working interests multiplied by the number of wells or number of acres. Undeveloped Acreage. Our gross and net working interests in undeveloped acreage in the Gulf Coast Region as of December 31, 1999 is described in the following table. These interests include both leased undeveloped acreage and areas for which we have lease options where 3-D seismic is being or has been conducted.
Undeveloped Acreage Prospect Description State Gross Net - ------------------------------------------- --------------- ---------------- ---------- East Bayou Sorrel.......................... Louisiana 90 14(1) Maurice Prospect........................... Louisiana 894 80(2) Parallel 3-D Program-Leases................ Texas 11,575 1,446(3) Austin Bayou............................... Texas 694 15(2) --------- ---------- Totals:............................... 13,253 1,555 ========= ==========
- ------------------------- (1) Substantially all of these leases will expire in 2001 unless production has been obtained. (2) Substantially all of these leases will expire in 2000 unless production has been obtained. (3) Unless production has been obtained, 601 net acres will expire in 2000, 829 net acres will expire in 2001 and 16 net acres will expire in 2002. Gulf Coast Properties and Prospects Overview. The U.S. Gulf Coast, although it has been actively explored, remains a prolific area with excellent upside potential for exploration due to modern proprietary 3-D seismic surveys. We believe that the combination of technology and the availability of leases to drill make this an opportune time for an aggressive exploration program. We currently participate as a non-operating, minority interest partner in three significant areas. East Bayou Sorrel. During 1997, we acquired a 10% working interest and a 7.125% after prospect payout leasehold interest in the 1996 discovery of a new oil and gas field, the East Bayou Sorrel Field located in Iberville Parish, Louisiana. This field has been explored with additional well tests and a 3-D seismic survey was completed in February 1998. As of March 31, 2000, the production from the three producing wells in this field represent approximately 86% of our net daily production per BOE. Preliminary results of the 3-D survey appear to confirm the producing reservoirs at East Bayou Sorrel, and a number of potential undrilled targets contained within the 3-D database. Additional development drilling of the East Bayou Sorrel Field, as well as exploratory drilling based on images from the 3-D seismic, is expected to be conducted sometime in the future. The prospect "paid out" effective November 15, 1999. The payout caused our working interest to increase from 8.9% to 15.6% as a result of our owning the after prospect payout interest. Maurice Field. In 1997, we joined Davis Petroleum and Amerada Hess to drill a discovery well at Maurice Field, Vermilion Parish, Louisiana. Since then two additional wells have been drilled and completed, of which one well was lost in late 1999 due to downhole mechanical problems. A 3-D survey is currently being interpreted and additional wells are expected to be drilled in the future in order to develop the field. The producing wells represent approximately 8% of our net daily production per BOE. Our working interests in this field range from 6.9% to 8.4%. 76 Formosa, Texana and Ganado 3-D Exploration Prospects. During 1997, we secured a 12.5% working interest in three specific on-shore upper Gulf Coast 3-D seismic survey projects located in and around Jackson County, Texas. The 3-D survey covers over 200 square miles (approximately 130,000 acres). The surveys on the three projects are completed and the data is currently being interpreted and integrated with known geology. Parallel Petroleum of Midland, Texas was the designated operator for these wells. Five wells were drilled on this acreage in 1999 of which four were dry holes. In May 2000, Beta Oil and Gas, Inc. became the designated operator for these prospects in an effort to better exploit the prospects. As a result of this change in operator, we expect that some of the 3-D data will be reprocessed and the drilling program will be significantly accelerated. Rocky Mountain Properties During 1998, we sold all of our Rocky Mountain oil and gas assets. Accordingly, our reserves, revenues and future cash flows are now limited to Gulf Coast region properties. Title to Properties Only a limited, perfunctory title examination is conducted at the time we acquire interests in oil and gas leases. This practice is customary in the oil and gas industry. Prior to the commencement of drilling operations, a thorough title examination is conducted. We believe that title to our properties is good and defensible in accordance with standards generally accepted in the oil and gas industry, subject to such exceptions which do not detract substantially from the property economics. In addition, some prospects may be burdened by customary royalty interests, liens incident to oil and gas operations and liens for taxes and other governmental charges as well as encumbrances, easements and restrictions. We do not believe that any of these burdens will materially interfere with our use of the properties. Estimated Proved Reserves Our oil and gas reserve and reserve value information is included in footnote 10 of our consolidated financial statements, titled "Oil and Gas Producing Activities." This information is prepared pursuant to Statement of Financial Accounting Standards No. 69, which includes the estimated net quantities of our proved oil and gas reserves and the standardized measure of discounted future net cash flows. The estimated proved reserves information for the Gulf Coast for both 1999 and 1998 is based upon an engineering evaluation by Netherland, Sewell & Associates, Inc. The estimated proved reserves represent forward-looking statements and should be read in connection with the disclosure on forward-looking statements set forth elsewhere in this proxy statement and prospectus. We have not filed any reports containing oil and gas reserve estimates with any federal authority or agency other than the Securities and Exchange Commission and the Department of Energy. There were no differences in the reserve estimates reported to these two agencies. All of our oil and gas reserves are located in the continental United States. The table below sets forth our estimated quantities of proved reserves, and the present value of estimated future net revenues discounted by 10% per year using prices we were receiving at the end of each of the three fiscal years ending December 31, 1999, 1998 and 1997 on a non-escalated basis. 77
December 31, ---------------------------------------------------------------- 1999 1998 1997 ---- ---- ------------------------------------- Gulf Coast Rocky Mtns. Total ---------- ---------- ----- Estimated Proved Oil Reserves (Bbls) .................... 334,000 275,000 308,000 777,000 1,085,000 Estimated Proved Gas Reserves (Mcf) ..................... 1,359,000 1,368,000 1,360,000 3,175,000 4,535,000 Estimated Future Net Revenues ........................... $ 8,156,700 $ 4,054,000 $ 5,796,000 $ 8,575,000 $14,371,000 Present Value of Estimated Future Net Revenues .......... $ 6,269,700 $ 2,951,000 $ 4,460,000 $ 5,218,000 $ 9,678,000 Prices used to determined reserves: Estimated Proved Oil Reserves (Bbls) .................... 334,000 275,000 308,000 777,000 1,085,000 Oil (per Bbl) ...................................... $ 24.91 $ 10.15 $ 17.11 $ 16.15 Gas (per Mcf) ...................................... $ 2.77 $ 2.43 $ 2.61 $ 1.78
Net Quantities of Oil and Gas Produced Our net oil and gas production for each of the last three years, all of which was from properties located in the United States, was as follows: Year Ended December 31, 1999 1998 1997 ---- ---- ---- Oil (Bbl) Gulf Coast ......... 74,000 58,000 43,000 Rocky Mtns ......... -- 51,000 80,000 -------- -------- -------- Total .......... 74,000 109,000 123,000 ======== ======== ======== Gas (Mcf) Gulf Coast ......... 337,000 320,000 91,000 Rocky Mtns ......... -- 230,000 392,000 -------- -------- -------- Total .......... 337,000 550,000 483,000 ======== ======== ======== The average sales price per barrel of oil and Mcf of gas, and average production costs per barrel of oil equivalent excluding depreciation, depletion and amortization were as follows:
Average Sales Prices Average ------------------------------------------- Production Year Ended December 31, Oil (Bbls) Gas (Mcf) Per BOE Cost Per BOE ---------------------- --------- -------- ------- ------------ 1999: Gulf Coast ............. $ 17.80 $ 2.46 $ 16.48 $ 3.11 1998: Gulf Coast ............. $ 12.19 $ 2.22 $ 12.73 $ 2.17 Rocky Mtns ............. $ 12.11 $ 1.39 $ 10.50 $ 9.04 Combined Avg ........ $ 12.16 $ 1.87 $ 11.74 $ 5.22 1997: Gulf Coast ............. $ 19.15 $ 2.94 $ 18.76 $ 2.84 Rocky Mtns ............. $ 18.75 $ 1.46 $ 14.25 $ 9.09 Combined Avg ........ $ 18.89 $ 1.74 $ 15.54 $ 7.29
78 Drilling Activity The following table summarizes our oil and gas drilling activities that were completed during the last two fiscal years, all of which were located in the continental United States:
Year Ended December 31, ------------------------------------------------------- 1999 1998 1997 ------------ --------------- ----------------- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Wells Drilled Exploratory Oil....................... -- -- 1 0.09 1 0.1 Gas....................... 3 .27(1) 4 0.14 1 0.08 Non-productive............ 4 0.5 3 0.32 6 0.77 ------ ------- ----- ----- ----- ----- Total................. 7 0.77 8 0.55 8 0.95 ====== ======= ===== ===== ===== ===== Development Oil....................... -- -- -- -- -- -- Gas....................... -- -- -- -- -- -- Non-productive............ -- -- -- -- -- -- ------ ------ ----- ----- ----- ----- Total................. -- -- -- -- -- -- ====== ====== ===== ===== ===== =====
- ----------------- (1) One of these wells is located in the Maurice Field and was successfully completed in March 1999. However, that interval was plugged during the fourth quarter of 1999 due to mechanical failure down-hole. Another formation up-hole in that well bore was recompleted during the first quarter of 2000. Competition The oil and gas industry is highly competitive in many respects, including identification of attractive oil and gas properties for acquisition, drilling and development, securing financing for such activities and obtaining the necessary equipment and personnel to conduct such operations and activities. We compete with a number of other companies, including large oil and gas companies and other independent operators with greater financial resources and more experience. There can be no assurance that we will be able to compete effectively with these other entities. Markets Overview. The three principal products which we currently produce and market through our operating partners are oil, natural gas and natural gas liquids. We do not currently use commodity futures contracts and price swaps in sales or marketing of oil and gas. Oil. Oil produced from our properties is generally transported by truck, barge or pipeline to unaffiliated third- party purchasers at the prevailing field price. Currently, the primary purchaser of our proportionate share of oil is Plains Marketing, L.P. which buys approximately 80% of our current oil production. The contracts are month-to- month and subject to change. The market for our oil is competitive and therefore we do not believe that the loss of one of our primary purchasers would have a material adverse effect on our business 79 because other arrangements could be made to market our oil products. We do not anticipate problems in selling future oil production because purchases are made based on current market conditions and pricing. Oil prices are subject to volatility due to several factors beyond our control, including political turmoil, domestic and foreign production levels, OPEC's ability to adhere to production quotas and governmental control and regulation. Natural Gas. We sell, through our operating partners, gas production at the wellhead. We generally sell to various pipeline purchasers or gas marketing companies. The property operators sell the gas and pass the revenue on to us when it is received. Currently, National Energy Group and Amerada Hess sell and distribute substantially all of our gas and corresponding revenues. The wellhead contracts have various terms and conditions, including contract duration. Under each wellhead contract, the purchaser is generally responsible for gathering, transporting, processing and selling the gas and gas liquids and we receive a net price at the wellhead. Regulations General. All aspects of the oil and gas industry are extensively regulated by federal, state and local governments. The following discussion of regulation of the oil and gas industry is necessarily brief and is not intended to constitute a complete discussion of the various statutes, rules, regulations or governmental orders to which our operations may be subject. Price Controls on Liquid Hydrocarbons. There are currently no federal price controls on liquid hydrocarbons which include oil, gas and natural gas liquids. As a result, we sell oil produced from our properties at unregulated market prices which historically have been volatile. Federal Regulation of Sales and Transportation of Natural Gas. The transportation and sale of natural gas in interstate commerce was regulated until 1993 pursuant to the Natural Gas Act, the Natural Gas Policy Act of 1978 and regulations promulgated thereunder. The Natural Gas Wellhead Decontrol Act of 1989 eliminated all regulation of wellhead gas sales effective January 1, 1993. As a result, gas sales are no longer regulated. The transportation and resale in interstate commerce of natural gas we produce continues to be subject to regulation by the Federal Energy Regulatory Commission (FERC) under the Natural Gas Act. The transportation and resale of gas transported and resold within the state of its production is usually regulated by the state involved. Although federal and state regulation of the transportation and resale of gas we produce currently does not have any material direct impact on us, such regulation does have a material impact on the market for our gas production and the price we receive for our gas production. Adverse changes in the regulation affecting our gas markets could have a material impact on us. Commencing in the mid-1980s and continuing until the present, FERC promulgated several orders designed to correct market distortions and to make gas markets more flexible and competitive. These orders have had a profound influence on gas markets in the United States and have increased the importance of interstate gas transportation and encouraged development of a large spot market for gas. In addition to FERC regulation of interstate pipelines under the Natural Gas Act, various state commissions also regulate the rates and services of pipelines whose operations are purely intrastate in nature. To the extent intrastate pipelines elect to transport gas in interstate commerce under certain provisions of the Natural Gas Policy Act, those transactions are subject to limited FERC regulation under this act that may ultimately affect the price of gas which we produce and sell. 80 There are many legislative proposals pending in Congress and in the legislatures of various states that, if enacted, might significantly affect the oil and gas industry. We are not able to predict what will be enacted and thus what effect, if any, such proposals would ultimately have on us. State and Local Regulation of Drilling and Production. State regulatory authorities have established rules and regulations requiring permits for drilling, bonds for drilling, reclamation and plugging operations, limitations on spacing and pooling of wells and reports concerning operations. The states in which we have oil and gas interests also have statutes and regulations governing a number of environmental and conservation matters, including the unitization and pooling of oil and gas properties and the establishment of maximum rates of production from oil and gas wells. For example, each well in the East Bayou Sorrell prospect is currently restricted to approximately 1,400 Bbls of oil per day because of such state mandated restrictions. A few states also prorate production to the market demand for oil and gas. These statutes and regulations limit the rate at which oil and gas could otherwise be produced. In recent years, pressure has increased in states where we have been active to mandate compensation to surface owners for the effects of oil and gas operations and to increase regulation of the oil and gas industry at the local government level. In general, such local regulation is aimed at increasing the involvement of local governments in the permitting of oil and gas operations, requiring additional restrictions or conditions on the conduct of operations to reduce the impact on the surrounding community and increasing financial assurance requirements. Accordingly, such regulation has the potential to delay and increase the cost, or, in some cases, to prohibit entirely, the conduct of drilling activities on our properties. Environmental Regulations. The production, handling, transportation and disposal of oil and gas and by- products is subject to regulation under federal, state and local environmental laws. In most instances, the applicable regulatory requirements relate to water and air pollution control and solid waste management measures or to restrictions on operations in environmentally sensitive areas. However, environmental assessments have not been performed on all of our properties. To date, expenditures for environmental control facilities and for remediation have not been significant in relation to our results of operations. However, it is reasonably likely that the trend in environmental legislation and regulations will continue towards stricter standards and may result in significant future costs to oil and gas producers. For instance, efforts have been made in Congress to amend the Resource Conservation and Recovery Act to reclassify oil and gas production wastes as hazardous waste, the effect of which would be to further regulate the handling, transportation and disposal of such waste. If such legislation were to pass, it could have a significant adverse impact on our operating costs and the oil and gas industry in general. We believe that our operations comply with all applicable legislation and regulations in all material respects, and that the existence of such regulations has had no more restrictive effect on our methods of operation than other similar companies in the industry. Although we do not believe our business operations presently impair environmental quality, compliance with federal, state and local regulations which have been enacted or adopted regulating the discharge of materials into the environment could have an adverse effect upon our capital expenditures, earnings and competitive position, the extent of which we are presently unable to assess. We are not aware of any environmental degradation which exists, or any obligation for remediation of which would arise under applicable state or federal environmental laws. We do not maintain a fund for environmental or other similar costs. We would pay any such costs or expenses out of operating capital. 81 Operational Hazards and Insurance Our operations are subject to the usual hazards incident to the drilling and production of oil and gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution, releases of toxic gas and other environmental hazards and risks. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operations. We maintain insurance of various types to cover our operations. Our insurance does not cover every potential risk associated with the drilling and production of oil and gas. In particular, coverage is not available for certain types of environmental hazards. The occurrence of a significant uninsured adverse event could have a material adverse effect on our financial condition and results of operations. Moreover, no assurance can be given that we will be able to maintain adequate insurance in the future at reasonable rates. Administration Office Facilities. We currently rent on a month-to-month basis approximately 3,400 square feet in an office facility in Grand Junction, Colorado. The rental rate is $2,400 per month. Employees. As of December 31, 1999, we had four full time employees and one part time employee. None of our employees are covered by a collective bargaining agreement. We believe that our relations with employees are satisfactory. 82 BUSINESS OF CARPATSKY Predecessors of Carpatsky were formed in 1992 to engage in exploration and development of oil and gas properties in the Republic of Ukraine. In May 1995, a predecessor of Carpatsky completed a merger with an Alberta Stock Exchange listed corporation and became a publicly-traded company. Oil and Gas Properties Carpatsky holds interests in the Rudovsko-Chervonozavodskoye gas and gas condensate field and the Bitkov- Babchensky oil field. Both of these properties are located in Ukraine. Rudovsko-Chervonozavodskoye gas and gas condensate field (RC field) The RC field is located approximately 150 miles east of Kyiv in the Poltava District of central Ukraine in the Dnieper-Donets basin. The basin is an asymmetric, Paleozoic rift 500 miles by 125 miles in size, formed in three stages of development. Exploration of the basin began in the 1970s and to date more than 200 oil and gas fields have been discovered. We believe that prospective anticlinal structures between 14,760' and 18,000' remain as targets for further exploration. Carpatsky and its partner Ukrnafta have drilled and completed three wells in this field. Carpatsky and Ukrnafta are currently drilling three additional wells. Of these, two wells are in various stages of completion and are expected to be on production in 2000. The third well is still being drilled. Carpatsky expects to drill at least two additional wells during the exploratory period and, subject to the agreement of the parties to the joint activity agreement, may drill up to 20 additional wells. Ownership Rights in the RC Field. Carpatsky has no direct rights in the license to extract gas and gas condensate from the RC field. Ukrnafta is the sole licensee for the RC field. Carpatsky participates in the operation and development of the RC field pursuant to a joint activity agreement between Carpatsky and Ukrnafta. A joint activity agreement is a type of consortium that dates from Soviet law and was intended to be a mechanism to permit collective ownership and bartering under the socialist legal system as practiced in the Soviet Union. Before the passage of appropriate reform legislation in the areas of company law and civil law, foreign investors, in the period of perestroika and in the very early years after the dissolution of the Soviet Union, seized upon the joint activity form as the only available mechanism to create a joint contractual relationship. The existing joint activity agreement has been amended several times in attempts to bring it up to date and more closely in conformity with Western practices. It is an inherently unstable form compared to the modern Western corporate form. The joint activity structure does not have the backing of the body of company law that aids in the interpretation of legal issues arising from the operation of a state chartered legal entity. In addition, the joint activity requires an annual meeting to decide upon the budget and contributions from the parties. The failure of Carpatsky and Ukrnafta to agree on a budget could result in either dissolution of the joint activity or failure to commence or continue any drilling or other activity of any kind. Under the joint activity agreement, Carpatsky is contractually entitled to receive 45% of the revenue from sale of production in the RC field, and is required to pay 50% of the exploration, development and production costs. Payments to the joint activity's account can be made in the form of cash or in kind by providing materials, equipment and specific services. Under the joint activity agreement, if Carpatsky or Ukrnafta do not pay their share of costs, their percent interest in revenues may be reduced, if agreed to by the parties, until revenues from the sale of production are sufficient to pay the costs otherwise payable. The actual percentage of Carpatsky's right to revenues is calculated quarterly, based on the relative cumulative contributions of the participants as reflected in the books maintained pursuant to the joint activity agreement. 83 We have received a legal opinion of Vasil Kisil & Partners, Kiev, Ukraine, regarding Carpatsky's rights under the joint activity agreement, and its ability to enforce those rights. The opinion notes that the rights to extract the oil and gas in the RC field are held by Ukrnafta as the license holder. The opinion also states that Ukrnafta is not restricted in the manner in which it disposes of oil and gas extracted from the RC field, including pursuant to the joint activity agreement. The opinion further states the belief of Vasil Kisil that Carpatsky could enforce its rights under the joint activity agreement through injunctive relief in the courts. The Vasil Kisil opinion also notes the disadvantages of operations under a joint activity agreement described above, including the lack of a right to convert ownership of the RC field from an exploration license to a development license. The opinion is based on a number of assumptions, including that Ukrnafta took all actions necessary to properly authorize and execute the documents reviewed, that all signatures were authentic and that reviewed documents were complete and conformed to originals. The opinion has been filed as an exhibit to the registration statement of which this proxy statement and prospectus is part. Conversion from a Joint Activity Agreement to a Modern Accepted Legal Form. Ukraine has in recent years adopted company law similar to those common in European civil law jurisdictions. The two most common forms of corporate entity are the joint stock company and the limited liability company. Carpatsky intends to reduce the existing risk arising from the joint activity form by creating a corporate entity with the cooperation of Ukrnafta. This process is expected to take place in the next six months pending initiation of direct negotiations. Although Carpatsky and Ukrnafta share management control over the joint activity equally, the structure of the joint activity is disadvantageous to Carpatsky. Carpatsky's remedy for a failure to agree on an annual budget is to dissolve the joint activity. Because Ukrnafta is the sole licenseholder, Ukrnafta's mineral rights will not be diminished in any way by dissolution of the joint activity, but Carpatsky would lose all contractual rights and claims to the RC field. The disparity in the effects of a dissolution on the parties gives Ukrnafta substantial bargaining power with respect to setting the annual budget for the joint activity. The creation of a modern corporate entity will also ameliorate many of the accounting problems associated with the joint activity form. The complexity and peculiarity of books and accounting related to joint property has resulted in considerable confusion in the past, despite the expenditure of significant management and accounting time and expense. Ownership of assets and claims by a true corporate entity is far less complex. Conversion from Licensing Regime to a Production Sharing Agreement. Ukrnafta holds an exploration and pilot production license to the RC field which will expire on March 30, 2003. Unless the exploration license is converted into a production license, which generally lasts for 20 years, all Ukrnafta's underlying mineral rights and Carpatsky's indirect rights through the joint activity mechanism to receive the proceeds of production in the RC field will terminate when the license terminates. The granting of a production license is at the discretion of the government of Ukraine. A statute authorizing production sharing agreements was recently passed by the Ukraine legislature and was signed into law late last year. The necessary enabling legislation was enacted in June 2000. The statute provides that any license granted before June 1, 1999 may be converted into a production sharing agreement. This grandfathering provision would allow Ukrnafta, but not Carpatsky, to convert its existing license to a production sharing agreement. 84 A production sharing agreement is a preferable form of conducting oil and gas operations in the Ukraine because it permits the assignment of interests in the production sharing agreement. This assignability would enable Carpatsky to be assigned a direct interest in the mineral rights in the RC field for the first time. The production sharing agreement legislation also contains other advantages from a legal perspective, including a provision that establishes a legislative basis for the Ukraine government to waive its sovereign immunity vis-a-vis the licensee. The legislation's other provisions include unrestricted carry-forward of losses, unrestricted use of production share and facilitation of exports. The most critical aspect of the legislation, as in production sharing agreements worldwide, is the fact that the production share of the state takes the place of most taxes, thus reducing uncertainty further and enhancing the ability to secure financing for the project. Ukrnafta and Carpatsky have verbally agreed to convert the license covering the RC field into a production sharing agreement at the earliest practicable time. Although no assurances can be made, based on discussions with government officials and legal counsel, Carpatsky believes that it will take at least six months to receive a production sharing agreement. Because the production sharing legislation is new, no assurances can be given as to the timing of receipt of a production sharing agreement or whether Ukrnafta will be able to convert the license into a production sharing agreement. If Carpatsky and Ukrnafta are unable to convert the license into a production sharing agreement, it will be difficult to reduce the risk attendant to the license ownership issue discussed above. Ukraine's major trading partners and multilateral lenders may interpret the failure of Ukraine to produce any valid production sharing contracts as an indication of the failure of economic reform, which could increase the difficulty of financing projects in Ukraine. Bitkov-Babchensky oil field (Bitkov Field) The Bitkov field is located in the western part of Ukraine, 350 miles east of Vienna, Austria. The geological term for this area is the Precarpathian foredeep, extending from Poland in the northwest to Romania in the southeast. The foredeep was formed by subsidence and has accumulated over 30,000' of sedimentary cover. Over 40 oil and 50 gas fields were discovered in the region between 1950 and 1970. Most of the fields are associated with complex over- thrusted anticlinal features and were discovered on the basis of surface geology, gravity and magnetic surveys. The area is the oldest oil producing region in Ukraine. Under the agreements covering operations in the field, Carpatsky is entitled to receive a portion of production which exceeds a specified baseline. Carpatsky's principal operations in the Bitkov field are therefore intended to increase production by conducting workovers, drilling new infill wells and by implementing a secondary recovery program. Daily net production to Carpatsky is approximately 110 Bbls oil and 350 Mcf of gas. Ownership of Interests in Bitkov Field. Carpatsky conducts operations in the Bitkov field through Ukrcarpatoil Ltd., a joint venture formed by Carpatsky and Ukrnafta in 1995. Ukrcarpatoil owns a license to conduct a 20 year exploitation program in the field which was awarded in 1995. Under the Ukrcarpatoil joint venture agreement production equal to the level of production on the date of the agreement remains the property of Ukrnafta and 80% of the incremental oil and gas production is the property of Ukrcarpatoil. Under the joint venture agreement, the profit from the sale of incremental production is shared 45% to Carpatsky and 55% by Ukrnafta. During the first 10 years of the venture the remaining 20% of production is allocated to Carpatsky in recognition of cost recovery. 85 Office Facilities Carpatsky currently maintains office space on a rent free basis at Bellwether's offices at 1331 Lamar, Suite 1450, Houston, Texas 77010. In Ukraine, Carpatsky maintains the registered office of its subsidiary in Kyiv at the offices of Ukrcarpatoil Ltd. The offices are at 6 Ivano Franko, 254053 Kyiv, Ukraine. The rental costs of this office are included as an operating cost of Ukrcarpatoil Ltd. Competition Competitive conditions in Ukraine are complicated by the country's evolving political, legal and financial environment. Most major international oil companies are awaiting the introduction of new oil and gas legislation which will include a production sharing agreement law and a new legal and tax framework. For the near term, Carpatsky's principal competitors include small foreign independent oil and gas companies, mainly Canadian, and newly emerging local companies. As political, legal, tax and financial conditions in Ukraine become stabilized and more favorable for foreign investment, Carpatsky expects to face increased competition from other foreign firms. In addition, the marketing of gas in Ukraine is heavily influenced by RAO Gazprom, the Russian national gas company and the world's largest gas company. RAO Gazprom currently provides a substantial portion of the gas consumed in Ukraine and western Europe. Because of its market share, gas prices in Ukraine can be effectively set by RAO Gazprom. Export prices are, in turn, influenced by the prices RAO Gazprom charges for gas delivered to western Europe. The situation is further complicated by the substantial debt Ukraine owes the Russian Federation for past deliveries of oil and gas. Markets and Gas Marketing During 1992-1996, gas sales in Ukraine were conducted by state enterprises including Ukrgrazprom, a state- owned monopoly of gas exploration, production, transportation and marketing, and Ukrnafta, a partially privatized monopoly of oil exploration, production and marketing. Ukrgrazprom sold all the Russian and Turkmen gas deliveries to the country, its own production and a portion of the gas produced by Ukrnafta. Ukrnafta sold directly to end-users the gas it produced which was not marketed by Ukrgrazprom. In 1996 the marketing of gas was conditionally demonopolized. A group of established companies with wide commercial activities among which were the sale of oil, refined products and lubricating products, started marketing gas. The Cabinet of Ministers decided to divide the market among these companies by geographical regions. Because most payments for gas that was sold were in the form of barter, requiring the sale of the goods received in payment for gas, each company was required to create dealer organizations to sell gas produced as well as dispose of bartered goods received. The privatization resulted in improved payments to RAO Gazprom, to the detriment of Ukrnafta, Ukrgrazprom and others because, while the payments to RAO Gazprom reduced Ukraine's debt to Russia, payments for gas produced by local Ukrainian companies entirely stopped. In 1998 the Cabinet of Ministers suspended regulation of regional market distribution creating intense competition among the distributors. In mid-1998 the Ukrainian government formed Naftogazukrainy, a national joint stock company, to meet the gas needs of the entire population of Ukraine. Naftogazukrainy was formed to settle and pay amounts due to suppliers in Russia and companies producing gas in Ukraine, including Carpatsky, and to provide for payment of future deliveries in a timely manner. This has yet to be fully accomplished and to date the joint activity has only received UAH 450,000 of approximately UAH 11.0 million owed by Naftogazukrainy and its predecessor for gas purchased by it from August 1998 to June 30, 1999. Naftagazurkainy has undergone major management changes over the past year and more changes are likely. A new natural resource company has been established by the state, but the implications of this new development for Naftagazukrainy and Ukrnafta are not yet clear. The governmental licensing authority has also been reorganized. Carpatsky has begun to use alternative marketing arrangements. One such arrangement is a monthly gas auction market in Ukraine. This facility was approved by the Council of Ministries and began operating in early 1999. Ukrcarpatoil, Ltd. started selling Bitkov and RC field gas in August 1999 for September deliveries and has become the second largest seller of gas in the auction market. The joint activity gas from the RC field is marketed by Ukrcarpatoil on a fee based arrangement. Ukrnafta, Carpatsky's partner in the RC field, has been restricted by Naftogazukrainy, its parent company, from selling its gas at auction, requiring it to sell all gas produced to Naftogazukrainy for which payment has not been forthcoming. Between October 1, 1999 and March 31, 2000, Ukrcarpatoil has sold 113.2 million M3 (3.2 Bcf) of the joint venture's gas in the auction program, at an average price of $0.90 per Mcf, net of VAT, of which it has received UAH 16.3 million (U.S.$3.2 million) in payments through March 31, 2000. While the monthly auction has become a viable alternative to sell and receive payment for gas and continues to grow in volume and prestige throughout Ukraine, it is not without problems. During October 1999, Ukrcarpatoil sold approximately $250,000 of joint activity gas to a major manufacturer who then filed the equivalent of bankruptcy. Ukrcarpatoil's claim has been lodged with the appropriate authorities and a payments program is now being negotiated. Carpatsky has been negotiating with gas purchasers in several foreign countries to export its gas to them. This would help circumvent payment and other problems. Officially Naftogazukrainy does not have authority to prohibit the export of gas, which is permitted by Ukraine law. However, an impediment arises in securing transportation on the country's pipeline system. Ukrtransgaz, the carrier of gas throughout the country, is a wholly-owned subsidiary of Naftogazukrainy and therefore Naftogazukrainy indirectly controls gas exports. Ukrcarpatoil secured approval from Naftogazukrainy to transport the RC field gas to the borders of several surrounding countries during 1999. Carpatsky is seeking approval for 2000 and later years on similar terms. In addition to the price at which the gas is to be sold and the monthly volumes to be delivered, these discussions also focus on liability for the Ukrainian pipeline transportation fees and delivery points. Ukrcarpatoil is making efforts to conclude one or more gas sales contracts with an internationally recognized, financially reputable and operationally capable firm during 2000. Carpatsky engaged Ryder Scott Company, L.P., independent petroleum engineers, to prepare estimates of proved reserves, projected future production, and related future net cash flows for Carpatsky's properties as of December 31, 1999. Estimates prepared by Ryder Scott were based upon a review of production histories and other geologic, economic, ownership, volumetric and engineering data. In determining the estimates of the reserves that are economically recoverable, oil and gas prices and estimated development and production costs as of December 31, 1999 were used. The following table sets forth estimates as of December 31, 1999 derived from the Ryder Scott reserve report. The present values (discounted at 10 percent) of estimated future net cash flows shown in the table are not intended to represent the current market value of the estimated oil and gas reserves owned by Carpatsky. For further information concerning the present value of future net cash flows from these proved reserves, see Unaudited Supplemental Oil and Gas Reserve Information in the December 31, 1999 consolidated financial statements. Because the license for the RC field expires in March 30, 2003, Carpatsky is not permitted to report reserves expected to be produced from the RC field following that date. 87
Estimated Net Proved Reserves ---------------------------------------------------- Pre-Tax Field Oil (MBbl) Gas (MMcf) MMcfe Discounted Present Value ----- --------- --------- ----- ------------------------ RC Field ........................ 113 15,604 16,282 $5,279,000 Bitkov Field .................... 86 229 745 351,000 ---------- ---------- ---------- ---------- Total ..................... 199 15,833 $ 17,027 5,630,000 ========== ========== ========== ==========
The weighted average sales prices, net of VAT, utilized for purposes of estimating Carpatsky's proved reserves and future net cash flows therefrom as of December 31, 1999 was $13.20 per Bbl for oil and $0.82 per Mcf for gas. The following table shows information about our estimated net proved and proved developed reserves of oil and gas.
December 31, ------------------------------------------------------------------------- 1999 1998 1997 ---------------- ----------------- ---------------- Oil Gas Oil Gas Oil Gas --- --- --- --- --- --- (MBbl) (MMcf) (MBbl) (MMcf) (MBbl) (MMcf) Proved reserves .......................... 199 15,833 360 32,840 370 31,601 Proved developed reserves ................ 70 7,487 47 835 61 207
The following table sets forth the pre-tax discounted present value of our estimated net proved oil and gas reserves:
December 31, ----------------------------------------------- 1999 1998 1997 ---- ---- ---- Pre-tax discounted present value: United States...................... $ -- $ -- $ -- International...................... 5,630,000 16,662,000 24,198,000 ------------ ------------- ------------- Total........................... 5,630,000 16,662,000 24,198,000 ============ ============= =============
88 There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the producer. The reserve data set forth herein represent only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment and the existence of development plans. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimates. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. Further, the estimated future net cash flows from proved reserves and the present value thereof are based upon certain assumptions, including geologic success, prices, future production levels and cost, that may not prove correct over time. Predictions about prices and future production levels are subject to great uncertainty, and the meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they are based. Oil and gas prices have fluctuated widely in recent years. There is no assurance that prices will not be materially higher or lower than the prices utilized in estimating Carpatsky's reserves. Production The following table sets forth Carpatsky's net oil and gas production, average sales prices, and costs and expenses associated with such production during the periods indicated. Year ended December 31, --------------------------------- Production 1999 1998 1997 ---- ---- ---- Oil (MBbls)............................ 26 12 5 Gas (MMcf)............................. 2,456 472 11 Equivalent (MMcfe)..................... 2,613 541 43 Average sales price per unit: Oil (Bbl).............................. $10.36 $11.41 $14.62 Gas (Mcf).............................. 0.88 1.35 1.84 Equivalent (Mcfe)...................... 0.93 1.42 2.28 Production costs per Mcfe.................. Carpatsky owned 4 gross (1.8 net) producing oil wells and 3 gross (1.2 net) producing gas wells as of December 31, 1999. A well is categorized as an oil well or a gas well based upon the ratio of gas to oil produced when it first commenced production, and such designation may not be indicative of current production. Development, Exploration and Acquisition Expenditures The following table sets forth certain information regarding the costs incurred by Carpatsky in its development and exploration activities during the periods indicated.
Year Ended December 31, ------------------------------------------------------------------------------- (in 000's) 1999 1998 1997 ------------------- ------------------- ------------------- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Development Costs ........................ $1,537 $1,440 $3,746 $1,660 $8,200 $3,449 Exploration Costs ........................ -- -- -- -- -- -- Property Acquisition Costs ............... -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ Total ................................ $1,537 $1,440 $3,746 $1,660 $8,200 $3,449 ====== ====== ====== ====== ====== ======
89 Drilling Activity The following table sets forth the wells drilled and completed by Carpatsky during the periods indicated. Year Ended December 31, 1999 ----------------------- Gross Net ----- --- Development: - ----------- Oil.................................... -- -- Gas.................................... 2 1 Non-productive......................... -- -- Total.............................. 2 1 Exploration: - ----------- Oil.................................... -- -- Gas.................................... -- -- Non-productive......................... -- -- Total.............................. -- -- 90 REPUBLIC OF UKRAINE Key Statistics The following information regarding the Republic of Ukraine was derived from sources believed to be accurate. Official name: Republic of Ukraine Total area: 233,000 Sq. Miles Population: 50.09 million Official language: Ukrainian. Russian is commonly used in business. Neighboring states: Russia, Moldova, Belarus, Poland, Romania, Slovakia, Hungary Currency: Hryvna (UAH) Exchange rate: UAH 5.18=U.S.$1 (National Bank of Ukraine official exchange rate, December 31, 1999) Current Status Although Ukraine embraced the opportunity for national independence offered by the collapse of the Soviet Union, it has been less willing to jettison the political and economic practices of the Soviet era. In particular, parliament and successive governments have been reluctant to back the structural reforms required to transform the economy. As a result of mistakes in budget policy and unfavorable government policy regarding foreign investors, the country has endured seven consecutive years of steeply declining gross domestic product and real incomes. Officially, foreigners have the same rights to invest in Ukraine as Ukrainian individuals and legal entities. Investments are protected against illegal expropriation and foreign investors are guaranteed prompt and unimpeded rights to repatriate profits. Foreign investors can participate in privatization on the same basis as Ukrainian entities and individuals; however, restrictions may be placed on all entities attempting to invest in strategic industries. Although foreign investors have the right to participate in privatization directly or through a licensed intermediary, privatization is dominated by political considerations and the rules, especially those governing foreign participation, are often contradictory. There is considerable scope for political interference in the privatization process. Ukraine - Political and Economic Context Recent history Ukraine became a republic of the Soviet Union in 1921 pursuant to the Treaty of Riga. Starting with President Khrushchev in the late 1950s, successive leaders sought to improve the performance of the Soviet economy in the face of mounting evidence of its inherent inefficiency. Limited reforms failed to address systemic weaknesses, the economy stagnated, and living standards fell further behind the West. Mikhail Gorbachev became leader of the Soviet Union in March 1985 and launched a series of far-reaching political and economic reforms known as glasnost (openness) and perestroika (restructuring). However, the gradual abandonment of central planning and other changes introduced under 91 perestroika led to worsening shortages and an intensification of inflationary pressure. Discussion of political issues allowed under glasnost contributed to a wider appreciation of the shortcomings of the Soviet system and more open expression of nationalist aspirations. The partial meltdown of Ukraine's Chernobyl nuclear reactor No. 4 emphasized the failure of Soviet industrial policy and intensified the disillusionment of the member republics, in addition to worsening the energy supply situation. President Gorbachev tried to meet the growing demands for independence by proposing the formation of a confederation of quasi-independent states under Russian control. Ukraine refused to join, stepped up its campaign for full independence and on August 24, 1991 Ukraine proclaimed its independence. A referendum on independence was held on December 1, 1991 with 90% of participants in the referendum voting in favor of independence. This referendum established the Republic of Ukraine. On December 7-8, 1999, Ukraine, Belarus and the Russian Federation signed the treaty establishing the Commonwealth of Independent States, which legally dissolved the Soviet Union. Political institutions The Constitution of the new state was adopted on June 28, 1996 when it was ratified by Ukraine's parliament. The Constitution defines Ukraine as a unitary democratic State and guarantees human and property rights. The Constitution establishes a balance of power between the Executive branch and the Legislature (Parliament or Rada). The country is headed by a President elected by popular vote for a maximum of two consecutive five-year terms. In terms of foreign policy, Ukraine focuses on fostering closer integration with the West while preserving its traditional links with the countries of the former Soviet Union. For defense purposes, Ukraine is aligned with neither Russia nor NATO. Soon after independence, Ukraine proclaimed itself a nuclear weapons free state and removed nuclear weapons sited on its territory. Reflecting its importance and size, Ukraine is a member of the United Nations, the IMF, the World Bank, the EBRD and the Council of Europe. It is also a member of NATO's Partnership for Peace. Greater ties with Russia have been one of the principal issues since the break-up of the Soviet Union. In February 1999, Russia's Federation Council, the upper house of parliament, ratified the Treaty on Friendship, Co- operation and Partnership, which recognizes the territorial sovereignty of Ukraine. On March 24, 1999, Ukraine's parliament ratified an agreement with Russia regarding Russia's Black Sea Fleet that officially allows Russia to use Sevastopol, the deep water port on the Black Sea. The most serious ethnic issue concerns the constitutional status of Crimea. Crimea was part of the Russian Federation until 1954 when Soviet Union Premiere Khrushchev transferred it to Ukraine to mark 300 years' union between the two countries. In May 1992, the Crimean legislature adopted a new constitution proclaiming the territory's independence that was rescinded after Ukraine's parliament threatened to impose an economic blockade. A new Constitution for the Crimean peninsula was approved by Ukraine's parliament on January 12, 1999, allowing Crimea to create its own national anthem, flag and crest. From time to time, there have also been ethnic conflicts between the residents of eastern Ukraine who are predominantly native Russian speakers and have traditionally been members of the Orthodox Church and the residents of western Ukraine who have aggressively promoted the Ukrainian language and have traditionally been members of the Eastern Rite Catholic Church. Political developments Initially, Ukraine was slow to reform its political and economic system. This was largely due to the conservative attitudes of members of the Soviet era parliament and the country's former communist president. Although some pro-reform policies were adopted, they were not always implemented because of political differences between the president and parliament or because of opposition from powerful interest groups such as managers of large state-owned enterprises. In addition, there were frequent shifts in policy, and reforms were obstructed and legislation distorted to favor certain interests. 92 Since his election in July 1994, President Leonid Kuchma has pushed a comprehensive economic reform program, maintained financial discipline and tried to remove almost all remaining controls over prices and foreign trade. Implementation of the President's economic agenda encountered considerable resistance from parliament, entrenched bureaucrats, and industrial interests. The March 1998 elections resulted in the largest group within the new parliament being the Communists, with 125 seats. Although they do not have a majority in parliament, the Communists can block certain parliamentarian decisions. At present, the majority party in parliament is unstable and depends on the temporary interests of other factions and groups. President Kuchma was reelected in November 1999 for a five-year term. Administrative and economic reforms during the first eight months of 1998 slowed Ukraine's economic decline. Then, turmoil in Asia and the financial crisis in Russia caused a new regression in the economy. Tactics by the government to counter the situation and the National Bank of Ukraine turned out to be efficient; Ukraine managed to control the hryvna devaluation, avoid the financial collapse that occurred in Russia and avoid bankruptcy. Ukraine continues to struggle economically. The adoption of the Production Sharing Agreement legislation is regarded as one of the few substantive reforms enacted recently by the country, and its implementation will be closely watched by Ukraine's trading partners. The entry into a new tax treaty with the United States, the timing of which coincided with President Clinton's state visit to Kiev, is also regarded as a positive development. Economic Context Ukraine experienced severe macroeconomic instability during the first five years of independence. GDP, industrial output and agricultural production all fell steeply and inflation was exceptionally high. In the spring of 1998, Ukraine was cut off from its U.S.$542 million IMF standby program as it failed to carry out reforms. Thereafter, President Kuchma started to issue economic decrees to reform the economy including agreement to implement the IMF requirements. On September 10, 1998 the IMF disbursed the first U.S.$257 million tranche of a new U.S.$2.2 billion, three-year loan. Subsequently, international public controversy arose regarding the central bank's overstating of reserves. Monetary Stabilization Monetary policy was tightened in 1995 leading to a steady fall in the monthly inflation rate during 1996 and 1997. Lower inflation, increasing foreign currency reserves and growing confidence in the currency contributed to a stable nominal exchange rate during the period January 1996 to September 1998. The country's close links with Russia and incomplete reforms led, in September 1998, to a sharp drop in currency valuation, high interest rates and rising inflation. Privatization The government and parliament have found it difficult to compromise on the privatization of Ukraine's strategic enterprises, despite the obvious need to generate cash for the budget and to improve industrial efficiency. The State Property Fund has responsibility for, state-owned companies currently undergoing privatization. Mass privatization as practiced in Ukraine has attempted to avoid some of the pitfalls that faced Russia's mass privatization "voucher" auction program. Foreign Investment General In accordance with the Law of Ukraine, "On Foreign Investment Regime," effective April 25, 1996, the national regime of investment and business activity applies to foreign investors. In most instances, the law provides for the equal treatment of foreign and Ukrainian-owned businesses, with restrictions applying to certain industries. A company with foreign investments is defined as a company where at least 10% of the paid up capital belongs to the foreign investor. 93 Investment protection Under current Ukrainian legislation, the following guarantees are available to foreign investors: o Foreign investors are protected for a period of 10 years against adverse changes to the investment guarantees contained in the law. o Investments cannot normally be expropriated, except for rescue operations in the event of a national emergency. If such expropriation does occur, foreign investors have a right to compensation based on market prices and an auditor's evaluation. o Foreign investors are compensated for losses due to the negligence of state bodies. o Foreign investors have the right to repatriate the original investment free of customs duty in the event of termination of the investment. Profit repatriation Foreign investors are entitled to repatriate profits, income or other funds relating to investments in Ukraine without any restrictions, after payment of any taxes due on the profits. Conversion of funds for repatriation is effected through the Ukrainian Inter-bank Currency Exchange subject to the possession of a foreign registration statement and confirmation of the amount of profit earned. Environmental protection Ukraine has adopted laws to prevent or reduce industrial pollution and control harmful substances. Under the 1991 Environment Protection Act, companies are required to keep records of harmful substances released into the environment, their compliance with targets for pollution control and the use of natural resources. In general, legal entities usually have a duty to: o conduct environmental audits before beginning industrial activity; o comply with established environmental regulations and discharge limits, including rules governing the disposal and handling of waste and harmful substances; and o pay compensation for use of natural resources and for pollution or other damage caused to the natural environment. Forms of Foreign Investment Foreign investment in Ukraine may take the form of a wholly owned subsidiary or a joint venture. Most foreign-invested wholly owned subsidiaries are either joint stock companies or limited liability companies. The Law on Business Association also permits the formation of a quasi-limited liability company, a general partnership or a limited partnership, but these forms are rarely used in foreign investment due to potential liability. Joint ventures may take the form of a Western style shareholding in a corporate entity, generally a joint stock company or a limited liability company, or a contractual relationship. A special form of contractual relationship that dates from Soviet times, known as a joint activity is often used for joint ventures formed using a contractual relationship. Another alternative for foreign investors is to establish a presence in the form of a representative office corresponding to a Western liaison office, if non-taxable, or a branch. 94 Joint activities A joint activity is a form of contractual relationship that is treated separately for tax purposes. Its operating partner is required to file separate reports in respect of the joint activity's operation. The joint activity agreement defines the objectives and permitted operations, the use of the property contributed by the parties, the distribution of profits and other major issues. A joint activity agreement between a resident and a foreign entity must be registered with the state authorities. The management of the venture is normally delegated to one of the parties. Profits of a joint venture are subject to withholding tax, and the distribution of profits is treated as dividend payments for Ukrainian tax purposes. Joint stock companies A joint stock company is a legal entity whose capital is divided into a specified number of shares and which must have at least two shareholders. There are two types of joint stock companies, open joint stock companies and closed joint stock companies. Shares in an open joint stock company may be offered to the general public and traded on a stock exchange, whereas ownership of shares in a closed joint stock company is limited according to the company's charter. Limited liability companies A limited liability company does not have shares in the usual sense. Participants in the company own a percentage of the company's capital on the basis of a written agreement between at least two founding members. This type of company is analogous to limited liability companies in other European civil-law jurisdictions. Representative offices A foreign company can set up a representative office in Ukraine, subject to registration with the state authorities. The representative office does not constitute a legal entity and operates in Ukraine on behalf of the foreign company it represents. A non-resident company operating a representative office may be deemed to be conducting business activity in Ukraine through a permanent establishment, and may be subject to corporate profits tax, if the office's activities exceed the criteria set forth in the relevant double taxation treaty. Taxation Currently, the main business taxes include a corporate profits tax and a Value-Added Tax. There are also numerous special charges and local taxes. Corporate Profits Tax The current corporate profits tax regime was introduced by the Corporate Profits Tax Law effective July 1, 1997. Under the law, a uniform tax at the rate of 30% applies to taxable profits earned by resident entities and permanent establishments of foreign companies. Taxable profits Taxable profits are defined as adjusted gross income less allowable gross expenses and depreciation charges. Gross income includes any sales income received or accrued within a quarterly reporting period. Gross income is deemed to be received at the earlier of shipping the goods or rendering services to the 95 customer and receiving payment from the customer. Gross expenses include any expense actually incurred or accrued in respect of the taxpayer's business excluding non-allowable expenses specified by the law. Gross expenses are recognized either at the date of payment to a supplier of the goods or services or at the date of obtaining ownership of the same. Permanent establishments The Ukrainian definition of a permanent establishment is a Ukrainian resident business entity that has the authority to act in the name of a non-resident entity. A permanent establishment provides a non-resident entity with civil rights and subjects the non-resident entity to obligations under Ukrainian law. A resident is defined as a legal entity or a representative office. Taxable profits of a Ukrainian permanent establishment can be determined by the difference between the gross taxable income, which consists of income attributable to the permanent establishment received onshore or offshore, and allowable expenses incurred by the permanent establishment, which include expenses incurred onshore. The United States-Ukraine double taxation treaty, which recently became effective, sets forth criteria for permitted activities of a preparatory and auxiliary character which are presumed not to result in a permanent establishment. This treaty should provide further stability for U.S. companies operating in Ukraine. Tax accounting loss carry forward Tax returns must be filed on a quarterly basis. Resident taxpayers, are required to pay tax in advance in monthly installments followed by the final payment by the 20th day of the month following the reporting quarter. Resident taxpayers can carry forward losses incurred during the reporting period to a future reporting period for twenty quarters, commencing with the quarter when the loss occurred. Value-added Tax (VAT) Subject to certain exceptions, a VAT is payable on the sale of goods, works or services in Ukraine and upon the importation of goods, works or services into Ukraine. Generally, there is no VAT payable on the on export of natural gas, goods and provision of works or services to be used outside Ukraine. A VAT is incurred at a rate of 16.67% for the value of the oil and gas production sold and amounts paid for equipment, drilling contractors and materials create VAT credits. There is no VAT obligation for production sold outside of the borders of Ukraine. Once a completed well is producing, all the VAT credits received for payment of drilling and completion expenses will be a credit against VAT due on revenues from production sales. The VAT incurred for production will not be due until the producer fully offsets the accumulated VAT credits. Tax reporting, liability and credit A taxpayer's VAT liability equals the total amount of VAT collected within a reporting period calendar month and arises on the earlier of the date of shipping goods to a customer or the date of receiving payment from the customer. A VAT credit is the amount that a taxpayer is entitled to offset against his VAT liability in a reporting period. Rights to VAT credits will arise on the earlier of the date of payment to the supplier or the date the VAT invoice is received. 96 Taxation on Oil and Gas The following table summarizes the basic taxes applied to oil and gas production in Ukraine.
UAH per U.S. Equivalent per Ukraine Tax 1000m3 of Gas Ton of Oil Mcf of Gas Bbl of Oil ----------- ------------- ---------- ---------- ------------------- Rental Payment ............................ 5 3 $ 0.142 $ 0.409 Minerals .................................. 0.67 1.64 $ 0.019 $ 0.224 Geologic Research and Exploration ......... 20.07 9.95 $ 0.568 $ 1.357
Other taxes called: Innovation fund: calculated as 1% of production income minus VAT: Road fund: 1.2% of production income minus the VAT. Transportation cost of natural gas There are two tiers of transport fees for gas. For export, the transportation cost is UAH 1.75 per 1000 M3 (or $.05 per Mcf) per each 100km distance to the metering station at the border. If the gas is sold domestically, the cost of transportation is UAH 10.63 per 1000 M3 (or $0.30/Mcf), regardless of the distance transported. Other Taxes and Charges Payroll taxes Employers are required to pay the following payroll taxes for their employees in Ukraine based on gross salary: o 32% of an employee's gross salary to the Pension Fund; o 4% of an employee's gross salary to the Social Security Fund; and o 1.5% to the Unemployment Insurance Fund. Currently the amount of salary exceeding UAH 1,000 per month is not subject to payroll taxes. Other taxes Other Ukrainian taxes include: o An excise tax is applied to certain goods imported into, or produced in, Ukraine, including gasoline and diesel fuel. o Land tax is paid by the owners or users of land. The rate depends on the nature and location of the land and is paid monthly in advance. o An Innovation Fund charge is paid by business entities monthly at the rate of 1% of sales. o To raise funds for the payment of outstanding pensions at the end of 1998, a 1% charge based on the value of a foreign exchange transaction and payable to the State Pension fund was introduced. The charge is payable by legal entities and individuals carrying out foreign exchange transactions. 97 o Five percent for those countries having a tax treaty with Ukraine and 15% for those who do not. Since the U.S. Congress has yet to approve the treaty, the expatriation tax with the United States is 15%. Double Taxation Treaty A new double taxation treaty between the United States and Ukraine became effective on June 5, 2000. The treaty replaces the tax treaty between the United States and the Soviet Union that was signed in 1973. The treaty applies, with respect to taxes withheld at the source, for amounts paid or credited after August 1, 2000, and, for all other taxes, beginning on or after January 1, 2001. MATERIAL CONTRACTS BETWEEN PEASE AND CARPATSKY On October 1, 1999 Pease and Carpatsky entered into an agreement whereby Pease agreed to provide Carpatsky bookkeeping services and staff assistance with regard to the accumulation and compilation of Carpatsky's accounting records and consolidated financial statements for the periods commencing January 1, 1996 and ending December 31, 2000. The services provided by Pease will be billed at agreed rates as provided in the agreement, plus out-of-pocket expenses, only in the event the contemplated merger between Pease and Carpatsky fails to close for any reason. This amount would be due separately from any amount that may be due by either party pursuant to the terms of the merger agreement should the contemplated transaction fail to occur. As of March 31, 2000, Carpatsky owed approximately $75,000 under this agreement if the merger does not close, and is expected to owe us $85,000 to $90,000 on September 30, 2000 if the merger does not close. 98 SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS OF PEASE The following table sets forth certain information regarding the beneficial ownership of our common stock and preferred stock, as of July 31, 2000, by each of our directors, officers and nominees and each person or entity who we know owns beneficially more than 5% of our outstanding common stock or preferred stock. Unless otherwise indicated, all shares are owned directly, and each owner has sole voting and investment power with respect to the shares.
Name and Address Amount and Nature of Beneficial Owner of Beneficial Ownership Percent of Class(12) ------------------- ----------------------- ------------------- Officers and Directors: Steven Allen Antry ........................ 60,496 Shares(1) 3.39% Patrick J. Duncan ......................... 36,564 Shares(2) 2.07% Stephen L. Fischer ........................ 30,115 Shares(3) 1.72% Homer C. Osborne .......................... 14,657 Shares(4) 0.84% James C. Ruane ............................ 31,761 Shares(5) 1.83% Clemons F. Walker ......................... 31,357 Shares(6) 1.80% J.P. Bryan(15) ............................ -- -- Douglas G. Manner(15) ..................... -- -- Dr. Jack Birks ............................ -- -- B. Dee Davis .............................. -- -- All Officers and Directors as ............. 204,950 Shares(7) 10.99% a group (10 persons) Our 5% Shareholders: Kayne Anderson, et al ......................... 4,984,820 Shares(8) 74.22% 1800 Avenue of the Stars Second Floor Los Angeles, CA 90067 State Street, et al ........................... 3,350,971 Shares(9) 65.93% Chase/Chemical Bank A/C State Street Bank & Trust Co. 4 New York Plaza Ground Floor/Receive Window New York, NY 10004 Howard Amster IRA ............................. 83,744 Shares(10) 4.62% 111 East Kilbourn Ave ..................... Milwaukee, WI 53202 The Madav IX Foundation ....................... 167,549 Shares(11) 8.82% 1750 Euclid Avenue Cleveland, OH 44115 Ramat Securities, Ltd. ........................ 27,227 Shares(12) 1.55% 23811 Chagrin Blvd., Suite 200 Beachwood, OH 44122 Tamar Securities, Inc. ........................ 251,323 Shares(13) 12.68% 23811 Chagrin Blvd., Suite 200 Beachwood, OH 44122 Security Ownership of Series B ................ 8,865,664 Shares(14) 83.66%(13) Preferred Shareholders as a Group (10 Entities)
- --------------------- (1) Includes 8,100 shares that are owned directly by Mr. Antry, 750 shares underlying presently exercisable options, 6,146 shares underlying presently exercisable warrants and 45,500 shares underlying presently exercisable warrants that are held by Mr. Antry's wife. (2) Includes 1,564 shares owned directly by Mr. Duncan, 35,000 shares underlying presently exercisable options. 99 (3) Includes 8,295 shares owned directly by Mr. Fischer, 400 shares owned by his wife, 750 shares underlying presently exercisable options and 20,670 shares underlying presently exercisable warrants. (4) Includes 10,376 shares owned directly by Mr. Osborne and 4,281 shares underlying presently exercisable options. (5) Includes 26,597 shares owned directly by Mr. Ruane, 456 shares held by Mr. Ruane as trustee for two trusts over which shares Mr. Ruane may be deemed to have shared voting and investment power, 1,225 shares underlying presently exercisable warrants and 3,483 shares underlying presently exercisable options. (6) Includes 16,335 shares owned directly by Mr. Walker, 14,272 shares underlying presently exercisable warrants and 750 shares underlying presently exercisable options. (7) Includes 72,123 shares owned, directly or indirectly, 45,014 shares underlying presently exercisable options and 87,813 shares underlying presently exercisable warrants. (8) Represents shares of common stock which have been or will be issued in exchange for outstanding series B convertible preferred stock upon consummation of the merger with Carpatsky. The preferred stock is held by four entities which are effectively controlled by Kayne Anderson Investment Management, Inc., a Nevada corporation, which is a registered investment advisor. The entities which directly own the stock are Arbco Associates, L.P., Kayne Anderson Non-Tradition Investments, L.P., Offense Group Associates, L.P. and Opportunity Associates, L.P. (9) Represents shares of common stock which will be issued in exchange for outstanding series B convertible preferred stock upon consummation of the merger with Carpatsky. The preferred stock is held by two entities, Marine Crew & Co. and Sandpiper & Co. that are effectively controlled by State Street Research and Management Company, a registered investment advisor to two large unaffiliated institutional investors. (10) Represents shares of common stock which will be issued in exchange for outstanding series B convertible preferred stock upon consummation of the merger with Carpatsky. (11) Represents shares of common stock which will be issued in exchange for outstanding series B convertible preferred stock upon consummation of the merger with Carpatsky. (12) Represents shares of common stock which will be issued in exchange for outstanding series B convertible preferred stock upon consummation of the merger with Carpatsky. (13) Represents shares of common stock which will be issued in exchange for outstanding series B convertible preferred stock upon consummation of the merger with Carpatsky. (14) As of the record date, there are 80,325 shares of series B preferred outstanding. The 10 beneficial owners of the series B preferred stock have agreed to exchange all of their preferred stock for an aggregate 8,865,665 shares of common stock. As of the record date, 25,503 shares of preferred stock have been exchanged for 2,136,496 shares of common stock. We are presently authorized to issue up to 4.0 million shares of common stock, an insufficient number of authorized shares for exchange of the outstanding series B preferred stock into common stock. Prior to, or concurrently with, the closing of the merger, the currently outstanding 80,325 shares of preferred stock will be exchanged for 6,729,168 shares of common stock. (15) Beneficially own shares of Carpatsky that will be converted into shares of Pease in the merger. See "Security Ownership of Management and Certain Beneficial Owners of Carpatsky." 100 SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS OF CARPATSKY The following table sets forth certain information regarding the beneficial ownership of Carpatsky common shares and preferred shares, its only classes of voting securities as of July 31, 2000, by each of Carpatsky's directors and officers, and each person or entity who is known to Carpatsky to beneficially own more than 5% of the outstanding common shares or preferred shares. Unless otherwise indicated, all shares are owned directly and each owner has sole voting and investment power with respect to the shares.
Name and Address Common Preferred Percent Of Officer or Director Shares Shares of Class(1) ---------------------- ------ --------- ---------- Officers and Directors: J. P. Bryan(2) ................................... 13,605,528 -- 7.58% Douglas G. Manner(3) ............................. 18,037,283 95,450,000(4) 60.80% Dr. Jack Birks ................................... -- -- Robert J. Bensh .................................. -- -- Cliff M. West .................................... -- -- James D. Thomson ................................. 100,000 -- 0.06% David A. Melman ....................................... 3,310,833(5) -- 1.91% Aaron Engen ...................................... -- -- David F. Phillips ................................ -- -- -- John Sparks ...................................... -- -- -- All Officers and Directors as a group ............ 35,053,644 95,450,000(4) 67.54% (10 persons) 5% Shareholders: Bellwether Exploration Co. ............................ 8,037,283(6) 95,450,000(4) 60.80% 1331 Lamar, Suite 1450 Houston, Texas 77010 Carpe Fund ............................................ 8,976,000(7) -- 5.12% 127 Peachtree St., Ste. 1551 Atlanta, Georgia 30303 Green Acres Enterprises, Inc. ......................... 9,011,186(8) -- 5.13% 7/F California Entertainment Bldg 34-36 D'Aguilar Street, Central Hong Kong, PRC Torch Energy Advisors Incorporated .................... 13,605,528(9) -- 7.58% 1221 Lamar, Ste. 1600 Houston, Texas 77010 Attention: B. D. Davis, Jr.
- -------------------- (1) Preferred stock and common shares vote together as a single class. Accordingly, the percentages shown represent the percent of the total voting shares outstanding, which consists of the sum of both the 77,728,263 outstanding shares and the 95,450,000 outstanding preferred shares, or 173,178,263 total voting shares. (2) Includes 7,397,720 common shares and 6,207,808 shares underlying presently exercisable warrants beneficially owned by Torch Energy Advisors Incorporated. Mr. Bryan disclaims beneficial ownership of these shares. Mr. Bryan is Senior Managing Director, and a holder of 120,920 shares of common stock, representing a 23% ownership interest on a fully diluted basis, of Torch Acquisition Company, the parent corporation of Torch Energy Advisors. 101 (3) Includes 4,569,987 common shares, 13,467,296 shares underlying presently exercisable warrants and 95,450,000 preferred shares beneficially owned by Bellwether Exploration Company. Mr. Manner disclaims beneficial ownership of these shares. Mr. Manner is President, Chief Executive Officer and a director of Bellwether. (4) The preferred stock may be converted into 50,000,000 common shares. (5) Includes 357,500 shares underlying a presently exercisable warrant (6) Includes 4,569,987 common shares and 13,467,296 shares underlying presently exercisable warrants. (7) Includes 2,000,000 shares underlying presently exercisable warrants. (8) Includes 2,529,586 shares underlying presently exercisable warrants. (9) Includes 6,207,808 shares underlying presently exercisable warrants. DIRECTORS AND EXECUTIVE OFFICERS Directors and Executive Officers The following table sets forth the names, ages and position of the persons who will serve as our directors and executive officers following the merger. Directors serve three year terms and until their successors are elected. Each year shareholders elect one class of directors. Executive officers serve terms of one year or until their death, resignation or removal by the board of directors. There are no family relationships between any of the directors and executive officers. In addition, there was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer. Our directors and executive will be: Name Age Position With Radiant Energy - ---- --- -------------------------------------------- J. P. Bryan 60 Chairman and Director Nominee (Term Expires 2003) Douglas G. Manner 45 Chief Executive Officer, President and Director Nominee (Term Expires 2003) Dr. Jack Birks 80 Director Nominee (Term Expires 2002) Patrick J. Duncan 37 Director Nominee (Term Expires 2002) B. Dee Davis 47 Director Nominee (Term Expires 2001) Robert J. Bensh 33 Executive Vice President and Chief Operating Officer Cliff M. West 60 Vice President and Assistant Secretary J. P. Bryan. Mr. Bryan has been Senior Managing Director of Torch Energy Advisors Incorporated since October 1988. He was also Chairman of the Board and Chief Executive Officer of Torch and its predecessor from January 1985 to May 1997. Mr. Bryan has been Chairman of the Board of Bellwether Exploration Company since August 1999 and has been a Director of Bellwether since June 1997. Mr. Bryan served as Chief Executive Officer of Bellwether Exploration Company from August 1999 until May 2000. Mr. Bryan has been a director of Carpatsky since December 1999. Mr. Bryan served as Carpatsky's Chief Executive Officer from December 1999 until June 2000. From January 1995 to February 1998, Mr. Bryan was Chief Executive Officer of Gulf Canada Resources Limited. He was Chairman of the Board of Nuevo Energy Company from March 1990 to December 1997, and was Chief Executive Officer of Nuevo from March 1990 to January 1995. Mr. Bryan is also a member of the Board of Directors of Auto Nation, Inc. 102 Douglas G. Manner. Mr. Manner has been President and Chief Executive Officer of Bellwether Exploration Company since May 2000 and of Carpatsky Petroleum Inc. since June 2000. He has also been a Director of Carpatsky since June 2000. He served as Vice President and Chief Operating Officer of Gulf Canada Resources from 1997 until May 2000. Mr. Manner joined Ryder Scott Petroleum Engineers in 1981 as a Consulting Reservoir Engineer and in 1995, as Senior Vice-President, he established and operated a branch office in Calgary, Canada until 1997. Prior to joining Ryder Scott, he was an Operations Reservoir Engineer and then a District Manager at Amoco Production Company. Mr. Manner is a member of the Board of Directors of Equatorial Energy based in Calgary. Mr. Manner received a B.S. degree in Mechanical Engineering from Rice University in 1977. Dr. Jack Birks. Dr. Birks has been a Director of the Bellwether Exploration Company since 1988 and of Carpatsky since December 1999. He was Chairman of the Board of Midland & Scottish Resources Plc. until September 30, 1997. He is life President of British Marine Technology Limited. Dr. Birks served as Chairman of the Board of North American Gas Investment Trust Plc. from 1989 until his retirement in 1995; as Chairman of the Board of Charterhouse Petroleum Plc from 1982 to 1986; as Chairman of the Board of London American Energy Inc. from 1982 to 1988; as Vice Chairman of the Board of Petrofina (UK) Limited from 1986 to 1989; and as a Managing Director of the Board of British Petroleum Company Plc from 1978 until his retirement in March 1982. He was appointed as a Director of Gulf Indonesia Resources Limited in August 1997. Patrick J. Duncan. Mr. Duncan has been the President of Pease since November 1998, the Chief Financial Officer of Pease since September 1994, and the Treasurer of Pease since March 1996. Mr. Duncan was an Audit Manager with HEIN + ASSOCIATES LLP, Certified Public Accountants, from 1991 until joining Pease as Pease's Controller in April 1994. From 1988 until 1991, Mr. Duncan was an Audit Supervisor with Coopers & Lybrand, Certified Public Accounts. Mr. Duncan received a B.S. degree from the University of Wyoming in 1985. B. Dee Davis. Mr. Davis joined Torch Energy Advisors Incorporated in 1990 and today is the Director--International Business Development. Beginning in 1976 and until joining Torch Energy, he has served in various financial and administrative positions with privately and publicly held companies focused on the oil and gas industry. He is a graduate of the University of Texas (B.B.A., 1975) and the University of Houston (M.B.A., 1987). Robert J. Bensh. Mr. Bensh has served as Executive Vice President and Chief Operating Officer of Carpatsky Petroleum, Inc. since June 2000. He has served as Senior Vice President--Finance and Corporate Secretary of Bellwether Exploration Company since September 1999. He had served as Vice President--Corporate Relations and Capital Markets and Corporate Secretary since joining the company in January of 1998. Mr. Bensh was Director of Investor Relations at Torch from August 1996 until joining Bellwether in 1998. From April 1995 until August 1996, Mr. Bensh was Director of Investor Relations and Strategic Planning for Box Energy. Cliff M. West. Mr. West has served as Vice President and Assistant Secretary of Carpatsky Petroleum, Inc. since June 2000. He has served as Senior Vice President--Exploration and Exploitation of Bellwether since September 1999. Mr. West served as Bellwether's acting International General Manager from June 1998 until August 1999. From November 1994 until joining Bellwether in November 1997 as a geophysicist consultant, Mr. West served as Vice President of Norcen Energy Resources Limited. He served as Vice President of Norcen Explorer from 1987 to November 1994. Mr. West has over 35 years of experience in the oil and gas industry. 103 In Ukraine Carpatsky currently maintains, and we will continue to maintain, an office in Kyiv staffed with ten people, all experienced oil and gas professionals. Included are petroleum engineers, economists, geologists, gas marketing administrators and support staff. The following is background information regarding the key employees in Ukraine: A. F. Zamulko. Mr. Zamulko, age 47, is a graduate of Ivano Frankovsr Institute of Oil and Gas and received his post graduate degree from the All Soviet Oil Institute in Moscow, Russia, specializing in the development of oil and gas fields in 1974. His entire career prior to joining Ukrcarpatoil Ltd. was spent with the Oil and Gas Institute of Ukraine managing the department in charge of the Pricarpathian oil and gas fields development. He joined Ukrcarpatoil in 1996. His duties include analyzing well log, test data, formulating development and drilling plans, calculating reserves, evaluating various reservoir characteristics and providing the technical supervision for the workover and development of the Bitkov field as well as the RC field drilling and production operations. He coordinates this work with his former colleagues, specialists at the Oil and Gas Institute. M. V. Dvorsky. Mr. Dvorsky, age 60, graduated from the Iyano-Frankovsk University with a degree in mechanical engineering (oil industry equipment) in 1967. Prior to joining Ukrcarpatoil in 1997 he was head of the Fuel-Energy Department of the State Shareholding Co.-Ukrresource. His primary duties are the marketing of gas and oil production from both fields. This involves locating credit worthy buyers, selling gas and monitoring collection activities for delivered gas. He also organizes and contracts transportation with Ukrtransgaz, submits documentation to the National Commission which regulates electric energy in the country and seeks approvals from NAK and other state organizations on each transaction on a monthly basis, etc. Executive Compensation The summary compensation table shows certain compensation information for services rendered in all capacities to either Pease or Carpatsky during each of the last three fiscal years by each company's Chief Executive Officer and those executive officers who received salary, bonus or other compensation in excess of $100,000 during 1999. The following information for these named executive officers includes the dollar value of base salaries, bonus awards, the number of stock options granted and certain other compensation, if any, whether paid or deferred.
SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation Awards ---------------------------------------------- ---------------------------------------------- Restricted Securities Name and Principal Other Annual Stock Underlying All Other Position Year Salary Bonus Compensation Awards Options/SARs(#) Compensation($) ------------------ ---- ------ ----- ------------ ---------- -------------- -------------- J. P. Bryan 1999 None None None None None None Chairman and CEO (1) Patrick J. Duncan 1999 $ 98,000(2) None None None None None Former President and 1998 $ 104,000(2) None None None None None CFO of Pease(3) 1997 $ 80,000(2) $ 5,000 None None 24,500 None Leslie C. Texas (4) 1999 $ 110,000 None None 100,000(5) None None Former CEO and 1998 $ 107,000 None None None None None President of Carpatsky 1997 $ 85,000 None None None 400,000 None
- ---------------------- 104 (1) Mr. Bryan served as Carpatsky's Chief Executive Officer from December 1999 until June 2000. He did not receive any compensation. (2) Includes $240 contributed by Pease each year to a qualified 401(k) retirement plan. (3) Mr. Duncan was appointed by the board of directors as Pease's President to succeed Mr. Pease in October 1998. No additional amounts have been shown as Other Annual Compensation because the aggregate incremental cost to Pease for personal benefits provided to Mr. Duncan did not exceed the lesser of $50,000 or 10% of his annual salary in any given year. (4) Mr. Texas resigned as an officer and director in 2000. (5) In December 1999, Mr. Texas surrendered 400,000 options, all of his outstanding options, in exchange for 100,000 Carpatsky common shares. For financial statement purposes, these shares were valued at $.10 per share. Option Grants in the Last Fiscal Year There were no grants of stock options to the Named Executive Officers pursuant to Pease's or Carpatsky's Stock Option Plans during the fiscal year ended December 31, 1999. Aggregated Option Exercises in the Last Fiscal Year and the Fiscal Year-End Option Values Set forth below is information with respect to the unexercised options to purchase our common stock held by named executive officers at December 31, 1999. No options were exercised during fiscal 1999.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values Number of Securities Underlying Unexercised Value of Unexercised Options/SARs at In-the-Money Options/ Shares Acquired Value FY-End (#) SARs at FY-End ($) Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable - --------------------------- ------------------- ------------------ --------------------------- --------------------------- Patrick J. Duncan None None 35,000/35,000 $0/0(1) President and Chief Financial Officer Leslie C. Texas None None None $0/0 Former CEO and President of Carpatsky (2)
- --------------------------- (1) The value of the unexercised In-the-Money Options was determined by multiplying the number of unexercised options (that were in other money on December 31, 1998) by the closing sales of Pease's common stock on December 31,1998 (as reported by NASDAQ) and from that total, subtracting the total exercise price. No options were in-the-money at December 31, 1998. (2) In December 1999, all outstanding options held by officers or directors, including options held by Mr. Texas, were surrendered and canceled. See "Certain Relationships and Related Transactions." 105 Long Term Incentive Plan At this time, we do not have a long-term incentive plan for our employees, other than our stock option plan. Employment Contract We reaffirmed our Employment Agreement at an annual salary of $97,500 with Patrick J. Duncan as our President and Chief Financial Officer dated December 27, 1994 by a letter agreement dated January 11, 1999. Upon termination or change of control, Pease is obligated to pay Mr. Duncan two year's salary and to repurchase all Pease stock then owned by Mr. Duncan at the higher of $25,000, Mr. Duncan's cost, or the present fair market value. Compensation of Directors Our directors who are employees or otherwise receive compensation from us do not receive additional compensation for service as directors. Outside directors each receive a $2,500 annual retainer fee, $750 per meeting attended and $100 per meeting conducted via telephone conference. All fees are paid with our restricted common stock. Outside directors serving on the Executive Committee receive a cash fee for the lesser of $75 per hour or $600 per day. Effective August 31, 1999 we issued a total of 42,700 shares of common stock to our non-employee directors as compensation for service through the date of issuance. The number of shares issued was determined as a predetermined amount for each meeting attended, which amount was then divided by the reported market price for our common stock as of the date of the meeting. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS WITH PEASE Transactions with Beta Capital Group, Inc. In March 1996 we entered into a three-year consulting agreement with Beta Capital Group, Inc. ("Beta"). Beta's president, Steve A. Antry, has been a director of Pease since August 1996. The consulting agreement with Beta provides for minimum monthly cash payments of $17,500 plus reimbursement for out-of-pocket expenses. We also agreed to pay Beta additional fees, as defined in the agreement, that are based on a percentage of the gross proceeds generated from any public financing, private financing or from any warrants that are exercised during the term of the agreement. The following is a summary of amounts we paid Beta, or its agents, during the term of the agreement:
1998 1997 1996 Total ---- ---- ---- ----- Monthly consulting fees....................................... $ 210,000 $ 210,000 $ 162,500 $ 582,500 Reimbursement of out-of-pocket expenses....................... 37,123 167,236 94,700 299,059 Fees related to funds generated from private placements....... -- 320,933 163,000 483,933 Fees related to funds generated from warrant exercises........ -- 273,855 4,506 278,361 ---------- ---------- --------- ---------- Total..................................................... $ 247,123 $ 972,024 $ 424,706 $ 1,643,853 ========== ========== ========= ==========
In addition to the cash compensation, in 1996 we granted Beta warrants to purchase 100,000 shares of our common stock for $7.50 per share. For financial reporting purposes, these warrants were valued at $294,000. Beta subsequently assigned 40,000 of those warrants to other parties, including 10,000 to a Richard Houlihan, a former director of Pease and 20,670 to Stephen Fischer, a current director of Pease (Fischer is also a principal of Beta). In March 1997, Pease granted Beta warrants to purchase an additional 10,000 shares of Pease's common stock at $37.50 per share. For financial statement reporting purposes, those warrants were valued at $60,000. All the warrants granted Beta expire in April 2001. 106 Transactions with Other Directors During the Last Fiscal Year In July 1998 our board of directors established an Executive Committee designed to manage the significant aspects of Pease's business on a committee basis. William F. Warnick, a director, was elected as Chairman of the Committee. In exchange for his services in 1998, Mr. Warnick received cash compensation of $44,010 plus $17,966 for reimbursement of out-of-pocket expenses. Payments to Mr. Warnick totaled $23,857 in 1999. In July 1997, we acquired a 0.1% overriding royalty interest in the East Bayou Sorrel Field from an entity that Homer Osborne, a director, was a principal. The interest was acquired for $50,000, consisting of $40,000 cash and 315 shares of our common stock valued at $10,000. Mr. Osborne received all of the common stock and $7,000 cash in the transaction. Transactions with Former Officers Effective January 1, 1998, J. N. Burkhalter resigned as our V.P. of Engineering and Production in light of the anticipated sale of the Rocky Mountain assets. In connection with this resignation, we entered into a Retirement, Severance and Termination of Employment Agreement with Mr. Burkhalter that provided for total severance of $138,050. The severance consisted of office equipment and one vehicle valued at $5,850 and a cash obligation of $132,200, paid in monthly installments through August 2000. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS WITH CARPATSKY Transactions with Directors Commencing in early 1996 Fred Hofheinz, who was then a director of Carpatsky, extended a series of loans to Carpatsky and made payments directly to creditors of Carpatsky. The loan balance reached $637,368 in December 1997 and was repaid from time to time as funds were made available to Carpatsky. Mr. Hofheinz resigned as a director on November 30, 1999 and all amounts due to him have been repaid. Effective September 30, 1999 Clive Richards, a director of Carpatsky, exchanged a debenture in the amount of $308,100 for: o 2,464,800 common shares; o a warrant to acquire 535,934 shares of common shares at U.S.$.20 per share on or before December 31, 2000; and o as additional consideration, existing warrants to acquire 1,040,000 common shares were modified to extend the expiration date to December 31, 2000 and reduce the exercise price from U.S.$.25 to U.S.$.20. The terms of this exchange were the same as those offered to all holders of Carpatsky's Series 1 Debentures, pursuant to which $780,000 of the $1 million of principal value of outstanding debentures were converted into an aggregate of 7,394,400 common shares and warrants to purchase up to 3,900,000 additional common shares. Mr. Richards resigned as a director on December 30, 1999 in connection with the Bellwether transaction. Effective September 30, 1999, Torch Energy Advisors Incorporated, to which Carpatsky owed $1,391,368, including accrued interest under a convertible loan, accepted Carpatsky's offer to reduce the conversion price in the loan agreement from $.20 to $.125 per share and the loan was converted into 11,130,944 shares of common shares. In connection with the guarantee of $500,000 of Torch's loan to Carpatsky and a payment thereon, Torch assigned 4,533,224 shares of common stock to Bellwether. At that same time, Torch received 800,000 shares of common stock in payment of $100,000 in fees incurred for financial and administrative services performed by Torch for Carpatsky over an 18 month 107 period. Torch holds 9.5% of Carpatsky's common shares and, Carpatsky committed to add B. Dee Davis, Jr., to its board of directors as a representative of Torch. As additional consideration for conversion of the debt, Carpatsky issued a warrant entitling Torch to purchase 2,375,104 shares of common shares at $.20 per share on or before December 31, 2000. Torch assigned a warrant to acquire 967,296 of those shares to Bellwether. In the year ended December 31, 1998, Carpatsky paid fees of $61,000 to the law firm of McManus and Thompson, of which Mr. Thompson, a director of Carpatsky, is a senior partner. On September 17, 1999, Messrs. Fred Hofheinz, Leslie C. Texas, Andrew Burges and Larry Braun, then all directors of Carpatsky, purchased 583,334, 583,334, 1,000,000, and 1,000,000 shares of common shares respectively, in Carpatsky's private placement at $0.075 per share. On September 30, 1999, Messrs. Hofheinz and Texas, directors of Carpatsky, each purchased 1,583,333 shares of common shares at $0.075 per share to complete the private placement described above. The shares received are restricted from re-sale for a period of one year. Upon completion of the private placement in 1999, David Melman received a fee, computed in accordance with Canadian Venture Exchange guidelines, of 953,333 shares of common shares and warrants to purchase 357,500 shares of common shares at $0.20 per share expiring on December 31, 2000. At that same time the board of directors of Carpatsky (1) elected Mr. Melman as Executive Vice President/Chief Corporate Officer, (2) awarded Mr. Melman cash compensation of $72,500 in recognition of his services in arranging debt to equity exchanges and conversions of which $20,000 has been paid and (3) committed to issue to 2 million shares of Carpatsky common shares to Mr. Melman upon completion of the merger with Pease. Subsequently, and with approval of the Canadian Venture Exchange, Carpatsky issued these shares to Mr. Melman in connection with the Bellwether transaction. In December 1999, Carpatsky, with the consent of the option holders, canceled options to purchase up to 1,422,224 common shares held by Clive Richards, Andrew Burgess, Larry Braun, Jim Thomson, Fred Hofheinz and Les Texas, each of whom is a present or former director, and issued 100,000 shares each to the six persons. In December 1999, Bellwether Exploration Company purchased 95.45 million shares of a newly issued class of Carpatsky preferred shares and warrants to purchase 12.5 million Carpatsky common shares for one year at an exercise price of U.S.$.20 per share. The purchase price for the preferred shares and warrants was U.S.$4.0 million. The preferred shares are convertible into 50 million common shares of Carpatsky. The preferred shares vote as a class with the common shares of Carpatsky on all matters submitted to shareholders, including the election of directors. The preferred shares issued to Bellwether constitute a majority of the total number of votes which may be cast by shareholders. Therefore, Bellwether will control all matters voted on by Carpatsky shareholders which require a majority vote, and will be able to veto any other matters voted on by Carpatsky's shareholders. Mr. J.P. Bryan and Dr. Jack Birks, both of whom are members of Bellwether's board of directors, were appointed to Carpatsky's board of directors in connection with the purchase of preferred stock by Bellwether. Additionally, three Canadian residents were appointed by Bellwether as temporary members of Carpatsky's board of directors to comply with applicable law which requires that a majority of the directors of an Alberta corporation be residents of Canada. Mr. Bryan also was elected Carpatsky's Chief Executive Officer. In the re-domestication and merger, the Bellwether preferred shares will be converted into 102.41 million shares of Radiant Energy preferred stock. This preferred stock will vote as a class with our common stock, and will entitle Bellwether to cast a majority of the votes submitted to Radiant Energy shareholders, including the election of directors. Bellwether will therefore control all matters voted on by our shareholders after the merger. In addition, Messrs. Bryan, Manner and Davis and Dr. Birks will become members of our board of directors and Mr.Manner will be our chief executive officer following completion of the merger. 108 DESCRIPTION OF CAPITAL STOCK We are presently authorized to issue 4,000,000 shares of $0.10 par value common stock and 830,000 shares of preferred stock, $0.01 par value of which 145,300 shares are designated as Series B 5% PIK Cumulative Convertible Preferred Stock, and 684,700 shares are undesignated. As of the date of this proxy statement and prospectus there were outstanding 3,867,894 shares of common stock, warrants to purchase up to 213,532 shares of common stock, 80,325 shares of Series B preferred and options to purchase up to 42,514 shares of common stock. Following the merger and adoption of the amended and restated articles of incorporation, we will be authorized to issue 150,000,000 shares of common stock, of which approximately 55.4 million shares will be issued and outstanding and 200,000,000 shares of undesignated preferred stock of which 102.41 million share will be designated as class A preferred and will be outstanding and held by Bellwether. Common Stock Holders of shares of common stock are entitled to one vote per share on all matters submitted to a vote of the shareholders. Except as may be required by applicable law, holders of common stock will not vote separately as a class, but will vote together with the holders of other classes of capital stock. There is no right to cumulate votes in the election of directors. A majority of the issued and outstanding common stock is required to effect certain fundamental corporate changes such as liquidation, merger or amendment of the articles of incorporation. Holders of shares of common stock are entitled to receive dividends, if, as, and when declared by the board of directors out of available funds, after payment of dividends required to be paid on outstanding shares of preferred stock. Upon liquidation, holders of shares of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the liquidation preference rights of any outstanding shares of preferred stock. Holders of our common stock have no conversion, redemption or preemptive rights. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of preferred stock. The outstanding shares of common stock are and all shares of common stock issued in the merger and the exchange will be, fully paid and nonassessable. Preferred Stock The board of directors has the power, and will have the power under the amended and restated articles of incorporation, without further action by the holders of the common stock, to designate the relative rights and preferences of our preferred stock. Such rights, privileges and preferences could include preferences as to liquidation, redemption and conversion rights, voting rights, dividends or other preferences, any of which may be dilutive of the interest of the holders of the common stock. The board previously designated the Series B preferred, all of which will be exchanged and retired upon completion of the merger. Additional classes of preferred stock may be designated and issued from time to time in one or more series with such designations, voting powers or other preferences and other rights or qualifications as are determined by resolution of our board of directors. The board of directors of Pease has designated the class A preferred stock which will be issued to Bellwether in the merger, once the amended and restated articles of incorporation are filed and become effective. 109 Series B 5% PIK Convertible Preferred Stock We designated 145,300 shares of series B preferred in 1997. There are 80,325 shares issued and the balance are reserved for issuance as payment in kind (PIK) dividends on outstanding series B preferred. The series B preferred is entitled to a dividend of $2.50 per year, payable quarterly, which amount may be paid, at our election, in cash or in kind. Each share issued as a PIK dividend is valued at $50. The dividend is cumulative to the date of payment. The series B preferred has a liquidation preference equal to $50 per share plus any unpaid dividends. The series B preferred is convertible at the option of a holder into a number of shares of our common stock determined by dividing the liquidation preference by the conversion price in effect at the time of conversion. The effective conversion price at the time of any conversion is the lowest reported public sales price for our common stock during the five trading days prior to receipt of a notice of conversion from a holder, reduced by a discount of 25%. The outstanding series B preferred would be convertible into approximately 25,197,143 shares of our common stock as of December 31, 1999, using the reported sales price for our common stock on that date. The series B preferred is non-voting and must be redeemed by us on December 31, 2002 at a price equal to the liquidation preference. We may require holders of all outstanding series B preferred to convert their shares into our common stock at any time in accordance with the above provisions relating to conversion. Upon a decision by a holder to convert series B preferred into our common stock at a time when the average last sale price for common stock for the 20 trading days prior to conversion is lower than $1.75, we will have the option to repurchase the preferred stock being converted. Upon such election, the repurchase price would be $62.50 per share of series B preferred subject to anti-dilution adjustments plus any accumulated unpaid dividends through the date of repurchase. Pursuant to the terms of the exchange agreements, the holders of the series B preferred have agreed that dividends will not cumulate or be paid through the completion of the merger and that the holders will exchange their shares of series B preferred for an aggregate of 8,865,665 shares of our common stock. Holders of series B preferred have already exchanged 25,503 shares of series B preferred for our common stock under these agreements. The 80,325 shares of series B preferred currently outstanding will be exchanged for 6,729,168 shares of our common stock at or before the effective time of the merger. After the exchange, there will be no series B preferred outstanding and we will retire all the stock of the class. Our series B preferred stock is fully paid and nonassessable. Class A Preferred Stock In the merger, we will issue 102,410,000 shares of our newly created and designated class A preferred stock to Bellwether. We will pay dividends on the class A preferred stock on an as converted basis. This means that if we declare a dividend to our common shareholders, we will declare a dividend to the holders of preferred stock equal to the amount they would have been entitled to receive if they had converted their preferred stock. Holders of the class A preferred stock will vote as a class with the holders of our common stock on all matters submitted to our shareholders. Each holder will be entitled to one vote for each share of preferred stock owned. Because there are more shares of preferred stock outstanding than common stock, the holders of preferred stock will control all matters submitted to our shareholders. If we issue additional shares of common stock, we are obligated to issue, as a dividend to holders of preferred stock, the same number of shares of preferred stock. Therefore, the holders of the preferred stock will have the right to vote a majority of the votes on matters submitted to shareholders. We have agreed not to issue capital stock with voting rights other than our common stock and the class A preferred stock. 110 The preferred stock is convertible into common stock. Initially, the preferred stock will be convertible into 28,920,984 shares of our common stock, representing approximately 34.25% of our shares of common stock if all of our outstanding convertible securities, options and warrants were converted into common stock. The number of shares of common stock to be received upon conversion of the preferred stock will be adjusted if o we split or recombine our common stock; o we issue shares of our common stock or shares convertible into our common stock at less than the market price of the stock; or o we merge or consolidate with another entity. The preferred stock may be converted only if a majority of the holders of preferred stock agree to convert their shares. If a majority elect to convert their shares, all shares of preferred stock must be converted. In addition, the preferred stock automatically converts into common stock on December 30, 2004, unless converted prior to that date. Bellwether will hold all of the outstanding preferred stock following the merger. If we dissolve, the holders of preferred stock are entitled to a nominal preference payment, and then they will participate in the liquidating distribution on an as converted basis. When issued in exchange for Carpatsky preferred shares, the class A preferred stock will be fully paid and nonassessable. Certain Provisions of the Articles of Incorporation, Bylaws and Nevada Law Our board of directors will have the authority to issue shares of new classes of preferred stock and to determine the rights, preferences, privileges, designations and limitations of any preferred stock it may issue, including the dividend rights, dividend rate, conversion rights, voting rights, terms of redemption and other terms or conditions. This authority could make it more difficult for a person to engage in, or discourage a person from engaging in, a change in control transaction without the cooperation of management of. Our amended and restated articles of incorporation contain a provision, authorized under Nevada law, which limits the liability of our directors or officers for monetary damages for breach of fiduciary duty as an officer or director other than for intentional misconduct, fraud, a knowing violation of law or for payment of a dividend in violation of Nevada law. Such provision limits recourse for money damages which might otherwise be available to us or our shareholders for negligence by individuals while acting as officers or directors. Although this provision would not prohibit injunctive or similar actions against directors or officers, the practical effect of such relief would be limited. Our amended and restated articles of incorporation and our bylaws also contain provisions requiring us to indemnify officers and directors to the fullest extent of Nevada law. The merger agreement provides that we will, from and after the effective date of the merger, indemnify, defend and hold harmless the present and former officers, directors, employees and agents of Carpatsky and of Pease in respect of acts or omissions occurring on or before the effective date of the merger. Such indemnification is to to the full extent we are permitted under Nevada law, our amended and restated articles of incorporation, Carpatsky's articles of incorporation, Carpatsky's bylaws or any indemnification agreement to which Carpatsky is a party, in each case as in effect on the date of the merger agreement. 111 Anti-Takeover Statutes Nevada law contains two provisions, described below, that would make more difficult the accomplishment of unsolicited or hostile takeover transactions. Restrictions on Certain Combinations Between Nevada Resident Corporations and Interested Shareholders. Nevada law includes provisions prohibiting business combinations, generally including certain mergers, disposition of assets transactions and share issuance or transfer transactions, between a resident domestic corporation and a beneficial owner of 10% or more of the voting power of the outstanding shares of the corporation, except those which are approved by the board of directors before the interested shareholder first obtained a 10% interest in the corporation's stock. These combination provisions apply unless the corporation elects against their application in its articles of incorporation or bylaws. Our amended and restated articles of incorporation contain a provision electing not to be covered by these combination provisions of Nevada law. Nevada Control Share Act. Nevada law also imposes procedural hurdles on greenmail practices of corporate raiders. These provisions of Nevada law temporarily disenfranchise the voting power of control shares of a person or group purchasing a controlling interest in a corporation not opting out of these provisions of Nevada law. In this regard, the control share provisions will apply to a corporation unless, before an acquisition is made, the articles of incorporation or bylaws in effect to the 10th day following the acquisition of a controlling interest provide that it is inapplicable. Our amended and restated articles of incorporation currently contain a provision electing not to be covered by the Nevada Control Share Act. Transfer Agent and Registrar Computershare Trust Company, Inc., Denver, Colorado, 80201, serves as the transfer agent and registrar for our common stock and will be the transfer agent for Radiant Energy common stock. Radiant Energy will act as the initial transfer agent for the Radiant Energy preferred stock. COMPARISON OF RIGHTS OF HOLDERS OF CARPATSKY, PEASE AND RADIANT ENERGY COMMON STOCK The following is a summary of the material differences between the rights of holders of Carpatsky common shares and the rights of holders of common shares of Pease prior to the merger and of Radiant Energy following the merger. Carpatsky is organized under the laws of the province of Alberta, Canada and Pease presently is, and Radiant Energy will be, organized under the laws of the state of Nevada. As a result, there are differences between the respective state laws and various provisions in their respective corporate charters and bylaws. Upon completion of the merger, holders of Carpatsky common shares will become shareholders of Radiant Energy (except to the extent any such holders may be compensated through the exercise of appraisal rights), at which time their rights will be governed by Nevada law, the amended and restated articles of incorporation of Radiant Energy and the Radiant Energy bylaws. The bylaws of Pease before the merger will be the bylaws of Radiant Energy following the merger. Unless otherwise specified, the articles of incorporation and bylaws of Radiant Energy after the merger will contain identical provisions to the articles of incorporation and bylaws of Pease prior to the merger. This summary is not intended to be an exhaustive or detailed description of the provisions discussed. The summary is qualified in its entirety by reference to the Nevada General Corporation Law and the Business Corporations Act (Alberta). See "Description of Capital Stock" for a summary of a number of other rights relating to Radiant Energy common and preferred stock. 112 The material differences that affect the rights and interests of shareholders of Carpatsky and Pease are as follows: Authorized capital stock The authorized capital stock of Pease presently is 4,000,000 shares of common stock, par value $0.10 per share, and 830,000 shares of preferred stock, par value $0.01 per share, of which 145,300 have been designated as Series B 5% PIK Convertible Preferred Stock. Under the amended and restated articles of incorporation of Radiant Energy, the authorized capital stock will be 150,000,000 shares of common stock, par value $0.001 per share and 200,000,000 shares of preferred stock without par value. Carpatsky is authorized to issue an unlimited number of common and preferred shares without par value. Number of directors Under Nevada law, a corporation's board of directors consists of at least one person, and the number of directors must be set forth in either the bylaws or the articles of incorporation and may be either a fixed or variable number. The articles of incorporation for Pease presently specify that there should be no fewer than three nor more than eleven directors, as fixed in the bylaws. Pease presently has eight directors and one vacancy. The amended and restated articles of incorporation for Radiant Energy provide that there shall be no fewer than five nor more than eleven directors. Under the law of Alberta, a corporation's board of directors consists of at least one person and the number of directors must be set forth in the articles of incorporation and may be either a fixed or variable number. Under the law of Alberta, a corporation that has distributed securities to the public must have at least three directors, at least two of whom are neither officers nor employees of the corporation or its affiliates. Carpatsky presently has seven directors. Classified board Nevada law provides that the board may be divided into classes provided that at least one-fourth of the total number of directors is elected at each annual meeting of shareholders. Furthermore, under Nevada law, the articles of incorporation may provide that individual directors or classes of directors may have voting power that is greater than or less than the other directors or classes of directors. Pease's articles provide that the directors, other than directors who may be elected by the holders of any outstanding series of preferred stock, shall be classified into three classes, as nearly equal in number as possible. Each class will be elected for a term expiring in the third year after election, and each will have equal voting power. As a result of the classification, holders of Radiant Energy common stock will, in the future, elect approximately one-third of the directors at each annual meeting of shareholders for a three year term. Alberta law permits the articles of incorporation to provide for the election of directors for terms expiring not later than the close of the third annual meeting of shareholders following their election and for the election of directors by creditors or employees of the corporation or by a class or classes of those creditors or employees. The articles of Carpatsky do not proved for a classified board; therefore, directors are elected annually. Vacancies on the board. Nevada law and Pease's bylaws provide that vacancies, including those caused by newly-created directorships, may be filled by a majority of the remaining directors then in office, even if the remaining directors do not constitute a quorum. 113 Under the law of Alberta, a quorum of directors may fill a vacancy among the directors, except for vacancies resulting from an increase in the number or minimum number of directors or from a failure to elect the number or minimum number of directors required by the articles. If there is not a quorum of directors, or if there has been a failure to elect the number or minimum number of directors required by the articles, the directors then in office must promptly call a special meeting of shareholders to fill the vacancy and, if they fail to call a meeting or if there are no directors then in office, the meeting may be called by any shareholder. Removal of directors Nevada law provides that any director or the entire board may be removed, with or without cause, by the holders of a two-thirds majority of the shares then entitled to vote at an election of directors. However, if the holders of a class or series of shares are entitled to elect a director, then removal is by two-thirds vote of that class. Pease's articles of incorporation provide that, subject to the rights, if any, of any series of outstanding preferred stock to elect directors and to remove any director whom the holders of such stock have the right to elect, any director may be removed from office only for cause. The term cause with respect to the removal of any director shall mean: o conviction of a felony or plea of nolo contendere after a charge of felony; o declaration of unsound mind by an order of a court of competent jurisdiction; o gross dereliction of duty; o commission of action involving moral turpitude; or o commission of an action which constitutes intentional misconduct or a knowing violation of laws, if such action in either event results in a material injury to the corporation. Alberta law provides that any director or the entire board may be removed, with or without cause, by a majority of the votes cast by shareholders at a special meeting of shareholders. Action by written consent of shareholders Nevada law provides that any action that may be taken at a meeting of shareholders may be taken without a meeting, without prior notice and without a vote if the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize the action at a meeting at which all shares entitled to vote were present and voted, sign a written consent setting forth the action taken. Under Alberta law, shareholders may pass a resolution without a meeting, without prior notice and without a vote, if all the shareholders entitled to vote on that resolution sign a resolution in writing. Special meeting of shareholders Nevada law does not have a separate provision for the calling of a special meeting. Special meetings are called in accordance with the bylaws of the company or the requirements of a specific provision of Nevada law. Pease's bylaws provide that a special meeting of shareholders may be called for any purpose by either: o the chairman of the board, the president or Pease's board of director; or o the president or secretary upon written request of either a majority of the directors or shareholders holding at least 10% of the issued and outstanding shares entitled to vote. 114 Alberta law provides that the board of directors may at any time call a special meeting of shareholders. In addition, the holders of not less than 5% of the issued shares of a corporation that carry the right to vote at a meeting may request that the directors call a meeting of shareholders. On receiving the request, the directors must, except in limited circumstances, call a meeting of shareholders within 21 days. Meetings of shareholders may also be called by the Court of Queen's Bench of Alberta for any reason that the court thinks fit. Amendment of articles Under Nevada law, a corporation's board and its shareholders may amend the corporation's articles of incorporation if the board of directors recommends the amendment and the holders of at least a majority of shares of stock entitled to vote approve the amendment. Alberta law provides that a corporation's articles of incorporation may be amended if the amendment is approved by not less than two-thirds of the votes cast by the shareholders who voted. Where classes of shareholders are entitled to vote separately, the amendment must be approved by each class. Adoption, amendment or repeal of bylaws Nevada law and the articles of incorporation of Pease authorize the directors to adopt, amend and repeal the bylaws, subject to bylaws, if any, adopted by shareholders. Alberta law provides that directors may make, amend and repeal bylaws. All such bylaw amendments must be submitted to shareholders at the next annual meeting and the shareholders may confirm, reject or amend the submitted bylaw. An amendment of the bylaws by directors is effective from the date it is adopted by the directors until it is submitted to the shareholders. If confirmed by the shareholders, the bylaw continues in effect in the form in which it is so confirmed. If a bylaw is rejected by the shareholders, or if the directors do not submit an amendment to the bylaws to the shareholders as required, the bylaw ceases to be effective and no subsequent resolution of the directors to make, amend or repeal a bylaw having substantially the same purpose or effect is effective until it is approved by the shareholders. Notice of shareholder proposals and nomination of directors Neither Nevada law nor the articles of incorporation or bylaws of Pease limit the right of a shareholder to bring business before an annual meeting of shareholders or make nominations of directors at shareholder meetings. Alberta law does not limit the right of shareholders to make nominations of directors; however, the right of a shareholder to bring business before a meeting is severely restricted if notice of the business was not given to all shareholders. Alberta law prescribes a procedure for shareholders to give notice to the corporation of any matter that he proposes to raise at an annual meeting of shareholders. Except in limited circumstances, where a notice is given, the corporation must disclose in its proxy material a description of the matter proposed to be raised and permit the shareholder to discuss the matter at the meeting. Voting rights in connection with certain business combinations Under Nevada law a merger agreement, consolidation or disposition of all or substantially all of a corporation's assets must be adopted by a resolution of the board and approved by the holders of a majority of the outstanding voting stock. Under Alberta law a statutory amalgamation or a disposition of all or substantially all of the corporation's assets must be approved by a majority of not less than 2/3rds of the votes cast by the shareholders who voted. 115 Nevada law includes provisions relating to the acquisition of a controlling interest and combinations with interested shareholders. These provisions would apply to and limit transactions that involve a change of control or a transaction with a shareholder which acquired a controlling interest within the last three years, unless the board of directors consents to the transaction. The articles of incorporation of Pease elect not to be subject to the provisions limiting certain transactions with interested shareholders. Neither Alberta law nor the articles of Carpatsky contain comparable provisions. Appraisal Rights Under Nevada law, a shareholder is entitled to obtain payment of the fair value of his shares: o in the event of a merger requiring approval by shareholders when the holder is entitled to vote on the merger; o if the corporation is a subsidiary corporation, upon the merger with its corporate parent; or o if the corporation is party to a plan of exchange that the shareholder is entitled to vote on, if the shareholders' interest in the corporation will be acquired. However, a shareholder's right to dissent and obtain payment for his shares is limited. Holders of securities listed on a national exchange, included in the national market system by the NASD or held by at least 2,000 holders of record are not entitled to appraisal rights unless the articles of incorporation of the corporation issuing the shares provide otherwise or the holders of the shares are required under the plan of merger or exchange to accept for the shares anything except cash and/or owner's interests of: o the surviving or acquiring entity; or o any other entity which, at the effective date of the merger, was either listed on a national securities exchange, included in the national market system by the NASD, or held of record by at least 2,000 holders. Under Alberta law, a holder of shares of any class of stock of a corporation is entitled to dissent if the corporation resolves to: o amend its articles to add, change or remove any provisions restricting or constraining the issue or transfer of shares of that class; o amend its articles to add, change or remove any restrictions on the business or businesses that the corporation may conduct; o amalgamate with a corporation other than a wholly owned subsidiary; o be continued under the laws of another jurisdiction; or o sell lease or exchange all or substantially all its property. In addition, holders of shares of a particular class that are entitled to vote separately as a class on an amendment to the articles that changes the terms of or affect the priority of such shares are entitled to dissent. Limitation of personal liability of directors Our amended and restated articles of incorporation contain a provision, authorized under Nevada law, which limits the liability of our directors or officers for monetary damages for breach of fiduciary duty as an officer or director. The limitation of liability does not apply if the breach involved intentional misconduct, fraud, a knowing violation of law or payment of a dividend in violation of Nevada law. Such provision limits recourse for money damages which might otherwise be available to us or our shareholders for negligence by individuals while acting as officers or directors. Although this provision would not prohibit injunctive or similar actions against directors or officers, the practical effect of such relief would be limited. 116 Alberta law includes no such right to limit personal liability or to limit personal liability by including provisions to that effect in the articles or bylaws. Accordingly, directors of Carpatsky could face responsibility or liability to the corporation or its shareholders under certain circumstances where no such liability would arise under the amended and restated articles of incorporation of Radiant Energy. Alberta law does; however, permit Carpatsky to indemnify directors and officers under conditions similar to Nevada law. Carpatsky has given its directors indemnity to the full extent permitted by Alberta law and Pease's bylaws provide for indemnity to the full extent of Nevada law. LEGAL OPINIONS Legal matters in connection with the merger are being passed upon for Pease by Alan W. Peryam, LLC, Denver, Colorado and for Carpatsky by Haynes and Boone, LLP, McManus and Thomson, Calgary, Alberta, Canada and Feleski Flynn, Calgary, Alberta, Canada. EXPERTS The consolidated financial statements of Pease at December 31, 1999, and for the years ended December 31, 1999 and 1998, included in this proxy statement and prospectus and the registration statement of which this proxy statement and prospectus is part, have been audited by HEIN + ASSOCIATES LLP, independent auditors, as set forth in their report appearing elsewhere in this proxy statement and prospectus, and in the registration statement, and are included in reliance upon that report given upon the authority of that firm as experts in accounting and auditing. The consolidated financial statements of Carpatsky at December 31, 1999 and 1998, and for each of the years in the three-year period ended December 31, 1999, included in this proxy statement and prospectus and the registration statement of which this proxy statement and prospectus is part, have been audited by HEIN + ASSOCIATES LLP, independent auditors, as set forth in their report appearing elsewhere in this proxy statement and prospectus, and in the registration statement, and are included in reliance upon that report given upon the authority of that firm as experts in accounting and auditing. RESERVE ENGINEERS The estimates of net proved reserves of Pease and related future cash flows have been prepared by Netherland Sewell and are included herein in reliance on their being experts in the preparation of reserve reports. The estimates of net proved reserves of Carpatsky and related future cash flows as of December 31, 1999, 1998 and 1997 have been prepared by Ryder Scott Company, L.P., Petroleum Engineers and are included herein in reliance on their being experts in the preparation of reserve reports. 117 GLOSSARY OF OIL AND GAS TERMS Terms used to describe quantities of oil and natural gas Bbl -- One stock tank barrel, or 42 U.S. gallons liquid volume, of crude oil or other liquid hydrocarbons. Bcf -- One billion cubic feet of natural gas. Bcfe -- One billion cubic feet of natural gas equivalent, computed on an approximate energy equivalent basis that one Bbl equals six Mcf. BOE -- One barrel of oil equivalent, converting gas to oil at the ratio of six Mcf of gas to one Bbl of oil. Mbbl-- One thousand Bbls. Mcf -- One thousand cubic feet of natural gas. Mcfe -- One thousand cubic feet of natural gas equivalent, computed on an approximate energy equivalent basis that one Bbl equals six Mcf. MMcf -- One million cubic feet of natural gas. MMcfe -- One million cubic feet of natural gas equivalent, computed on an approximate energy equivalent basis that one Bbl equals six Mcf. Terms used to describe our interests in wells and acreage Gross oil and gas wells or acres. Our gross wells or gross acres represent the total number of wells or acres in which we own a working interest (or, where we do not own a working interest, a royalty interest). Net oil and gas wells or acres. Determined by multiplying "gross" oil and natural gas wells or acres by the working interest (or, where we do not own a working interest, a royalty interest) that we own in such wells or acres. Terms used to assign a present value to our reserves Standardized measure of proved reserves. The present value, discounted at 10%, of the pre-tax future net cash flows attributable to estimated net proved reserves. We calculate this amount by assuming that we will sell the oil and gas production attributable to the proved reserves estimated in our independent engineer's reserve report for the prices we received for the production on the date of the report, unless we had a contract to sell the production for a different price. We also assume that the cost to produce the reserves will remain constant at the costs prevailing on the date of the report. The assumed costs are subtracted from the assumed revenues resulting in a stream of future net cash flows. Estimated future income taxes using rates in effect on the date of the report are deducted from the net cash flow stream. The after-tax cash flows are discounted at 10% to result in the standardized measure of our proved reserves. Discounted present value. The discounted present value of proved reserves is identical to the standardized measure, except that estimated future income taxes are not deducted in calculating future net cash flows. We disclose the discounted present value without deducted estimated income taxes to provide what we believe is a better basis for comparison of our reserves to other producers who may have different tax rates. Proved reserves. The estimated quantities of crude oil, natural gas and natural gas liquids which, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and natural gas reservoirs under existing economic and operating conditions. 118 The Securities and Exchange Commission definition of proved oil and gas reserves, as set forth in Article 4-10(a) (2) of Regulation S-X, is as follows: Proved oil and gas reserves. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. (i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. (ii) Reserves which can be produced economically through application of improved recovery, techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. (iii)Estimates of proved reserves do not include the following: (A) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves;" (B) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (C) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources. Proved developed reserves. Proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves. Proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required. Terms used to describe the legal ownership of our oil and gas properties Royalty interest. A real property interest entitling the owner to receive a specified portion of the gross proceeds of the sale of oil and natural gas production or, if the conveyance creating the interest provides, a specific portion of oil and natural gas produced, without any deduction for the costs to explore for, develop or produce the oil and natural gas. A royalty interest owner has no right to consent to or approve the operation and development of the property, while the owners of the working interest have the exclusive right to exploit the mineral on the land. 119 Working interest. A real property interest entitling the owner to receive a specified percentage of the proceeds of the sale of oil and natural gas production or a percentage of the production, but requiring the owner of the working interest to bear the cost to explore for, develop and produce such oil and natural gas. A working interest owner who owns a portion of the working interest may participate either as operator or by voting his percentage interest to approve or disapprove the appointment of an operator and drilling and other major activities in connection with the development and operation of a property. Terms used to describe seismic operations Seismic data. Oil and gas companies use seismic data as their principal source of information to locate oil and gas deposits, both to aid in exploration for new deposits and to manage or enhance production from known reservoirs. To gather seismic data, an energy source is used to send sound waves into the subsurface strata. These waves are reflected back to the surface by underground formations, where they are detected by geophones which digitize and record the reflected waves. Computers are then used to process the raw data to develop an image of underground formations. 2-D seismic data. 2-D seismic survey data has been the standard acquisition technique used to image geologic formations over a broad area. 2-D seismic data is collected by a single line of energy sources which reflect seismic waves to a single line of geophones. When processed, 2-D seismic data produces an image of a single vertical plane of sub-surface data. 3-D seismic. 3-D seismic data is collected using a grid of energy sources, which are generally spread over several miles. A 3-D survey produces a three dimensional image of the subsurface geology by collecting seismic data along parallel lines and creating a cube of information that can be divided into various planes, thus improving visualization. Consequently, 3-D seismic data is a more reliable indicator of potential oil and natural gas reservoirs in the area evaluated. 120 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Pease Oil and Gas Independent Auditor's Report.............................................. F-2 Consolidated Balance Sheets - March 31, 2000 (Unaudited) and December 31, 1999................................................ F-3 Consolidated Statements of Operations - For the Three Months Ended March 31, 2000 and 1999 (Unaudited) and the Years Ended December 31, 1999 and 1998........................................... F-4 Consolidated Statements of Shareholders' Equity - For the Three Months Ended March 31, 2000 (Unaudited) and For the Years Ended December 31, 1999 and 1998............................... F-5 Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 2000 and 1999 (Unaudited) and the Years Ended December 31, 1999 and 1998........................................... F-6 Notes to Consolidated Financial Statements................................ F-7 CARPATSKY PETROLEUM, INC. Independent Auditor's Report.............................................. F-22 Consolidated Balance Sheets - March 31, 2000 (Unaudited) and December 31, 1999 and 1998 .......................................... F-23 Consolidated Statements of Operations - For the Three Months Ended March 31, 2000 and 1999 (Unaudited) and for the Years Ended December 31, 1999, 1998 and 1997..................................... F-24 Consolidated Statement of Changes in Shareholders' Equity - For the Period January 1, 1997 through December 31, 1999 and January 1, 2000 through March 31, 2000 (Unaudited)................... F-25 Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 2000 and 1999 (Unaudited), and the Years Ended December 31, 1999, 1998 and 1997..................................... F-26 Notes to Consolidated Financial Statements................................ F-27 F-1 INDEPENDENT AUDITOR'S REPORT Board of Directors Pease Oil and Gas Company Grand Junction, Colorado We have audited the accompanying consolidated balance sheet of Pease Oil and Gas Company and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pease Oil and Gas Company and subsidiaries as of December 31, 1999, and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As discussed in Note 1 to the Financial Statements, the Company has historically incurred net operating losses resulting in an accumulated deficit of $33.5 million as of December 31, 1999. These conditions and other matters discussed in Note 1 raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 1. The Financial Statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Hein + Associates LLP Denver, Colorado February 18, 2000 F-2
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET March 31, December 31, 2000 1999 ---------- ----------- (Unaudited) ASSETS Current Assets: Cash and equivalents ...................................................... 909,000 724,000 Trade receivables, net .................................................... 538,000 403,000 Prepaid expenses and other ................................................ 72,000 76,000 ----------- ----------- Total current assets .................................................... 1,519,000 1,203,000 Oil and Gas Properties, at cost (full cost method): Unevaluated properties .................................................... 2,370,000 2,282,000 Costs being amortized ..................................................... 18,384,000 18,278,000 ----------- ----------- Total oil and gas properties ............................................ 20,754,000 20,560,000 Less accumulated amortization ............................................. (15,115,000) (14,868,000) ----------- ----------- Net oil and gas properties .............................................. 5,639,000 5,692,000 ----------- ----------- Other Assets: Debt issuance costs, net .................................................. 150,000 184,000 Office equipment and vehicles, net ........................................ 49,000 54,000 Deposits and other ........................................................ 5,000 8,000 ----------- ----------- Total other assets ...................................................... 204,000 246,000 ----------- ----------- Total Assets ................................................................... 7,362,000 7,141,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt ...................................... 5,000 6,000 Accounts payable, trade ................................................... 207,000 141,000 Accrued expenses .......................................................... 105,000 134,000 ----------- ----------- Total current liabilities ............................................... 317,000 281,000 Long-Term Debt, less current maturities: ....................................... 2,561,000 2,506,000 ----------- ----------- Stockholders' Equity: Preferred Stock, par value $0.01 per share, 2,000,000 shares authorized, 105,828 shares of Series B 5% PIK Cumulative (liquidation preference of $5,445,000 at March 31, 2000) .............................. 1,000 1,000 Common shares, par value $0.10 per share, 4,000,000 shares authorized, 1,731,398 shares issued and outstanding ................................... 173,000 173,000 Additional paid-in capital ..................................................... 37,636,000 37,636,000 Accumulated deficit ............................................................ (33,326,000) (33,456,000) ----------- ----------- Total Stockholders' Equity .............................................. 4,484,000 4,354,000 ----------- ----------- Total Liabilities and Stockholders' Equity ..................................... 7,362,000 7,141,000 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-3
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months For the Years Ended March 31, Ended December 31, ----------------------- ------------------------ 2000 1999 1999 1998 ---- ---- ---- ---- (Unaudited) (Unaudited) Revenue: Oil and gas sales ............................. $ 799,000 $ 412,000 $ 2,144,000 $ 2,360,000 Gas plant, service and supply ................. -- -- -- 528,000 ------------ ------------ ------------ ------------ Total revenue ............................. 799,000 412,000 2,144,000 2,888,000 ------------ ------------ ------------ ------------ Expenses: Oil and gas production costs .................. 163,000 84,000 405,000 1,049,000 Gas plant, service and supply ................. -- -- -- 571,000 General and administrative .................... 173,000 180,000 845,000 1,587,000 Consulting expense-related party .............. -- 38,000 38,000 247,000 Depreciation, depletion and amortization ................................ 252,000 263,000 1,007,000 2,241,000 Impairment expense: Oil and gas properties ...................... -- -- -- 7,279,000 Assets held for sale ........................ -- -- -- 314,000 ------------ ------------ ------------ ------------ Total expenses ............................ 588,000 565,000 2,295,000 13,288,000 ------------ ------------ ------------ ------------ Income (Loss) from Operations ...................... 211,000 (153,000) (151,000) (10,400,000) ------------ ------------ ------------ ------------ Other Income (Expenses): Interest expense .............................. (90,000) (90,000) (360,000) (399,000) Interest and other income ..................... 9,000 11,000 45,000 169,000 Gain (Loss) on sale of assets ................. -- -- 1,000 3,000 ------------ ------------ ------------ ------------ Total other income (expenses, net) ........ (81,000) (79,000) (314,000) (227,000) ------------ ------------ ------------ ------------ Net Income (Loss) .................................. $ 130,000 $ (232,000) $ (465,000) $(10,627,000) ============ ============ ============ ============ Net Income (Loss) Available to Common Stockholders ................................ $ 64,000 $ (298,000) $ (731,000) $(12,695,000) ============ ============ ============ ============ Basic: Earnings (Loss) Per Share ..................... $ 0.04 $ (0.18) $ (0.43) $ (7.99) Weighted Avg Shares Outstanding ............... 1,731,000 1,626,000 1,684,000 1,588,000 Diluted: Earnings (Loss) Per Share ..................... $ .01 $ (0.18) $ (0.43) $ (7.99) Weighted Avg Shares Outstanding ............... 18,326,000 1,626,000 1,684,000 1,588,000
The accompanying notes are an integral part of these consolidated financial statements. F-4
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1999 and 1998 and Three Months Ended March 31, 2000 (unaudited) Preferred Stock Common Stock --------------------- ------------------- Shares Amount Shares Amount ------ ------ ------ ------ BALANCES, December 31, 1997 ................. 113,333 $ 1,000 1,579,353 $ 158,000 Purchase and retirement of series B preferred stock ................................... (4,500) -- -- -- Issuance of common shares for: Exercise of warrants .................... -- -- 125 -- Conversion of series B preferred stock .. (1,497) -- 21,584 2,000 Series B preferred stock dividends .......... -- -- -- -- Net Loss .................................... -- -- -- -- ----------- ---------- ---------- --------- BALANCES, December 31, 1998 ................. 107,336 1,000 1,601,062 160,000 Purchase and retirement of series B preferred stock ................................... (825) -- -- -- Series B Preferred Stock dividends .......... -- -- -- -- Issuance of Common shares for: Conversion of series B preferred stock .. (683) -- 87,636 9,000 Services of Directors in lieu of cash ... -- -- 42,700 4,000 Net loss .................................... -- -- -- -- ----------- ---------- ---------- --------- BALANCES, December 31, 1999 ................. 105,828 1,000 1,731,398 173,000 Net income (unaudited) ...................... -- -- -- -- ----------- ---------- ---------- --------- BALANCES, March 31, 2000 (unaudited) ........ 105,828 $ 1,000 1,731,398 $ 173,000 =========== ========== ========== ========= Additional Total Paid-in Accumulated Stockholders' Capital Deficit Equity ---------- ----------- ------------ BALANCES, December 31, 1997 ................. 38,296,000 $ (22,364,000)$ 16,091,000 Purchase and retirement of series B preferred stock ................................... (206,000) -- (206,000) Issuance of common shares for: Exercise of warrants .................... 1,000 -- 1,000 Conversion of series B preferred stock .. (2,000) -- -- Series B preferred stock dividends .......... (278,000) -- (278,000) Net Loss .................................... -- (10,627,000) (10,627,000) ----------- ----------- ----------- BALANCES, December 31, 1998 ................. 37,811,000 (32,991,000) 4,981,000 Purchase and retirement of series B preferred stock ................................... (51,000) -- (51,000) Series B Preferred Stock dividends .......... (178,000) -- (178,000) Issuance of Common shares for: Conversion of series B preferred stock .. (9,000) -- -- Services of Directors in lieu of cash ... 63,000 -- 67,000 Net loss .................................... -- (465,000) (465,000) ----------- ----------- ----------- BALANCES, December 31, 1999 ................. 37,636,000 (33,456,000) 4,354,000 Net income (unaudited) ...................... -- 130,000 130,000 ----------- ----------- ----------- BALANCES, March 31, 2000 (unaudited) ........ 37,636,000 $ (33,326,000)$ 4,484,000 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-5
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months For the Years Ended March 31, Ended December 31, ----------------------------------- --------------------------- 2000 1999 1999 1998 ----------------- ----------------- ----------------- ----------- (Unaudited) (Unaudited) Cash Flows from Operating Activities: Net Income (Loss) ..................................... $ 130,000 $ (232,000) $ (465,000) $(10,627,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision for depreciation and depletion .............. 252,000 263,000 1,007,000 2,241,000 Amortization of intangible assets ..................... 89,000 89,000 358,000 397,000 Bad debt expense ...................................... -- -- 24,000 -- Provision for impairment .............................. -- -- -- 7,593,000 Loss (gain) on sale of assets ......................... -- -- (1,000) (4,000) Other ................................................. -- -- 30,000 13,000 Changes in operating assets and/or liabilities: (Increase) decrease in: Trade receivables ................................. (134,000) 159,000 (6,000) 337,000 Inventory ......................................... -- -- -- 385,000 Prepaid expenses and other assets ................. (8,000) (8,000) 24,000 8,000 Increase (decrease) in: Accounts payable .................................. 22,000 7,000 (148,000) (41,000) Accrued expenses .................................. (29,000) (46,000) (84,000) (513,000) ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities .............................. 322,000 232,000 739,000 (211,000) ------------ ------------ ------------ ------------ Cash Flows from Investing Activities: Expenditures for property and equipment ............... (150,000) (294,000) (934,000) (7,364,000) Proceeds from sale of property and equipment .......... -- 72,000 101,000 3,823,000 Redemption of certificate of deposit .................. 15,000 -- 70,000 25,000 ------------ ------------ ------------ ------------ Net cash used in investing activities ............... (135,000) (222,000) (763,000) (3,516,000) ------------ ------------ ------------ ------------ Cash Flows from Financing Activities: Proceeds from exercise of warrants .................... -- -- -- 1,000 Repayment of long-term debt ........................... (2,000) (2,000) (6,000) (1,208,000) Series B preferred stock dividends .................... -- (67,000) (245,000) (211,000) Offering costs - Series B preferred ................... -- -- -- (147,000) Purchase and retirement of Series B preferred stock ..................................... -- (31,000) (51,000) (206,000) ------------ ------------ ------------ ------------ Net cash used in financing activities ............... (2,000) (100,000) (302,000) (1,771,000) ------------ ------------ ------------ ------------ Net Increase (Decrease) in Cash and Equivalents ........................................... 185,000 (90,000) (326,000) (5,498,000) Cash and Equivalents, beginning of year ............... 724,000 1,050,000 1,050,000 6,548,000 ------------ ------------ ------------ ------------ Cash and Equivalents, end of year ..................... $ 909,000 $ 960,000 $ 724,000 $ 1,050,000 ============ ============ ============ ============ Supplemental Disclosure of Cash Flow Information: Cash paid for interest ................................ $ 71,000 $ 71,000 $ 280,000 $ 400,000 Supplemental Disclosure of Non-Cash Investing and Financing Activities: Debt incurred for purchase of vehicles ................ $ -- $ -- $ -- $ 33,000 Increase (decrease) in payables for: Oil and gas properties .............................. 44,000 40,000 (22,000) (1,002,000) Offering costs ...................................... -- -- -- (147,000) Series B preferred stock dividends .................. -- -- (67,000) 67,000 Capitalized portion of amortized debt ...................... -- -- -- 486,000 issuance/discount costs
The accompanying notes are an integral part of these consolidated financial statements. F-6 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ------------------------------------------------------------------- Nature of Operations - At December 31, 1999 the principal business of Pease Oil and Gas Company ("Pease") is to participate as a non-operating, minority interest owner in exploration, development, production and sale of oil, natural gas and natural gas liquids. Pease was previously engaged in the processing and marketing of natural gas at a gas processing plant, the sale of oil and gas production equipment and oilfield supplies, and oil and gas well completion and operational services. However, as discussed in Note 2, during 1998, Pease's gas processing plant and the oilfield service and supply businesses were sold. Pease conducted its operations through the following wholly-owned subsidiaries: Loveland Gas Processing Company, Ltd.; Pease Oil Field Services, Inc.; Pease Oil Field Supply, Inc.; and Pease Operating Company, Inc. All the subsidiaries are currently inactive. Continuing Operations - Pease has historically incurred net operating losses resulting in an accumulated deficit of $33.5 million as of December 31, 1999. As a result of the continuing losses, Pease's stockholders' equity has been reduced to approximately $4.3 million. At December 31, 1999, the liquidation preference of the series B preferred stock is in excess of total stockholders' equity and the hyperdilutive potential of the conversion feature has resulted in Pease's inability to raise additional equity capital which is critical to carry out development and exploration activities that are planned for the next several years. Pease may be required to redeem the series B preferred stock on December 31, 2002 at a price equal to the liquidation preference. Alternatively, Pease can force the holders to convert to common shares which would result in ownership by the Preferred holders in excess of 90% (based on the current trading price of the common shares). However, Pease does not currently have a sufficient number of common shares authorized to convert all of the Preferred stock. Under the terms of the Preferred Stock Agreement, Pease is obligated to take the appropriate steps to increase the number of authorized shares in the future. However, no assurance can be given at this time whether or not additional shares can or will be authorized. In April 2001, Pease will also be required to pay off convertible debentures with a current outstanding balance of $2,783,000. During 1998 and into 1999, Pease has taken several steps to reduce general and administrative costs and management believes Pease will be able to generate positive operating cash flows in 2000. Management believes capital requirements for 2000 will be between $200,000 and $1,200,000. Accordingly, management believes that existing working capital, plus cash expected to be generated from operating activities will be sufficient to meet commitments for capital expenditures and other obligations of Pease through at least the first quarter of 2001. However, should the existing working capital not be sufficient to meet future obligations, Pease may have to consider other alternatives, including the sale of existing assets, cancellation of existing exploration agreements, farmouts, joint ventures, restructuring under the protection of the Federal Bankruptcy Laws and/or liquidation. During 1998, in response to a series of dry holes and other factors that contributed to the historically poor financial results, Pease restructured its management and began to vigorously pursue a merger candidate. Pease's Board of Directors believed that a merger would, among other things, increase Pease's asset base and improve the chances of financing future opportunities. As a result of these efforts, Pease F-7 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS signed an Agreement and Plan of Merger ("Merger Agreement") on September 1, 1999 (and amended in December 1999) with Carpatsky Petroleum, Inc. ("Carpatsky"), a publicly held company traded on the Alberta Stock Exchange under the symbol "KPY." Carpatsky is engaged in production and development of oil, gas and condensate in the Republic of Ukraine with proven reserves much greater than Pease's. The transaction is still conditioned upon, among other things, regulatory and shareholder approvals. Pursuant to the terms of the proposed merger transaction, Pease will issue approximately 44.96 million shares of common shares plus 102.41 million shares of a newly designated preferred stock to acquire all the outstanding stock of Carpatsky. In addition, all of Pease's currently outstanding series B preferred stock will be exchanged for approximately 8.9 million shares of common shares at the close of the transaction. All holders of the series B preferred stock have agreed that dividends subsequent to September 2000 shall not be paid on their holdings if the contemplated transaction with Carpatsky is ultimately consummated. They have also agreed not to sell or convert any outstanding shares of the Series B Preferred until the contemplated transaction with Carpatsky is either completed or abandoned. The Merger Agreement contemplates an "opt-out" break-up fee of $250,000 payable by the defaulting party to the merger. If this merger occurs, Carpatsky will have control of Pease as Pease will have only one of the expected seven board of director positions. It is expected current management will also be replaced. Principles of Consolidation - The accompanying financial statements include the accounts of Pease and its wholly-owned subsidiaries. All material intercompany transactions and accounts have been eliminated in consolidation. Cash and Equivalents - Pease considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Oil and Gas Properties - Pease's oil and gas producing activities are accounted for using the full cost method of accounting. Pease has one cost center (full cost pool) since all of its oil and gas producing activities are conducted in the United States. Under the full cost method, all costs associated with the acquisition, development and exploration of oil and gas properties are capitalized, including payroll and other internal costs that are directly attributable to these activities. For the years ended December 31, 1999 and 1998, capital expenditures include internal costs of $24,000 and $237,000, respectively. Proceeds from sales of oil and gas properties are credited to the full cost pool with no gain or loss recognized unless such adjustments would significantly alter the relationship between capitalized costs and proved oil and gas reserves. Acquisition costs of unproved properties and costs related to exploratory drilling and seismic activities are initially excluded from amortization. These costs are periodically evaluated for impairment and transferred to properties being amortized when either proved reserves are established or the costs are determined to be impaired. F-8 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The capitalized costs related to all evaluated oil and gas properties are amortized using the units of production method based upon production and estimates of proved reserve quantities. Future costs to develop proved reserves, as well as site restoration, dismantlement and abandonment costs, are estimated based on current costs and are also amortized to expense using the units of production method. The capitalized costs of evaluated oil and gas properties (net of accumulated amortization and related deferred income taxes) are not permitted to exceed the full cost ceiling. The full cost ceiling involves a quarterly calculation of the estimated future net cash flows from proved oil and gas properties, using current prices and costs and an annual discount factor of 10%. Accordingly, the full cost ceiling may be particularly sensitive in the near term due to changes in oil and gas prices or production rates. Impairment of Long-Lived Assets - Pease performs an assessment for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If the net carrying value exceeds estimated undiscounted future net cash flows, then impairment is recognized to reduce the carrying value to the estimated fair value. Property, Plant and Equipment - Property, plant and equipment is stated at cost. Depreciation of property, plant and equipment was calculated using the straight-line method over the estimated useful lives of the assets, as follows: Years ----- Gas plant 17 Service equipment and vehicles 4-7 Buildings and office equipment 7-15 Depreciation expense related to property, plant and equipment amounted to $22,000 and $327,000 for the years ended December 31, 1999 and 1998, respectively. The costs of normal maintenance and repairs are charged to operating expenses as incurred. Material expenditures which increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of properties sold, or otherwise disposed of, and the related accumulated depreciation or amortization are removed from the accounts, and any gains or losses are reflected in current operations. Debt Issuance Costs - Debt issuance costs relate to the $5 million private placement of convertible debentures discussed in Note 3. These costs are being amortized using the interest method. Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The actual results could differ from those estimates. F-9 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pease's financial statements are based on a number of significant estimates including the allowance for doubtful accounts, assumptions affecting the fair value of stock options and warrants, and oil and gas reserve quantities which are the basis for the calculation of amortization and impairment of oil and gas properties. Management emphasizes that reserve estimates are inherently imprecise and that estimates of more recent discoveries are more imprecise than those for properties with long production histories. Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on previously recorded deferred tax assets and liabilities resulting from a change in tax rates is recognized in earnings in the period in which the change is enacted. Revenue Recognition - Pease recognizes revenues for oil and gas sales upon delivery to the purchaser. Revenues from oil field services were recognized as the services are performed. Oil field supply and equipment sales were recognized when the goods were shipped to the customer. Net Loss Per Common Share -Net loss per common share is presented in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, which requires disclosure of basic and diluted earnings per share ("EPS"). Basic EPS excludes dilution for potential common shares and is computed by dividing the net loss applicable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares. Basic and diluted EPS are the same in 1999 and 1998 as all potential common shares were antidilutive. Stock Split - Effective December 1, 1998, the Board of Directors declared a 1 for 10 reverse stock split related to Pease's common shares. All share and per share amounts in the accompanying financial statements and notes have been retroactively restated for this stock split. Stock-Based Compensation - Pease accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of Pease's common shares at the measurement date (generally, the date of grant) over the amount an employee must pay to acquire the stock. In October 1995, the Financial Accounting Standards Board issued a new statement titled Accounting for Stock- Based Compensation. SFAS No. 123 requires that options, warrants, and similar instruments which are granted to non-employees for goods and services be recorded at fair value on the grant date and pro forma information be provided as to the fair value effects of transactions with employees. Fair value is generally determined under an option pricing model using the criteria set forth in SFAS No. 123. F-10 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited Information - Pease's balance sheet as of March 31, 2000 and the statement of shareholders' equity for the period then ended as well as the statement of operations and cash flows for the three months ended March 31, 2000 and March 31, 1999 are prepared by management without audit. However, in the opinion of management, such information includes all adjustments (consisting of normal and recurring items) necessary for the fair presentation of Pease's financial position and results of operations in conformity with generally accepted accounting principals. Comprehensive Income - There are no components of comprehensive income which have been excluded from net income (loss) and, therefore, no separate statement of comprehensive income has been presented. 2. ASSETS DIVESTITURE: ------------------ During the fourth quarter of 1997, Pease's Board of Directors determined that Pease's long-term strategy had shifted to exploration and development activities in the Gulf Coast region and that the Rocky Mountain assets should be divested. Accordingly, Pease evaluated these assets in 1997 for impairment and reduced the net carrying value to the estimated fair value. These assets were sold during 1998 for cash proceeds of $3,054,000 and an additional payment of $100,000 was received in April 1999. The Company recognized an impairment charge in 1998 of $313,953, to account for the difference between the net realizable value estimated in 1997 and the actual amount realized in 1998. The results of operations during 1998, exclusive of the impairment charge, related to the Rocky Mountain assets are as follows: The results of operations, exclusive of the impairment charge, related to the Rocky Mountain assets are as follows: 1998 1997 ---- ---- Revenues............................ $ 1,489,000 $ 3,683,000 Operating costs and expenses........ (1,394,000) (2,368,000) Depreciation and amortization....... (550,000) (1,606,000) ----------- ----------- Loss from operations................ $ (455,000) (291,000) =========== =========== F-11 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DEBT FINANCING ARRANGEMENTS: --------------------------- Long-Term Debt - Long-term debt consists of the following: March 31, December 31, 2000 1999 --------- ----------- (Unaudited) Convertible debentures, interest at 10% due April 2001, unsecured, ...................... $ 2,783,000 $ 2,783,000 Less unamortized discount ........................... (238,000) (293,000) ---------- ---------- Net carrying value .......................... 2,545,000 2,490,000 ---------- ---------- Note payable to bank, interest at 8.5%, monthly payments of $669, due March 2003, collateralized by vehicle ...................... 21,000 22,000 ---------- ---------- Total long-term debt ....................... 2,566,000 2,512,000 ---------- ---------- Less current maturities .................... (5,000) (6,000) ---------- ---------- Long-term debt, less current maturities .... $2,561,000 $ 2,506,000 ========== ========== Current maturities of long-term debt, excluding unamortized discounts are as follows: As of Year Ending December 31, December 31, 1999 -------------- ------------ 2000 $ 6,000 2001 2,789,000 2002 8,000 2003 2,000 ----------- $ 2,805,000 =========== Convertible Debentures and Consulting Agreement - In March 1996, Pease entered into a consulting agreement with a company (the "Consultant") that specializes in developing and implementing capitalization plans, including the utilization of debt capital in business operations. The agreement expired in February 1999, and provided for minimum monthly cash payments of $17,500. In addition to cash compensation, Pease agreed to grant warrants to purchase 100,000 shares of Pease's common shares. The exercise price of the warrants is $7.50 per share and they expire in March 2001. In April 1996, Pease, with the assistance of the Consultant, initiated a private placement to sell up to $5,000,000 of collateralized convertible debentures in the form of "Units." Each Unit consists of one $50,000 five-year 10% collateralized convertible debenture and detachable warrants to purchase 2,500 shares of Pease's common shares at $12.50 per share (see Note 7 for additional information with respect to the warrants). In November 1996, the offering was completed and Pease was successful in selling the entire $5,000,000 generating net cash proceeds of $4,300,000. The estimated fair value of the detachable warrants of $1,829,000 has been treated as a discount and is being amortized using the interest method. The debentures were initially collateralized by a first priority interest in certain Rocky Mountain oil and gas properties owned and operated by Pease. The debentures are convertible, at the holder's option, into Pease's common shares for $30.00 per share and may be redeemed by Pease, in whole or in part, at a premium to the original principal amount. During the year ended December 31, 1997, the holders of $1,025,000 of debentures elected to convert to 341,665 shares of common shares. Effective October 1, 1998, the holders of the debentures voted to amend the debentures to release the oil and gas properties which previously collateralized this debt. In exchange for this release, Pease agreed to retire 30% of the outstanding principal balance which amounted to an aggregate of $1,192,500. Interest on the debentures is payable quarterly and the principal balance is due on April 15, 2001. F-12 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. INCOME TAXES: ------------ Deferred tax assets (there are no deferred tax liabilities) as of December 31, 1999 are comprised of the following: 1999 ---- Long-term Assets Net operating loss carryforwards . $ 9,646,000 Property, plant and equipment .... 968,000 Tax credit carryforwards ......... 294,000 Percentage depletion carryforwards 160,000 Other ............................ 8,000 ------------ Total .......................... 11,076,000 Less valuation allowance ......... (11,076,000) ------------ Net long-term asset ............ $ -- ============ During the years ended December 31, 1999 and 1998, Pease increased the valuation allowance by $1,525,000 and $3,050,000, respectively, primarily due to an increase in the net operating loss carryforwards which are not considered to be realizable. Pease has provided a valuation allowance for the net operating loss and credit carryforwards based upon the various expiration dates and the limitations which exist under IRS Sections 382 and 384. At December 31, 1999, Pease had net operating loss carryforwards for income tax purposes of approximately $24 million, which expire primarily in 2008 through 2019. Some of these net operating losses are subject to limitations under IRS Sections 382 and 384, particularly should a significant number of series B preferred stock convert into common shares in the future or the merger with Carpatsky is consummated. Additionally, Pease has tax credit carryforwards at December 31, 1998, of approximately $294,000 and percentage depletion carryforwards of approximately $429,000. 5. COMMITMENTS AND CONTINGENCIES: Employment Agreements - During 1994, the Board of Directors approved an employment agreement with Pease's current President/CFO and formally reaffirmed that commitment in 1999. The agreement may be terminated by the officer upon 90 days notice or by Pease without cause upon 30 days notice. In the event of a termination by Pease without cause, Pease would be required to pay the officer one year's salary. If the termination occurs following a change in control, which includes a merger, Pease would be required to make a lump sum payment equivalent to two year's salary. Profit Sharing Plan - Pease has established a 401(k) profit sharing plan that covers all employees with six months of service who elect to participate in the Plan. The Plan provides that the employees may elect to contribute up to 15% of their salary to the Plan. All of Pease's contributions are discretionary and amounted to $3,862 and $5,401 for the years ended December 31, 1999 and 1998, respectively. Environmental - Pease is subject to extensive Federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require Pease to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending F-13 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Bankruptcy of Third Party Operator - In December 1998, NEG filed an Involuntary Petition for an Order and Relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in United States Bankruptcy Court for the Northern District of Texas, Dallas Division. As operator of the East Bayou Sorrel field, which represents a majority of Pease's current production, the bankruptcy petition might adversely effect future development or operation of the field; however, Pease does not expect that its interest in the field or production from currently existing wells will be affected. Pease does have an unsecured claim in the bankruptcy proceeding for various amounts which Pease believes were overpaid to the operator in connection with the drilling of existing wells. Collection of these amounts may be delayed or may not occur, pending disposition of NEG's reorganization proceeding. The total claim is approximately $60,000. However, no amount has been recorded in the financial statements as of December 31, 1999. Contingencies - Pease may from time to time be involved in various claims, lawsuits, disputes with third parties, actions involving allegations of discrimination, or breach of contract incidental to the operations of its business. Pease is not currently involved in any such incidental litigation which it believes could have a materially adverse effect on its financial conditions or results of operations. 6. PREFERRED STOCK --------------- Pease has the authority to issue up to 2,000,000 shares of Preferred Stock, which may be issued in such series and with such preferences as determined by the Board of Directors. During 1993, Pease issued 1,170,000 shares of Series A Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"). Each share of Series A Preferred Stock was entitled to receive dividends at 10% per annum when, as and if declared by Pease's Board of Directors. Unpaid dividends accrued and were cumulative. During 1997, the holders of all remaining shares of Series A Preferred Stock elected to convert to 56,990 shares of common shares pursuant to the original conversion terms. Upon conversion, the holders also received warrants to purchase 56,990 shares of common shares at $60.00 per share through August 13, 1998. On March 4, 1998, the expiration date of these warrants was extended for one year and therefore expired on August 13, 1999. In December 1997, the Board of Directors authorized a new series of preferred stock which was designated as the Series B 5% PIK Cumulative Convertible Preferred Stock (the "series B preferred stock"). Pease has authority to issue up to 145,300 shares of series B preferred stock. On December 31, 1997, Pease issued 113,333 shares of series B preferred stock for $5,666,650. The series B preferred stock is convertible into common shares at a conversion price equal to a 25% discount to the average trading price of the common shares prior to conversion. This discount started at 12% in April 1998 and increased periodically until it topped out at 25%. The discount was being accounted for as an additional dividend on the series B preferred stock which was recognized as a charge to earnings applicable to common shareholders in 1998. The series B preferred stock provides for a liquidation preference of $50 per share and the holders are entitled to dividends at $2.50 per annum, payable quarterly in cash or additional shares of series B preferred stock at the option of Pease. F-14 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS However, in connection with the contemplated merger with Carpatsky, the Preferred stockholders have signed Agreements Not to Sell or Convert Securities which, among other things, stated that Pease's obligation to accrue and pay additional dividends on the series B preferred stock shall be deferred from the date that an Agreement and Plan of Merger with Carpatsky is signed. Therefore, dividends were accrued and paid to the Preferred stockholders through the close of business on September 1, 1999. If the merger with Carpatsky is consummated, there will be no further dividends paid. If the merger is not consummated, Pease shall be obligated at that time to accrue and pay dividends for the period from September 1, 1999 through the date on which the merger is abandoned. For financial statement presentation purposes, however, the preferred dividends for September 1, 1999 to December 31, 1999 have been deducted in determining net loss applicable to common shareholders as if such amounts were required to be paid. Beginning in June 1999, Pease may force the holders to convert to common shares at a conversion price that generally represents a 25% discount from the fair value of the common shares. If not previously converted, Pease is required to redeem the series B preferred stock on December 31, 2002 at a price equal to the Liquidation Preference. In connection with the issuance of this preferred stock, Pease agreed to issue warrants to the placement agent for 32,380 shares of common shares at $17.50 per share. 7. STOCK BASED COMPENSATION: ------------------------ Stock Option Plans - Pease's shareholders have approved the following stock option plans that authorize an aggregate of 185,732 shares that may be granted to officers, directors, employees, and consultants: 9,000 shares in June 1991; 27,732 shares in June 1993; 15,000 shares in June 1994; 34,000 shares in August 1996; and 100,000 shares in May 1997. The plans permit the issuance of incentive and nonstatutory options and provide for a minimum exercise price equal to 100% of the fair market value of Pease's common shares on the date of grant. The maximum term of options granted under the plan is 10 years and options granted to employees expire three months after the termination of employment. None of the options may be exercised during the first six months of the option term. No options may be granted after 10 years from the adoption date of each plan. The following is a summary of activity under these stock option plans for the years ended December 31, 1999 and 1998: 1999 1998 -------------------- ------------------- Weighted Weighted Average Average Number Exercise Number Exercise of Shares Price of Shares Price --------- -------- --------- -------- Outstanding, beginning of year 71,030 $ 13.85 118,880 9.61 Canceled ..................... (6,250) 13.75 (46,350) 21.36 Expired ...................... -- -- (1,500) 29.4 Repriced ..................... -- -- (20,000) 26.9 Granted ...................... -- -- 20,000 11.25 Exercised .................... -- -- -- -- ------- ------- ------- ----- Outstanding, end of year ..... 64,780 $ 13.86 71,030 13.85 ======= ======= ======= ===== F-15 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For all options granted, the market price of Pease's common shares on the date of grant was equal to the exercise price. All options are currently exercisable and if not previously exercised, will expire as follows: Range of Weighted Exercise Prices Average ---------------- Exercise Number Low High Price of Shares Year Ending December 31, --- ---- -------- --------- ----------------------- 2000 $ 7.00 $ 8.30 $ 7.77 $ 22,265 2001 10.00 18.10 12.8 10,015 2002 5.00 29.70 18.35 32,500 ------ -------- $ 13.86 64,780 ====== ======== Warrants and Non-Qualified Stock Options - The Company has also granted warrants and non-qualified options which are summarized as follows for the years ended December 31, 1999 and 1998: 1999 1998 --------------------- --------------------- Weighted Weighted Average Average Number Exercise Number Exercise of Shares Price of Shares Price --------- -------- --------- -------- Outstanding, beginning of year ... 570,071 $ 40.87 587,790 $ 43.11 Granted to former officers and directors for severance .......... -- -- 39,850 14.88 Expired .......................... (339,546) 57.61 (57,444) 45.81 Exercised ........................ -- -- (125) 7.5 -------- ------- -------- ------ Outstanding, end of year ......... 230,525 $ 16.21 570,071 $ 40.87 ======== ======= ======== ====== If not previously exercised, warrants and non-qualified options will expire as follows: Range of Weighted Exercise Prices Average ---------------- Exercise Number Low High Price of Shares Year Ending December 31, --- ---- -------- --------- ----------------------- 2000................. $ 5.0 $ 71.9 $ 18.58 66,845 2001................. 7.5 37.5 10.79 98,900 2002................. 17.5 30.3 22.05 64,780 -------- ------- $ 16.21 230,525 ======== ======= Pro Forma Stock-Based Compensation Disclosures - The Company applies APB Opinion 25 and related interpretations in accounting for stock options and warrants which are granted to employees. Accordingly, no compensation cost has been recognized for grants of options and warrants to employees since the exercise prices were not less than the fair value of the Company's common shares on the grant dates. Had compensation cost been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FAS 123, the Company's net loss and loss per share would have been changed to the pro forma amounts indicated below. F-16 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 1999 1998 ---- ---- Net loss applicable to common shareholders: As reported ......... $ (731,000) $ (12,695,000) Pro forma ........... (731,000) (16,507,000) Net loss per common share: As reported ......... $ (0.43) $ (7.99) Pro forma ........... (0.43) (8.29) The weighted average fair value of options and warrants granted to employees for the year ended December 31, 1998 was $2.24. No options or warrants were granted in 1999. The fair value of each employee option and warrant granted in 1998 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Year Ended December 31, 1999 1998 ---------------------- Expected volatility ........... N/A 80.0% Risk-free interest rate ....... N/A 5.6% Expected dividends ............ N/A -- Expected terms (in years) ...... N/A 2.2 8. FINANCIAL INSTRUMENTS --------------------- Statement of Financial Accounting Standards No. 107 requires all entities to disclose the fair value of certain financial instruments in their financial statements. Accordingly, at December 31, 1999, management's best estimate is that the carrying amount of cash, receivables, notes payable to unaffiliated parties, accounts payable, and accrued expenses approximates fair value due to the short maturity of these instruments. Management estimates that fair value is approximately equal to carrying value of the convertible debentures since market interest rates have not changed significantly since the offering commenced. F-17 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. SIGNIFICANT CONCENTRATIONS: -------------------------- Substantially all of Pease's accounts receivable at December 31, 1999, resulted from crude oil and natural gas sales to companies in the oil and gas industry. This concentration of customers and joint interest owners may impact our overall credit risk, either positively or negatively, since these entities may be similarly affected by changes in economic or other conditions. In determining whether to require collateral from a significant customer or joint interest owner, Pease analyzes the entity's net worth, cash flows, earnings, and/or credit ratings. Receivables are generally not collateralized; however, receivables from joint interest owners are subject to collection under operating agreements which generally provide lien rights. Historical credit losses incurred on trade receivables by Pease have been insignificant. For the years ended December 31, 1999 and 1998, the Company had oil sales to a single customer which accounted for 46% and 20% of total revenues, respectively. At December 31, 1999, substantially all of Pease's cash and temporary cash investments were held at a single financial institution. The Company does not maintain insurance to cover the risk that cash and temporary investments with a single financial institution may be in excess of amounts insured by federal deposit insurance. 10. OIL AND GAS PRODUCING ACTIVITIES: -------------------------------- Property Acquisitions - In January 1997, Pease completed the acquisition of a 7.8125% after prospect payout working interest in a producing oil and gas prospect in Louisiana. The prospect is operated by National Energy Group, Inc. (NEGX), an independent oil and gas producer. The purchase price was $1,750,000 which consisted of $875,000 in cash and the issuance of 31,500 shares of Pease's common shares with a fair value of $875,000. In February 1997, the Company entered into agreements with unaffiliated parties for the purchase of a 10% working interest in this prospect for $2.5 million. The assets acquired from this acquisition account for 77% of Pease's proved reserves at December 31, 1999. Full Cost Amortization Expense - Amortization expense amounted to $985,000 and $1,914,000 for the years ended December 31, 1999 and 1998, respectively. Amortization expense per equivalent units of oil and gas produced amounted to $7.64 and $9.52 for the years ended December 31, 1999 and 1998 respectively. Natural gas is converted to equivalent units of oil on the basis of six Mcf of gas to one equivalent barrel of oil. Unevaluated Oil and Gas Properties - At December 31, 1999, unevaluated oil and gas properties consist of the following: Unproved acquisition costs.............. $ 961,000 Geologic and geophysical costs.......... 926,000 Interest and other costs................ 395,000 --------- $ 2,282,000 ========= F-18 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. SIGNIFICANT CONCENTRATIONS: -------------------------- All unevaluated costs were incurred during 1997, 1998 and 1999 and management expects that planned activities will enable the evaluation of substantially all of these costs by the end of 2000. Capitalization of Interest - For the years ended December 31, 1999 and 1998, the Company capitalized interest costs of $278,000 and $854,000, respectively, related to unevaluated oil and gas properties and other exploration activities. Full Cost Ceiling - During 1998, Pease recognized an impairment charge of $7,279,000 due to the full cost ceiling limitation of which $4,740,000 was recognized in the fourth quarter. The fourth quarter impairment charge was substantially attributed to the expiration of certain previously unevaluated leases, the collapse of oil prices during that period and dry holes. No impairment charge has been recognized in 1999 since the ceiling is substantially higher at December 31, 1999 as a result of increased oil prices and additional discoveries and extensions of the Company's oil and gas reserves. Costs Incurred in Oil and Gas Producing Activities - The following is a summary of costs incurred in oil and gas producing activities for the years ended December 31, 1999 and 1998: 1999 1998 ---- ---- Lease acquisition costs ................. $ 77,000 $ -- Development costs ....................... 239,000 14,000 Exploration costs ....................... 593,000 6,799,000 ------- --------- Total .................................. $ 909,000 $6,813,000 ======= ========== Results of Operations from Oil and Gas Producing Activities - Results of operations from oil and gas producing activities (excluding well administration fees, general and administrative expenses, and interest expense) for the years ended December 31, 1999 and 1998 are presented below. 1999 1998 ---- ---- Oil and gas sales....................... $ 2,144,000 $ 2,360,000 Production costs........................ (405,000) (1,050,000) Amortization expense.................... (985,000) (1,914,000) Impairment expense...................... -- (7,279,000) ---------- ----------- Results of operations from oil/gas producing activities.................... $ 754,000 $(7,883,000) ========== =========== Oil and Gas Reserve Quantities (Unaudited) - Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those reserves expected to be recovered through existing wells with existing equipment and operating methods. The reserve data is based on studies prepared by Pease's F-19 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS consulting petroleum engineers, Netherland, Sewell & Associates, Inc. Reserve estimates require substantial judgment on the part of petroleum engineers resulting in imprecise determinations, particularly with respect to new discoveries. Accordingly, it is expected that the estimates of reserves will change as future production and development information becomes available. All proved oil and gas reserves are located in the United States. The following table presents estimates of our net proved oil and gas reserves, and changes therein for the years ended December 31, 1999 and 1998.
1999 1998 -------------------- -------------------- Oil Gas Oil Gas (Bbls) (Mcf) (Bbls) (Mcf) ---- --- ---- --- Proved reserves, beginning of year ............ 275,000 1,368,000 1,085,000 4,535,000 Purchase of minerals in place ............ -- -- -- -- Sale of minerals in place ................ -- -- (725,000) (2,848,000) Extensions, discoveries, and other additions .......................... 130,000 330,000 129,000 517,000 Revisions of previous estimates .......... 3,000 (2,000) (105,000) (286,000) Production ............................... (74,000) (337,000) (109,000) (550,000) ---------- ---------- ---------- ---------- Proved reserves, end of year .................. 334,000 1,359,000 275,000 1,368,000 ========== ========== ========== ========== Proved developed reserves, beg. of year ....... 261,000 920,000 930,000 3,833,000 ========== ========== ========== ========== Proved developed reserves, end of year ........ 310,000 648,000 261,000 920,000 ========== ========== ========== ==========
The downward revisions of "previous estimates" in 1998 were primarily attributable to previously recorded undeveloped reserves were removed as a result of drilling dry holes. The upward revisions of "extensions, discoveries and other additions" in both 1998 and 1999 were primarily attributable to significant extensions of the estimated ultimate recoveries of oil and gas at the East Bayou Sorrel Field. F-20 PEASE OIL AND GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Standardized Measure of Discounted Future Net Cash Flows (Unaudited) - Statement of Financial Accounting Standards No. 69 prescribes guidelines for computing a standardized measure of future net cash flows and changes therein relating to estimated proved reserves. We have followed these guidelines which are briefly discussed below. Future cash inflows and future production and development costs are determined by applying year-end prices and costs to the estimated quantities of oil and gas to be produced. Estimated future income taxes are computed using current statutory income tax rates including consideration for estimated future statutory depletion and tax credits and the utilization of net operating loss carryforwards. The resulting future net cash flows are reduced to present value amounts by applying a 10% annual discount factor. The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standards Board and, as such, do not necessarily reflect our expectations for actual revenues to be derived from those reserves nor their present worth. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations since these estimates are the basis for the valuation process. The following summary sets forth the Company's future net cash flows relating to proved oil and gas reserves as of December 31, 1999 and 1998 based on the standardized measure prescribed in Statement of Financial Accounting Standards No. 69. 1999 1998 ---- ---- Future cash inflows........................... $ 12,080,000 $ 6,117,000 Future production costs....................... (3,089,100) (1,519,000) Future development costs...................... (834,200) (544,000) Future income tax expense..................... -- -- ---------- ---------- Future net cash flows..................... 8,156,700 4,054,000 10% annual discount for estimated time of cash flow.............................. (1,887,000) (1,103,000) ---------- ---------- Standardized Measure of Discounted Future Net Cash Flows..................... $ 6,269,700 $ 2,951,000 ========== ========== Average prices used to estimate the reserves: Oil (per bbl)............................. $ 24.91 $ 10.15 Gas (per Mcf)............................. $ 2.77 $ 2.43 Changes in Standardized Measure (Unaudited) - The following are the principal sources of change in the standardized measure of discounted future net cash flows for the years ended December 31, 1999 and 1998: 1999 1998 ---- ---- Standardized measure, beginning of year ........... $ 2,951,000 $ 9,678,000 Sale of oil and gas produced, net of production costs ........................................... (1,739,000) (1,310,000) Sale of minerals in place ......................... -- (5,109,000) Net changes in prices and production costs ........ 2,504,000 (1,031,000) Net changes in estimated development costs ........ (245,000) 907,000 Revisions of previous quantity estimates .......... (267,000) (2,874,000) Discoveries, extensions, and other additions ...... 2,771,000 1,722,000 Accretion of discount ............................. 295,000 968,000 ----------- ----------- Standardized Measure, end of year ................. $ 6,270,000 $ 2,951,000 =========== =========== F-21 INDEPENDENT AUDITOR'S REPORT Board of Directors Carpatsky Petroleum, Inc. Houston, Texas We have audited the accompanying consolidated balance sheets of Carpatsky Petroleum, Inc. and subsidiary (Carpatsky), as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. These financial statements are the responsibility of Carpatsky's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carpatsky Petroleum Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. Carpatsky's principal operations are in Ukraine. As discussed in Note 1 to the financial statements, there is a considerable degree of uncertainty in Ukraine surrounding the likely future direction of its domestic economic policy, regulatory policy, and political development. Further, the economy of Ukraine has entered a period of economic and financial difficulty. The impact of these difficulties, includes, but is not limited to, a significant devaluation of Ukraine's currency and an increasing rate of inflation. Accordingly, there are significant uncertainties within Ukraine that may affect the financial condition of Carpatsky and its future operations. Carpatsky has been affected and will likely, for the foreseeable future, continue to be affected by economic instability in Ukraine. The accompanying consolidated financial statements have been prepared assuming that Carpatsky will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As discussed in Note 1 to the financial statements, Carpatsky has incurred substantial losses from operations, which, in conjunction with other matters discussed in Note 1, raise substantial doubt about Carpatsky's ability to continue as a going concern. Management's plans with regard to these matters are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/HEIN + ASSOCIATES LLP Denver, Colorado March 13, 2000 F-22
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, March 31, 2000 1999 1998 -------------- ---- ---- (Unaudited) ASSETS Current Assets: Cash and equivalents ................................................ $ 1,976,000 $ 3,227,000 $ 25,000 Restricted cash ..................................................... -- 500,000 -- Trade receivables, net of allowance for bad debts of $1,944,000 (unaudited), $1,925,000 and $760,000, respectively ............... 296,000 70,000 45,000 Other receivables ................................................... 7,000 48,000 -- Inventories ......................................................... 120,000 120,000 47,000 VAT refundable ...................................................... 50,000 58,000 87,000 Prepaid expenses and other .......................................... 205,000 1,000 4,000 ----------- ----------- ----------- Total current assets ........................................... 2,654,000 4,024,000 208,000 ----------- ----------- ----------- Oil and Gas Properties, using the full cost method: Evaluated properties ................................................ 9,723,000 8,868,000 9,161,000 Accumulated depreciation, depletion and impairment .................. (5,768,000) (4,757,000) (396,000) ----------- Net oil and gas properties ..................................... 3,955,000 4,111,000 8,765,000 ----------- ----------- ----------- Other Assets: VAT refundable ...................................................... 87,000 133,000 420,000 Deferred acquisition costs .......................................... 133,000 133,000 -- Loan to Ukrainian joint venture partner ............................. 72,000 72,000 55,000 Furniture and equipment, net of accumulated depreciation of $68,000 (unaudited), $65,000 and $49,000 ......................... 37,000 34,000 41,000 ----------- ----------- ----------- Total other assets ............................................. 329,000 372,000 516,000 ----------- ----------- ----------- Total Assets ........................................................... $ 6,938,000 $ 8,507,000 $ 9,489,000 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable: Related party .................................................... $ 663,000 $ -- $ -- Other ............................................................ -- 575,000 549,000 Accounts payable .................................................... 1,846,000 2,148,000 3,645,000 Taxes payable ....................................................... 409,000 711,000 291,000 Accrued expenses .................................................... 54,000 211,000 325,000 Advances received ...................................................... 170,000 -- -- Due to officers and directors ....................................... -- -- 40,000 ----------- ----------- ----------- Total current liabilities ...................................... 3,142,000 3,645,000 4,850,000 ----------- ----------- ----------- Long-Term Debt: Convertible note .................................................... -- -- 1,228,000 Debentures .......................................................... -- -- 780,000 ----------- ----------- ----------- -- -- 2,008,000 ----------- ----------- ----------- Commitments and Contingencies (Notes 1, 2, and 3) Stockholders' Equity: Preferred stock, no par value; 500,000,000 shares authorized, 95,450,000 shares issued and outstanding ......................... 4,000,000 4,000,000 -- Common shares, no par value; unlimited authorized shares; 77,728,263 shares issued and outstanding .................................... 9,395,000 9,395,000 5,410,000 Accumulated deficit ................................................. (9,599,000) (8,533,000) (2,779,000) ----------- ----------- ----------- Total stockholders' equity ..................................... 3,796,000 4,862,000 2,631,000 ----------- ----------- ----------- Total Liabilities and Shareholders' Equity ............................. $ 6,938,000 $ 8,507,000 $ 9,489,000 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-23
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, For the Years Ended December 31, ----------------------------------- ------------------------------------ 2000 1999 1999 1998 1997 ---- ---- ---- ---- ---- (Unaudited) Oil and Gas Sales Total sales ............................ $ 638,000 $ 434,000 $ 2,430,000 $ 769,000 $ 99,000 Less allowance for doubtful accounts ... (63,000) (323,000) (1,630,000) (543,000) (13,000) ------------ ------------ ------------ ------------ ------------ Net oil and gas sales ............... 575,000 111,000 800,000 226,000 86,000 ------------ ------------ ------------ ------------ ------------ Operating Costs and Expenses: Oil and gas production costs ........... 191,000 100,000 454,000 196,000 80,000 Production taxes ....................... 145,000 70,000 563,000 113,000 3,000 Depreciation, depletion and amortization 446,000 185,000 1,366,000 337,000 29,000 Impairment ............................. 500,000 -- 3,050,000 -- -- General and administrative ............. 333,000 104,000 1,385,000 552,000 805,000 ------------ ------------ ------------ ------------ ------------ Total operating costs and expenses .. 1,615,000 459,000 6,818,000 1,198,000 917,000 ------------ ------------ ------------ ------------ ------------ Loss From Operations ...................... (1,040,000) (348,000) (6,018,000) (972,000) (831,000) ------------ ------------ ------------ ------------ ------------ Other Income (Expenses): Interest income ........................ 9,000 -- -- -- 6,000 Net barter income ...................... 7,000 16,000 35,000 4,000 34,000 Interest expense ....................... (23,000) (84,000) (260,000) (318,000) (90,000) Amortization of debt discount .......... -- -- -- (658,000) (139,000) Gain on the net monetary position ...... 63,000 297,000 936,000 1,477,000 44,000 ------------ ------------ ------------ ------------ ------------ Total other income (expenses) ....... 56,000 229,000 711,000 505,000 (145,000) ------------ ------------ ------------ ------------ ------------ Loss Before Taxes ......................... (984,000) (119,000) (5,307,000) (467,000) (976,000) Income Taxes ........................... (82,000) (55,000) (447,000) (132,000) -- ------------ ------------ ------------ ------------ ------------ Net Loss .................................. (1,066,000) (174,000) (5,754,000) (599,000) (976,000) Imputed preferred stock dividend for valuation of warrants ............... -- -- (336,000) -- -- ------------ ------------ ------------ ------------ ------------ Loss attributable to common shareholders .. $ (1,066,000) $ (174,000 $ (6,090,000) $ (599,000) $ (976,000) ============ ============ ============ ============ ============ Net Loss Per Share, Basic and Diluted ..... $ (.01) $ -- $ (.12) $ (0.01) $ (0.03) ============ ============ ============ ============ ============ Weighted Average Number of Shares Outstanding ............................ 77,728,263 40,796,246 49,471,164 40,796,246 31,691,266 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-24
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH MARCH 31, 2000 (Unaudited) Voting Common Stock Preferred Stock -------------------- ---------------------- Accumulated Shares Amount Shares Amount Deficit Total ------ ------ ------ ------ ----------- ----- Balances, January 1, 1997...................... 24,074,677 $ 1,440,000 -- -- $ (1,204,000) $ 236,000 Exercise of options and warrants ........... 1,501,161 279,000 -- -- -- 279,000 Issuance of stock in private placements .... 14,681,108 2,914,000 -- -- -- 2,914,000 Issuance of stock in lieu of commission .... 539,300 108,000 -- -- -- 108,000 Issuance costs ............................. -- (226,000) -- -- -- (226,000) Estimated fair value of warrants and options issued .................................. -- 427,000 -- -- -- 427,000 Net loss ................................... -- -- -- -- (976,000) (976,000) ----------- ----------- ----------- ----------- ----------- ----------- Balances, December 31, 1997 ................... 40,796,246 4,942,000 -- -- (2,180,000) 2,762,000 Estimated fair value of warrants and options issued .................................. -- 468,000 -- -- -- 468,000 Net loss ................................... -- -- -- -- (599,000) (599,000) ----------- ----------- ----------- ----------- ----------- ----------- Balances, December 31, 1998 ................... 40,796,246 5,410,000 -- -- (2,779,000) 2,631,000 Conversion of long-term debt to equity ..... 18,525,344 2,456,000 -- -- -- 2,456,000 Issuance of stock in private placements .... 13,333,340 1,000,000 -- -- -- 1,000,000 Settlement of liabilities for stock ........ 1,520,000 220,000 -- -- -- 220,000 Issuance of stock in lieu of commission .... 953,333 72,000 -- -- -- 72,000 Issuance costs ............................. -- (45,000) -- -- -- (45,000) Issuance of preferred stock ................ -- -- 95,450,000 4,000,000 -- 4,000,000 Estimated fair value of options issued ..... -- 22,000 -- -- -- 22,000 Common stock issued for services to officers and directors ........................... 2,600,000 260,000 -- -- -- 260,000 Net loss ................................... -- -- -- -- (5,754,000) (5,754,000) ----------- ----------- ----------- ----------- ----------- ----------- Balances, December 31, 1999 ................... 77,728,263 9,395,000 95,450,000 4,000,000 (8,533,000) 4,862,000 Net loss (unaudited) ....................... -- -- -- -- (1,066,000) (1,066,000) ----------- ----------- ----------- ----------- ----------- ----------- Balances, March 31, 2000 (unaudited) .......... 77,728,263 $ 9,395,000 95,450,000 $ 4,000,000 $(9,599,000) $ 3,796,000
The accompanying notes are an integral part of these consolidated financial statements. F-25
CARPATSKY PETROLEUM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months For the Years Ended Ended March 31, December 31, -------------------- ---------------------------------- 2000 1999 1999 1998 1997 ---- ---- ---- ---- ---- (Unaudited) (Unaudited) Cash Flows from Operating Activities: Net loss ........................................... $(1,066,000) $ (174,000) $(5,754,000) $ (599,000) $ (966,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and depletion ....................... 446,000 185,000 1,366,000 337,000 19,000 Amortization of debt issuance costs .............. -- -- -- 658,000 139,000 Impairment ....................................... 500,000 -- 3,050,000 -- -- Provision for doubtful accounts .................. 63,000 323,000 1,630,000 545,000 13,000 Stock and options issued for services ............ -- -- 477,000 43,000 55,000 Net monetary (gain) or loss ...................... (64,000) (297,000) (937,000) (1,477,000) (44,000) Changes in operating assets and liabilities: Decrease (increase) in: Receivables .................................... (276,000) (317,000) (1,654,000) (534,000) (202,000) Prepaid expenses and other ..................... 70,000 29,000 211,000 (295,000) (33,000) Inventory ...................................... 114,000 (25,000) (100,000) 41,000 (73,000) Increase (decrease) in: Accounts payable ............................... (225,000) 20,000 281,000 226,000 63,000 Accrued expenses ............................... (353,000) 249,000 754,000 586,000 113,000 ----------- ----------- ----------- ----------- ----------- Net cash used in operating activities ............ (791,000) (7,000) (676,000) (469,000) (916,000) Cash Flows from Investing Activities: Capital expenditures, principally for oil and gas activities ............................. (1,016,000) (539,000) (1,404,000) (1,660,000) (3,449,000) Loan to Ukrainian joint venture .................... -- -- (16,000) (6,000) (50,000) Deferred acquisition costs ......................... (8,000) -- (133,000) -- -- ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities ............ (1,024,000) (539,000) (1,553,000) (1,666,000) (3,499,000) Cash Flows from Financing Activities: Proceeds from issuance of: Common shares .................................... -- 250,000 1,000,000 -- 2,914,000 Convertible term note ............................ -- -- -- 600,000 600,000 Preferred stock .................................. -- -- 4,000,000 -- -- Debentures ....................................... -- -- -- -- 1,000,000 Warrants and options ............................. -- -- -- -- 279,000 Offering costs related to issuance of shares ....... -- -- (6,000) -- (119,000) Payment on debentures .............................. -- -- -- -- (230,000) ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities ........ -- 250,000 4,994,000 600,000 4,444,000 Effect of Changes in Foreign Exchange on Cash Flows ................................ 64,000 297,000 937,000 1,477,000 44,000 ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Cash and Equivalents ....................................... (1,751,000) 1,000 3,702,000 (58,000) 73,000 Cash and Equivalents, beginning of period ............... 3,727,000 25,000 25,000 83,000 10,000 ----------- ----------- ----------- ----------- ----------- Cash and Equivalents, at end of period .................. $ 1,976,000 $ 26,000 $ 3,727,000 $ 25,000 $ 83,000 =========== =========== =========== =========== =========== Supplemental Cash Flow Information: Cash payments for: Interest ......................................... $ -- $ -- $ 15,000 $ 16,000 $ 40,000 =========== =========== =========== =========== =========== Income taxes ..................................... $ 80,000 $ 55,000 $ 450,000 $ 130,000 $ -- =========== =========== =========== =========== =========== Supplemental Disclosure of Non-cash Investing and Financing Activities: Increase (decrease) in payables for oil and gas properties ............................. $ (141,000) $ (328,000) $ 366,000 $ 794,000 $ 2,467,000 =========== =========== =========== =========== =========== Conversion of notes/debentures, including principal and accrued interest, to common stock .............................................. $ -- $ -- $ 2,456,000 $ -- $ -- =========== =========== =========== =========== =========== Settlement of liabilities for stock ................ $ -- $ -- $ 220,000 $ -- $ -- =========== =========== =========== =========== =========== Fair value of warrants issued for debt discount .... $-- $ -- $ -- $ 425,000 $ 372,000 =========== =========== =========== =========== =========== Accrued interest transferred to long-term debt ..... $ -- $ -- $ -- $ 86,000 $ 1,000 =========== =========== =========== =========== =========== Common shares issued in lieu of commission ......... $ -- $ -- $ 72,000 $ -- $ 108,000 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-26 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ------------------------------------------------------------------- Nature of Operations - The principal business of Carpatsky Petroleum, Inc. (Carpatsky) is to participate in the exploration, development, production and sale of oil, natural gas and natural gas liquids in Ukraine as a non- operating interest owner through joint ownership and joint venture arrangements. Carpatsky is organized under laws of the Province of Alberta, Canada. Continued Operations - Carpatsky has incurred operating losses and negative cash flow in operations since inception. Additionally, Carpatsky has not paid its joint venture partners on a timely basis, which could result in Carpatsky's interest in its Ukrainian projects being permanently reduced (see Note 2). Furthermore, Carpatsky is subject to certain foreign country risks, which are discussed below. If future working capital is not sufficient to meet its obligations, Carpatsky may have to consider other alternatives, including the sale of existing assets, cancellation or modification of existing joint interest agreements, and/or restructuring. In September 1999, Carpatsky completed a private placement which raised $1,000,000 in additional equity and holders of debt and payables converted their outstanding obligations of approximately $2,676,000 into common stock. In December 1999, Carpatsky closed a significant preferred stock sale with an industry partner and raised an additional $4,000,000 (see Note 6). In late 1999, Carpatsky also began selling oil and gas on a newly developed spot market in Ukraine, which has resulted in additional cash flow to Carpatsky. In addition, Carpatsky entered into a merger agreement with Pease Oil and Gas Company ("Pease"), a public company (see Note 9). While no assurance can be given, it is hopeful that with the increased and diversified asset base of the newly combined entity and with the continued financial support of its preferred stockholder, Carpatsky will be able to raise additional capital to further develop its Ukrainian oil and gas properties and reduce existing obligations. The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the ordinary course of business. The financial statements do not include any adjustments should Carpatsky be unable to continue operations. Continuation of Carpatsky is dependent, among other things, upon the continued funding of its share of current joint venture obligations, as well as future exploration, development, and overhead costs; and ultimately Carpatsky must achieve profitable operations and repatriate funds from Ukraine. Concentration of Risks - Carpatsky experiences certain risks not associated with an oil and gas company with operations within the United States. Risks include operations in a foreign country in transition to capitalism where political, social, economic and legal systems are not highly developed. Carpatsky's results may be adversely affected by changes in the political and social conditions in Ukraine, changes in governmental policies with respect to laws and regulations and other considerations as discussed below. F-27 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) As a developer and a producer of natural resources Carpatsky is subjected to additional regulation, foreign taxes and market restrictions. In addition, the ultimate transfer of funds is subject to repatriation taxes on the net currency to be transferred. Furthermore, Ukraine, as it transitions from a socialistic to a market economy, has suffered with a highly inflationary economy. While inflation has been decreasing in recent years, inflation is expected to continue and could increase as a result of unforeseen political and economic pressures. Through August 1999, a substantial portion of Carpatsky's natural gas was sold to a state owned utility, which is an affiliate of Carpatsky's joint venture partner in Ukraine (Ukrnafta) (see Note 2). The utility is dependent upon payment by its customers, which are primarily commercial enterprises, in order to generate revenues to pay Carpatsky. Ukraine is a "cash poor" country and many of the gas consumers are unable to, or because of past socialistic practices do not, meet their financial obligations on a timely basis. Carpatsky experienced significant losses as a result of uncollected billings to the utility. In September 1999, Carpatsky began selling natural gas on a newly developed "spot market" in Ukraine. While the price per mcf is less than on the world market or quoted from the affiliated utility, Carpatsky has been generally paid for the gas sold on the spot market. Assuming additional oil and gas reserves are developed by Carpatsky and others, management believes gas will become available for export, irrespective of Ukraine remaining a net importer of gas. Assuming Carpatsky enters into arrangements to export its gas, transportation of gas to export points will subject the joint ventures to additional transportation charges. Management believes the opportunities in the Ukraine exceed the associated risks, however, no assurances can be made in connection with any of the above assumptions and Carpatsky will be successful in overcoming the associated risks of operating in Ukraine. Principles of Consolidation - The accompanying financial statements include the accounts of Carpatsky and its wholly-owned Delaware subsidiary, Carpatsky Petroleum Corp. (CPC). CPC is a partner in two Ukraine joint ventures with varying ownership interests (see Note 2). Carpatsky proportionately consolidated its interest in these oil and gas joint ventures. All material intercompany transactions and accounts have been eliminated in consolidation. Cash and Equivalents - Carpatsky considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Ukraine government placed a lien on the RC Joint Venture (Note 2) cash account until certain taxes (which have been accrued) were paid. As a condition to the equity sale (see Note 6) at December 30, 1999, $500,000 of this cash infusion was used to pay past delinquent taxes in the Ukraine and is reflected as restricted cash at December 31, 1999, and the balance of delinquent taxes was paid from gas revenues subsequent to year-end. Inventories - Inventories generally consist of supplies and are valued cost, based on specific identification. Oil and Gas Properties - Carpatsky's oil and gas producing activities are accounted for using the full cost method of accounting. Carpatsky has one cost center (full cost pool) since all of its oil and gas producing activities are conducted in Ukraine. Under the full cost method, all costs incurred in the acquisition, development and exploration of oil and gas properties are capitalized. Proceeds from sales of oil and gas properties are credited to the full cost pool with no gain or loss recognized unless such adjustments would significantly alter the relationship between capitalized costs and proved oil and gas reserves. F-28 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) Acquisition costs of unproved properties and costs related to exploratory drilling and seismic activities are initially excluded from amortization and categorized as "unevaluated properties" on the balance sheet. These costs are periodically evaluated for impairment and are transferred to properties being amortized ("evaluated properties") when either proved reserves are established or the costs are determined to be impaired. Carpatsky has no unevaluated properties for any of the periods presented. The capitalized costs related to all evaluated oil and gas properties are amortized using the units of production method based upon production and estimates of proved reserve quantities. Future costs to develop proved reserves, as well as site restoration, dismantlement and abandonment costs, are estimated based on current costs and are also amortized to expense using the units of production method. Carpatsky will accrue the estimated cost of dismantlement and abandonment over the estimated life of the producing property. The capitalized costs of evaluated oil and gas properties (net of accumulated amortization and related deferred income taxes) are not permitted to exceed the full cost ceiling. The full cost ceiling involves a quarterly calculation of the estimated future net cash flows from proved oil and gas properties, using current prices and costs and an annual discount factor of 10%. Accordingly, the value of Carpatsky's oil and gas reserves and the full cost ceiling are both particularly sensitive in the near term to changes in oil and gas prices or production rates. Carpatsky has estimated its oil and gas reserves based on the term of Ukrnafta's current exploration license. Even though management believes the license will be extended or other regulatory changes will be made to allow Carpatsky's Ukrainian joint venture to continue producing oil and gas reserves beyond the current license period (see Note 2), no assurance can be given. Therefore, in 1999, Carpatsky recognized a $3,050,000 impairment to reduce the oil and gas properties to the full cost ceiling based on estimated reserves through the current term of the license which is through March 2003. In the first quarter of 2000, an additional $500,000 impairment was recognized, based on the full cost ceiling limitation. Other Property and Equipment - Other property and equipment is stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, as follows: Years ----- Vehicles ........................................ 7 Office equipment ................................ 3 to 7 Depreciation expense related to other property and equipment amounted to $16,000, $14,000 and $15,000 for the years ended December 31, 1999, 1998 and 1997, respectively. F-29 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) The costs of normal maintenance and repairs are charged to operating expenses as incurred. Material expenditures which increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of properties sold, or otherwise disposed of, and the related accumulated depreciation or amortization are removed from the accounts, and any gains or losses are reflected in current operations. Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The actual results could differ from those estimates. Carpatsky's financial statements are based on a number of significant estimates including the allowance for doubtful accounts, assumptions affecting the fair value of stock options and warrants, and oil and gas reserve quantities which are the basis for the calculation of amortization and impairment of oil and gas properties as well as estimated taxes payable in the Ukraine. Management emphasizes that reserve estimates are inherently imprecise and that estimates of more recent discoveries are more imprecise than those for properties with long production histories. Ukraine's tax and legal system is relatively new and undergoing rapid development. As such, there is little official interpretation available in that there has been an insufficient period of time for the laws to be thoroughly tested in practice either at an administrative or judicial level. Carpatsky's estimate of Ukraine taxes is Carpatsky's best understanding of laws currently in effect based on the legislation in force, on available official interpretation and unofficial discussion with Ukrainian authorities. Because of the lack of official interpretation available and the fact that the relevant Ukrainian authorities have little experience in interpretations of such laws, estimates as to taxes currently payable in the Ukraine could materially change in the near term. Taxes - Upon transfer of funds from the foreign joint ventures to the United States, Carpatsky may be subject to repatriation and withholding taxes. The foreign joint ventures are also subject to (i) a current value added tax (VAT) of 20% for items purchased, which is currently computed for oil and gas companies on a cash basis and (ii) profits tax of 30% currently computed on a semi-accrual basis. VAT refundable represents VAT taxes paid, generally on capitalized purchases of oil and gas equipment, which can offset VAT taxes payable on future production. As amounts will be offset against future production, it has been classified as long-term, except to the extent there is a current VAT tax payable. Deferred tax assets and liabilities are recognized for future tax effects attributable to the differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured F-30 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on previously recorded deferred tax assets and liabilities resulting from a change in tax rates is recognized in earnings in the period in which the change is enacted. Revenue Recognition - Oil and gas revenues are recognized upon delivery to the purchaser. Due to uncertainty surrounding the collection of receivables from past sales of gas, primarily to a government controlled affected utility in Ukraine, Carpatsky has provided for a substantial allowance against its prior unpaid gas sales. Barter Transactions - As is customary in undeveloped, cash poor countries, Carpatsky receives and pays for certain transactions in Ukraine in barter; the effects of these transactions are summarized as follows:
For the Three Months Ended For the Years Ended March 31, December 31, ----------------- ----------------------------- 2000 1999 1999 1998 1997 ---- ---- ---- ---- ---- Gross barter income ... $ 9,000 $ 36,000 $ 91,000 $ 104,000 $ 40,000 Costs of bartered goods (2,000) (20,000) (56,000) (100,000) (6,000) --------- --------- --------- --------- --------- Net barter income ..... $ 7,000 $ 16,000 $ 35,000 $ 4,000 $ 34,000 ========= ========= ========= ========= =========
Net Loss Per Common Share -Net loss per common share is presented in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, which requires disclosure of basic and diluted earnings per share (EPS). Basic EPS excludes dilution for potential common shares and is computed by dividing income or loss applicable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock. Basic and diluted EPS are the same in 1999, 1998, and 1997 as all potential common shares were antidilutive. Stock-Based Compensation - Carpatsky accounts for stock-based compensation for stock or options issued to employees and directors using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options granted to employees or directors is measured as the excess, if any, of the quoted market price of Carpatsky's common stock at the measurement date (generally, the date of grant) over the amount an employee must pay to acquire the stock. F-31 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) In October 1995, the SFAS issued a statement titled Accounting for Stock-Based Compensation (No. 123). SFAS No. 123 requires that options, warrants, and similar instruments which are granted to non-employees for goods and services be recorded at fair value on the grant date and pro-forma information be provided in the notes to the financial statements for the fair value of options granted to employees and directors. Fair value is generally determined under an option pricing model using the criteria set forth in SFAS No. 123. Foreign Currency - Because Ukraine is considered to have a highly inflationary economy, the functional currency for accounting purposes of Carpatsky's Ukrainian operations is the U.S. dollar. Even though the Ukrainian government has reported reduced inflation rates in the last few years, Carpatsky feels the true inflation factor in Ukraine is more accurately reflected in the continuing substantial decline of Ukrainian currency relative to other currencies. The political, social, and economic instability leaves the inflation rates relative to other currencies unpredictable. Therefore, for accounting purposes, translation of foreign currency monetary assets (generally current assets and liabilities) are adjusted as of each balance sheet date and non-monetary assets (consisting principally of Carpatsky's investment in its oil and gas properties) are translated at the historical exchange rate. The net effect of these transaction adjustments are reflected in the statement of operations along with exchange gains and losses in foreign currency transactions. During 1997, 1998, and 1999, this has resulted in a substantial gain due to the significant current liabilities in excess of current assets. If and when the Ukrainian economy is considered not to be highly inflationary, all assets and liabilities will be translated at the exchange rate as of the balance sheet date. Adjustments resulting from translation of foreign currency financial statements (translated gain and losses) will be accumulated in a separate component of equity (such adjustments, however, would be reflected as a component of comprehensive income at that time) and would be transferred to income only on sale, or substantial complete liquidation of Carpatsky's interest in the foreign joint ventures. Impact of Recently Issued Accounting Pronouncements - In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities was issued. SFAS No. 133 establishes accounting and reporting standards for derivative financial instruments and for hedging activities. Carpatsky does not currently engage in any activities that would be covered by SFAS No. 133. Unaudited Information - Carpatsky's balance sheet as of March 31, 2000 and the statement of shareholders' equity for the period then ended as well as the statement of operations and cash flows for the three months F-32 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) ended March 31, 2000 and 1999 are prepared by management without audit. However, in the opinion of management, such information includes all adjustments (consisting of normal and recurring items) necessary for the fair presentation of Carpatsky's financial position and results of operations in conformity with generally accepted accounting principles. 2. JOINT VENTURE ARRANGEMENTS: -------------------------- Carpatsky's oil and gas interests consist of two separate joint ownership/venture arrangements in Ukraine. Common to the oil and gas industry in many foreign countries, Carpatsky does not own any interest in any real property. But rather its rights and obligations are governed by the joint ownership/venture arrangements. The first arrangement, Ukrcarpatoil, Ltd., a joint venture, was formed in 1994 to develop the Bitkov-Babchensky Oil Field in Western Ukraine (Bitkov) with Ukrnafta, a joint stock company controlled by the Ukranian government. Carpatsky owns a 45% interest in the joint venture at Bitkov, which extends for a period of up to 20 years. Under the Ukrcarpatoil joint venture agreement production equal to the level of production on the date of the agreement remains the property of Ukrnafta and 80% of the incremental oil and gas production is the property of Ukrcarpatoil. The profit from the sale of oil and gas production is shared 45% to Carpatsky and 55% by Ukrnafta. Also during the first 10 years of the joint venture, the remaining 20% of incremental production is allocated to Carpatsky. Carpatsky's investment in Bitkov joint venture is approximately $1,026,000 as of December 31, 1999 and revenues and expenses of its operations have not yet been significant. In 1995, Carpatsky executed a joint activity agreement (Agreement) with Ukrnafta to undertake the joint development of the Rudovsko-Chervonozavodskoye natural gas and condensate field (the "RC Field" or "RC Joint Venture") in Eastern Ukraine. Ukrnafta's initial contribution was certain uncompleted oil and gas wells. Carpatsky's investment has been based on its contributions, which have primarily been cash. Substantially all of Carpatsky's oil and gas reserves are attributable to this field. Production operations in the field initially commenced after completion of the first well in February 1997. The Agreement contemplated both joint venture parties owning a 50% working interest in the project based on equal contributions to the joint account with Ukrnafta receiving an additional 10% net revenue interest (e.g., Carpatsky would have a 45% net revenue interest if both parties have contributed an equal 50% to the joint account). Under the current operating agreement, the ownership percentage is based on the capital contributions computed on a quarterly basis. Carpatsky's investment in the RC field was approximately $4,780,000 at December 31, 1999. Carpatsky has proportionately consolidated its interest based on relative ownership interest as of the end of each quarter for both the Bitkov and RC Field joint arrangements. For the year ended December 31, 1999 and 1998 and March 2000 and 1999 these amounts were 38.8%, 45.0%, and 39.23%, 45.0%, respectively, for the RC Field. The Bitkov field was consolidated using 45% for all periods presented. Ukrnafta holds an exploration and pilot production license to the RC Field which will expire on March 30, 2003. Unless the exploration license is converted into a production license, which generally lasts for 20 years, Carpatsky's rights to continue receiving the proceeds of production under the joint agreement will terminate when the license terminates. The granting of a production license is at the discretion of the government of Ukraine. F-33 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) Carpatsky's share of net revenues is based on capital contributions to the joint activity's account and is computed on a quarterly basis. Based on a recent review of the payments to and withdrawals from the joint activity's account, Carpatsky notified Ukrnafta that Carpatsky disagreed with certain of the charges to and withdrawals from the account. Ukrnafta and Carpatsky are currently negotiating an agreement to adjust the relative ownership interest of Carpatsky in the joint activity's account. Carpatsky has proposed to Ukrnafta that the relative net revenue interest of Carpatsky be set at 45%. Carpatsky believes that these negotiations will be completed during September 2000. No assurances can be made that Carpatsky will be successful in these negotiations or the timing of a resolution of this disagreement. Any change to the relative ownership will be accounted for on a prospective basis. Ukrnafta and Carpatsky have verbally agreed to convert the joint activity agreement and the license covering the RC Field into a production sharing agreement at the earliest practicable time. Because the regulations adopted under the production sharing legislation have not yet been enacted in Ukraine, no assurances can be given as to the timing of receipt of a production sharing agreement. If Carpatsky and Ukrnafta are unable to convert the license into a production sharing agreement, the joint venture will continue to operate under the license agreement. 3. DEBT ---- Notes payable consists of the following:
December 31, 1999 1998 ---- ---- Promissory note, interest at 12%, collateralized by common shares of CPC, past due ....................................................... $ 355,000 $ 329,000 Series 1 debenture, interest of 12%, collateralized by common shares of CPC, past due, subordinated to the above promissory note ............ 220,000 220,000 ---------- ---------- Total current debt ......................................... 575,000 549,000 Debt converted into common shares in September 1999: Other Series 1 debentures .................................. -- 780,000 Convertible notes, uncollateralized ........................ -- 1,228,000 ---------- ---------- $ 575,000 $2,557,000 ========== ==========
Subsequent to December 31, 1999, the outstanding debt was purchased by the preferred stockholder from the note holders, and the Promissory Note with a principal balance of $355,000 was repaid in full. F-34 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) 4. INCOME TAXES: ------------ Carpatsky is delinquent in filing its US and Canadian tax returns. The amounts presented below may change based on the filing of such tax returns, but management believes any change would be offset by a corresponding change in the valuation allowance. As amounts are based on estimates and subject to change without any expected significant impact to Carpatsky's financial position, 1998 comparative amounts are not presented. Deferred tax assets (liabilities) as of December 31, 1999 are estimated to be comprised of the following.
1999 ---------------------------------------- U.S. Subsidiary Ukrainian Canadian Operations Operations Operations ---------- ---------- ---------- Deferred tax assets (liabilities): Current: Allowance for bad debts .............. $ -- $ 575,000 $ -- Non-Current: Property basis differences ........... 1,000,000 1,200,000 -- Tax effect of net operating loss carryforwards ...................... 300,000 -- 900,000 Less valuation allowance ..................... (1,300,000) (1,775,000) (900,000) ----------- ----------- -------- Net deferred tax assets ..................... $ -- $ -- $ -- =========== =========== ========
Total income tax expense (benefit) differed from the amounts computed by applying the U.S. statutory tax rates to pre-tax income as follows:
For the Years Ending December 31, -------------------------------- 1999 1998 1997 ---- ---- ---- Total benefit computed by applying the statutory rate .............................. $(1,808,000) $ (158,000) $(332,000) Increase in valuation allowance ............... 2,043,000 271,000 332,000 Effect of foreign tax rates ................... 212,000 19,000 -- ----------- ----------- -------- Income tax expense ............................ $ 447,000 $ 132,000 $ -- =========== =========== ========
Income tax expense included in the financial statements represents amounts payable to the Ukraine government. For Canada and U.S. tax reporting purposes, Carpatsky has net operating loss carryforwards (NOL) estimated at approximately $2,000,000 and 900,000, respectively. The utilization of its loss carryforwards may be limited based on the potential merger with Pease Oil and Gas Company, and/or ultimately Carpatsky's intent to reincorporate in the United States. The NOL has been fully provided for by a valuation allowance. F-35 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) 5. COMMITMENTS AND CONTINGENCIES: ----------------------------- Environmental - Carpatsky and its foreign joint ventures are subject to environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require Carpatsky and/or its joint ventures to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Oil and gas companies operating in Ukraine have little, if any, experience with restoring oil and gas properties at the time they are abandoned. Carpatsky intends to use the best information available to accrue such costs over the life of its wells. Stock Exchange Compliance Issues - Carpatsky has received notification from the Venture Capital Stock Exchange (formerly the Alberta Stock Exchange) that it is noncompliant with the filing of its annual report. Carpatsky intends to file such information with the inclusion of December 31, 1999, financial statements in the near future. Until the annual report is filed and accepted by the Exchange, Carpatsky's common stock has been delisted and cannot be sold on the public market. While no claims have been made against Carpatsky, until such time as Carpatsky's common stock is relisted for sale, Carpatsky may be exposed to various adverse consequences. Contingencies - Carpatsky may from time to time be involved in various claims, lawsuits, disputes with third parties, actions involving allegations of discrimination, or breach of contract incidental to the operations of its business. Carpatsky is not currently involved in any such incidental litigation which it believes could have a materially adverse effect on its financial conditions or results of operations. 6. STOCKHOLDERS' EQUITY: Private Placements and Debt Conversions - In September 1999, Carpatsky completed a private placement of securities in which it raised $1,000,000 from the sale of 13,333,340 shares of common stock and 5,000,000 warrants. Each warrant entitled the holder to one share of common stock exercisable at $0.20 through December 31, 2000. Officers and directors of Carpatsky subscribed and paid $475,000 of this private placement. Upon the completion of this private placement, debt holders and other creditors converted $2,007,706 of debt, $220,000 of payables and $448,558 of interest into 20,045,344 shares of common stock and 4,387,904 warrants. In addition, 7,920,000 warrants, which were previously outstanding to those debtholders and other creditors, were canceled and re-issued with new terms in connection with these conversions. The warrants are on the same terms as the private placement. For certain of these common shares Carpatsky has agreed to register for resale at its cost. F-36 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) On December 30, 1999, Carpatsky sold 95.45 million of its preferred shares and warrants to acquire 12,500,000 common shares to Bellwether Exploration Company (Bellwether) for $4 million. The warrants are exercisable at $.20 per share through December 31, 2000. Carpatsky recognized $336,000 as the implied fair value attributable to the warrants. (This amount was based upon a Black Scholes Model using the same assumptions in computing fair values for options [see below]). The preferred shares are convertible (at $.08 per share) into 50 million Carpatsky common shares, do not carry a preferential dividend and have majority voting rights over Carpatsky as well as a liquidation preference of $4,000,000. Furthermore, if Carpatsky issues for any reason additional shares of voting stock, Bellwether will receive at no cost a like number of additional shares of preferred stock. However, any additional preferred shares issued will not be convertible into common shares. Therefore, the effect of such additional preferred shares is to enable Bellwether to maintain voting control upon the issuance of additional voting stock. In connection with this investment, the Chairman and CEO of Bellwether became the Chairman and CEO of Carpatsky and three Carpatsky directors retired and were replaced by three Bellwether appointees, giving Bellwether four of the current seven directorships of Carpatsky. The funds received were placed in a company cash account, but Bellwether maintains signing control over the disbursements. Common Shares Issued for Services - Based on the success of the private offering in September, Carpatsky granted an individual 953,333 shares of common stock, 357,000 warrants (issued on the same terms as the private placement) valued at $72,500. This individual subsequently became an officer of Carpatsky (COO) and such amounts were expensed in operations. In connection with the Bellwether financing, the COO was granted 2,000,000 shares of common stock which were previously contingent upon the completion of the Pease merger. These shares were valued at their estimated fair value of $200,000 for financial reporting purposes. Stock Option Plans - Carpatsky's shareholders have approved a stock option plan that authorizes an unlimited number of shares for stock options, not to exceed the maximum permitted by the Venture Capital Stock Exchange, that may be granted to officers, directors, employees, and consultants. This amount is currently 10% of the issued and outstanding shares of common stock. Any grantee may not have options exercisable into more than 5% of Carpatsky's common stock at any one time. The plan permits the issuance of incentive and nonstatutory options and provides for a minimum exercise price equal to 100% of the fair market value of Carpatsky's common stock on the date of grant. The maximum term of options granted under the plan is 5 years and options granted to employees expire after the termination of employment. None of the options may be exercised during the first six months of the option term. F-37 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) The following is a summary of activity under this stock option plan for the years ended December 31, 1999, 1998, and 1997:
1999 1998 1997 --------------------- ---------------------- ------------------------ Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price --------- -------- --------- -------- --------- -------- Outstanding, beginning of period 1,622,000 $ .18 1,822,000 $ .21 850,000 $ .14 Granted ................... -- -- 200,000 .20 1,700,000 .22 Canceled .................. -- -- (400,000) .36 -- -- Surrendered ............... 1,422,000) (.18) -- -- -- -- Exercised ................. -- -- -- -- (728,000) .14 ---------- ------ ---------- ------ ---------- ------ Outstanding, end of period ..... 200,000 $ .20 1,622,000 $ .18 1,822,000 $ .21 ========== ====== ========== ====== ========== ======
In December 1999, certain officers and directors surrendered 1,422,000 options and were issued an aggregate of 600,000 shares of common stock which was valued at their estimated fair value of $60,000 for financial reporting purposes. For all options granted during 1998 and 1997, the exercise price of Carpatsky's common stock on the grant date was greater than the market price. Options which are currently exercisable if not previously exercised, will expire in 2003 (or the earlier of 30 days after a reorganization of Carpatsky as contemplated in the merger with Pease) and are exercisable at $.20. F-38 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) Warrants - Carpatsky has also granted warrants and non-qualified options which are summarized as follows:
1999 1998 1997 ------------------------ ------------------------ ----------------------- Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price --------- -------- --------- -------- --------- -------- Outstanding, beginning of period ............ 23,734,300 $ 0.25 21,303,415 $ 0.25 3,142,500 $ 0.25 Exercised ............................... -- -- -- -- (773,385) 0.29 Expired ................................. (15,814,300) 0.25 (2,369,115) 0.25 -- -- Canceled ................................ (7,920,000) 0.25 -- -- (773,385) 0.29 Private placement of debt ............... -- -- 4,800,000 0.25 4,000,000 0.25 Granted to: Brokers and underwriter in private placements .................. 357,500 0.20 -- -- 1,987,685 0.25 Private placement of common stock ....... 5,000,000 0.20 -- -- 13,720,000 0.25 Granted for conversion of debt .......... 12,307,904 0.20 -- -- -- -- Preferred shareholder ................... 12,500,000 0.20 -- -- -- -- ----------- -------- ----------- ------- ----------- -------- Outstanding, end of period .................. 30,165,404 $ 0.20 23,734,300 $ 0.25 21,303,415 $ 0.25 =========== ======== =========== ======== =========== ========
All warrants will expire on December 31, 2000. Pro Forma Stock-Based Compensation Disclosures - Carpatsky applies APB Opinion 25 and related interpretations in accounting for stock options and warrants which are granted to employees and directors. Accordingly, no compensation cost has been recognized for grants of options and warrants to employees since the exercise prices were not less than the fair value of Carpatsky's common stock on the grant dates. Had compensation cost been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, Carpatsky's net loss and loss per share would have been changed to the pro forma amounts indicated below. 1999 1998 1997 ---- ---- ---- Net loss As reported............... $ (6,090,000) $ (599,000) $ (966,000) Pro forma................. (6,114,000) (611,000) (1,233,000) Net loss per common share: As reported............... (0.12) (0.01) (0.03) Pro forma................. (0.12) (0.01) (0.03) The weighted average fair value of options and warrants granted to employees for the years ended December 31, 1998 and 1997 was $.21 and $.16, respectively. All options granted in 1998 and 1997 were exercisable below the market price. The fair value of options and warrants granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: F-39 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) 1999 1998 1997 ---- ---- ---- Expected volatility .................... 160.0% 154.0% 170.0% Risk-free interest rate ................ 6.0% 6.0% 6.0% Expected dividends ..................... -- -- -- Expected terms (in years) .............. 1 3.5 4.0 7. FINANCIAL INSTRUMENTS: --------------------- SFAS No. 107 requires all entities to disclose the fair value of certain financial instruments in their financial statements. Accordingly, at December 31, 1999, management's best estimate is that the carrying amount of cash, receivables, notes payable to unaffiliated parties, accounts payable, and accrued expenses approximates fair value due to the short maturity of these instruments. However, due to changes in the Ukraine inflation rate or foreign currency exchange, these accounts may ultimately be settled at different amounts. Further, the joint ventures have a VAT refundable amount in Ukraine. Such amounts are generally not repaid in cash in Ukraine, but rather are offset against other taxes. Therefore, these offsets are dependent upon continued development and operating profits in Ukraine. Carpatsky expects the recovery or offset of this VAT refundable tax will be in the short term, however, it could extend over a longer period which may reduce its ultimate fair value. 8. SIGNIFICANT CONCENTRATIONS: -------------------------- Substantially all of Carpatsky's accounts receivable at December 31, 1998, result from crude oil and natural gas sales to entities in Ukraine. This concentration of customers may negatively impact Carpatsky's overall credit risk, since these entities may be similarly affected by changes in economic or other conditions. Carpatsky does not obtain collateral from any of its customers. Historically, a substantial portion of these sales were to an affiliate of Ukrnafta in the RC field. Sales to this affiliate were approximately 47%, 53%, and 10%, respectively, for the years ended December 31, 1999, 1998, and 1997. As previously discussed, prior to the sale of Carpatsky's gas on the spot market, the ultimate payment of the joint venture's receivables were dependent upon payment of this affiliate's customers, which in the past has resulted in significant delinquencies or non-payment. As of December 31, 1999, the net receivable balance from the affiliated entity was not significant, as it has been substantially reserved as uncollectible. 9. AGREEMENT TO MERGE WITH PEASE OIL AND GAS COMPANY: ------------------------------------------------- On September 1, 1999, Carpatsky and Pease Oil and Gas Company (Pease) entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") to combine their respective businesses through a reverse merger. The Merger Agreement was amended on December 30, 1999 and Carpatsky and Pease are in the process of finalizing a new amendment to F-40 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) the agreement in connection with a financing arrangement entered into by Carpatsky with Bellwether Exploration Company (see Note 6). Pursuant to the terms of the amended Merger Agreement, the newly combined entity will have approximately 84.5 million shares outstanding distributed as follows: approximately 87.5% to Carpatsky's former Carpatsky shareholders (including Bellwether who would receive 102,410,000 shares of preferred stock of Pease and assuming these shares were converted into 28,920,984 common shares); approximately 10.5% to former Pease Series B Preferred stockholders; and approximately 2.0% to Pease's current common stockholders. If the merger with Pease is successful, Bellwether's preferred stock will be exchanged into preferred stock of Pease based upon an exchange rate which will enable Bellwether to maintain its voting control, however the conversion rights into common stock will be based on the same exchange ratio as other common shareholders of Carpatsky. The Merger Agreement is still conditioned upon, among other things, shareholder approvals. However, the Merger Agreement was unanimously approved by the Boards of Directors of both companies, and the directors and officers of Pease have agreed to vote their shares in favor of the transaction. The parties expect to complete the transaction in early 2000. Pursuant to the Merger Agreement, there is a break fee of $250,000 payable by the defaulting company. In addition, Carpatsky would be required to reimburse Pease for certain accounting and administrative services provided them under a separate agreement dated October 1, 1999. 10. OIL AND GAS PRODUCING ACTIVITIES: -------------------------------- Costs Incurred in Oil and Gas Producing Activities - The following is a summary of Carpatsky's proportionate costs incurred in oil and gas producing activities for the years ended December 31, 1999, 1998 and 1997: 1999 1998 1997 ---- ---- ---- Property acquisition costs...... $ -- $ -- $ -- Development costs............... 1,768,000 2,441,000 5,672,000 Exploration costs............... -- -- -- --------- ---------- --------- Total................... $1,768,000 $2,441,000 $5,672,000 ========= ========== ========= Full Cost Amortization Expense - Amortization expense amounted to $1,361,000, $329,000, and $27,000 for the years ended December 31, 1999, 1998, and 1997, respectively. Amortization expense per equivalent units of natural gas produced (mcfe) amounted to $0.52, $0.60, and $0.33 per mcfe for the years ended December 31, 1999, 1998, and 1997, respectively. Oil is converted to equivalent units of natural gas on the basis of 6 mcf of gas to one barrel of oil. F-41 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) Oil and Gas Reserve Quantities (Unaudited) - Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those reserves expected to be recovered through existing wells with existing equipment and operating methods. The reserve data is based on studies prepared by Carpatsky's consulting petroleum engineers. Reserve estimates require substantial judgment on the part of petroleum engineers resulting in imprecise determinations, particularly with respect to new discoveries. Accordingly, it is expected that the estimates of reserves will change as future production and development information becomes available. All proved oil and gas reserves are located in the Republic of Ukraine. The following table presents estimates of Carpatsky's net proved oil and gas reserves, and changes therein for the years ended December 31, 1999, 1998 and 1997. The reserve estimates are based on Carpatsky's portionate interest as of year end in its joint ventures (see Note 2 regarding Carpatsky's ownership interest). Because the current license in the RC field expires on March 30, 2003, Carpatsky is not permitted to report reserves expected to be produced from the RC field following that date.
1999 1998 1997 ----------------- ------------------- ----------------- Oil Gas Oil Gas Oil Gas (bbls) (mcf) (bbls) (mcf) (bbls) (mcf) ---- --- ---- --- ---- --- Proved reserves, beginning of year ............ 360,000 32,840,000 370,000 31,601,000 375,000 31,612,000 Extensions, discoveries, revisions and other (96,000) (11,081,000) 20,000 2,375,000 -- -- Production .................................. (65,000) (5,926,000) (30,000) (1,136,000) (5,000) (11,000) ----------- ----------- ----------- ----------- ----------- Proved reserves, end of year .................. 199,000 15,833,000 360,000 32,840,000 370,000 31,601,000 =========== =========== =========== =========== =========== =========== Proved developed reserves, beginning of year .. 47,000 835,000 61,000 207,000 66,000 218,000 =========== =========== =========== =========== =========== =========== Proved developed reserves, end of year ........ 70,000 7,487,000 47,000 835,000 61,000 207,000 =========== =========== =========== =========== =========== ===========
Standardized Measure of Discounted Future Net Cash Flows (Unaudited) - Statement of Financial Accounting Standards No. 69 prescribes guidelines for computing a standardized measure of future net cash flows and changes therein relating to estimated proved reserves. Carpatsky has followed these guidelines which are briefly discussed below. Future cash inflows and future production and development costs are determined by applying year-end prices and costs to the estimated quantities of oil and gas to be produced. Estimated future income taxes are computed using current statutory income tax rates including consideration for estimated future statutory depletion and tax credits. The resulting future net cash flows are reduced to present value amounts by applying a 10% annual discount factor. Future income taxes are based on U.S. Statutory rates, the highest tax applicable assuming offsetting benefits will be available for income taxes paid in Ukraine. Repatriation taxes of 15% for funds transferred outside Ukraine have not been considered as such amount ultimately repatriated is not certain. F-42 CARPATSKY PETROLEUM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1999 is Unaudited) The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standards Board and, as such, do not necessarily reflect Carpatsky's expectations for actual revenues to be derived from those reserves nor their present worth. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computation since these estimates are the basis for the valuation process. The following summary sets forth Carpatsky's future net cash flows relating to proved oil and gas reserves as of December 31, 1999 and 1998 based on the standardized measure prescribed in Statement of Financial Accounting Standards No. 69. 1999 1998 ---- ---- Future cash inflows ........................... $ 18,706,000 $ 60,963,000 Future production costs ....................... (8,344,000) (20,112,000) Future development costs ...................... (3,302,000) (17,090,000) Future income tax expense ..................... (2,191,000) (8,362,000) ------------ ------------ Future net cash flows ........... 4,869,000 15,399,000 10% annual discount for estimated timing of cash flow ................................... (1,463,000) (4,620,000) ------------ ------------ Standardized Measure of Discounted Future Net Cash Flows .................................. $ 3,406,000 $ 10,779,000 ============ ============ Changes in Standardized Measure (Unaudited) - The following are the principal sources of change in the standardized measure of discounted future net cash flows for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- Standardized Measure, beginning of year ............. $ 10,779,000 $ 15,357,000 $ 13,975,000 Sale of oil and gas produced, net of production costs (1,401,000) (461,000) (16,000) Net changes in prices and production costs .......... (18,427,000) (12,218,000) -- Net changes in estimated development costs .......... 10,667,000 370,000 -- Revisions of previous quantity estimates and other .. (4,225,000) 2,699,000 -- Discoveries, extensions, and other additions ........ -- -- -- Accretion of discount ............................... 1,078,000 1,536,000 1,398,000 Changes in income taxes, net ........................ 4,943,000 3,496,000 -- ------------ ------------ ------------ Standardized Measure, end of year ................... $ 3,414,000 $ 10,779,000 $ 15,357,000 ============ ============ ============
F-43 APPENDIX B CONFIDENTIAL June 27, 2000 Board of Directors Pease Oil & Gas Company 751 Horizon Ct. Suite 203 Grand Junction, CO 81506-8718 Ladies and Gentlemen: We understand that Pease Oil and Gas Company ("Pease" or "the Company") has entered into a definitive merger agreement (the "Merger") with Carpatsky Petroleum, Inc. ("Carpatsky") whereby Pease will issue approximately 44.96 million shares of common stock plus approximately 102.41 million shares of newly designated preferred stock to acquire all of the outstanding stock of Carpatsky in a reverse triangular merger transaction that is intended to qualify as a "tax-free" reorganization under the Internal Revenue Code of 1986, as amended. We also understand that at or before the closing of the Merger all of the currently outstanding Series B Convertible Preferred Stock of Pease will be exchanged for approximately 8.9 million common shares of Pease. You have requested our opinion as to whether the Merger, pursuant to the definitive merger agreement, dated August 31, 1999 and amended December 30, 1999 is fair, from a financial point of view, to Pease and its stockholders as of the date hereof (the "Opinion"). For the purposes of the Opinion set forth herein, we have, among other things: a. Reviewed the financial terms of the transaction as provided in the definitive Merger Agreement. This included a review of the First Amendment to Merger Agreement, including exhibits. b. Reviewed the Pease and Carpatsky disclosure schedules to the Merger Agreement. c. Reviewed the financial terms of the Securities Purchase by Bellwether Exploration Company of Convertible Preferred Shares and Warrants of Carpatsky as provided in the Securities Purchase Agreement by and between Carpatsky Petroleum, Inc. and Bellwether Exploration Company including exhibits. d. Reviewed the public Securities and Exchange Commission filings of Pease including the most recent 10-QSB, 10-KSB, and the 8-K announcing the planned merger. e. Reviewed financial statements of Pease and Carpatsky for each of the last three fiscal years audited by Hein + Associates and the unaudited financial statements for each company for the quarter ended March 31, 2000. f. Reviewed internal financial and capitalization schedules describing the operations of Pease prepared by Pease management. B-1 g. Reviewed reserve reports as of January 1, 1999 and 2000 of Pease oil and natural gas reserves as prepared by Netherland, Sewell & Associates, Inc. and dated March 16, 1999, and February 21, 2000 respectively. Additionally, Houlihan was provided with a pricing sensitivity analysis prepared by the same dated March 18, 1999. h. Reviewed reserve reports dated June 30, 1999 of certain leasehold interests of Carpatsky as prepared by Ryder Scott Company, L.P. and dated June 21 and 23, 1999. These reports represent the full contractual interest reserves as well as the paid-in interest reserves assuming Carpatsky will retain an interest in the RC Field for the full economic life of the field beyond March 2001. In addition, we have reviewed reserve reports dated December 31, 1999, 1998 and 1997 of certain leasehold interests of Carpatsky as prepared by Ryder Scott Company, L.P. and dated May 26, 2000. These latter reports establish the reserves attributable to Carpatsky's interest in its principal property under existing arrangements through expiration of those agreements in 2003. Houlihan also reviewed various reserve sensitivity analyses prepared by Ryder Scott. i. Reviewed a report of Wise & Treece Petroleum Management, Inc. dated August 23, 1999 which reviews the Ryder Scott reserve report, and calculates an estimated engineered value of the reserves in the Carpatsky interest in the RC field based upon the Ryder Scott data and other assumptions provided by Wise & Treece and Pease management. j. Reviewed other due diligence documents and letters including documents reviews, due diligence memos and opinions from Pease management and Ostrander-Krug & Sobel, LLC. k. Reviewed several other proposals for mergers, acquisitions, or proposed financings as well various memos from advisors to Pease evaluating several of these various offers. l. Reviewed the Agreement Not to Sell or Convert Securities and the Exchange Agreement and Irrevocable Proxy pertaining to the outstanding Series B Convertible preferred stockholders' agreement not to convert outstanding preferred stock to common stock during the merger negotiations and the final agreement by holders of the preferred stock to exchange all outstanding Series B Preferred for a set number of shares of common stock at or before the Effective Time of the merger. m. Reviewed the Resolutions of the Pease board of directors and the Amended and Restated Articles of Incorporation proposed to facilitate the merger. n. Analyzed the historical trading prices and volumes of Pease and Carpatsky stock as quoted on the NASDAQ Small Cap Market and OTC Bulletin Board in the case of Pease and the Alberta Stock Exchange in the case of Carpatsky. o. Analyzed the risk adjusted valuation of Pease assets and the various assets of Carpatsky and the share exchange ratio calculation that determined the number of shares of Pease common stock to be issued in the merger. p. Compared Pease and Carpatsky from a financial point of view with certain other companies in the oil and gas exploration and production industry that we deemed to be relevant. Houlihan focused on general financial ratios as well as equity and asset valuation ratios. q. Conducted such other studies, analyses, inquiries and investigations as Houlihan deemed appropriate. B-2 In arriving at our Opinion we have considered such factors as we have deemed relevant including, but not limited to: (1) the reserve and engineering values as calculated by Pease advisors, (2) the revised reserves booked for accounting purposes in response to SEC comments, (3) the allocation between preferred and common shareholders of Pease as negotiated by Pease and documented in the Exchange Agreement and Irrevocable Proxy; (4) the historical cash flows of Pease and Carpatsky, (5) the conditions of closing of the Merger, (6) the risks associated with the Merger, (7) the upside potential of the Merger, as described in the due diligence conducted by Pease management, and (8) other due diligence findings of Pease related to the Merger. During our review, we relied upon and assumed, without independent verification, the accuracy, completeness and fairness of the financial and other information provided, and have further relied upon the assurances of Pease management that they are unaware of any facts that would make the information provided to us to be incomplete or misleading for the purposes of this Opinion. We have not assumed responsibility for any independent verification of this information or undertaken any obligation to verify this information. The management of Pease and Carpatsky informed us that the forecasts and reserve reports provided represent their best current judgment, at the date of the opinion, as to the future financial performance of Pease and Carpatsky, each on a stand-alone basis. We assumed reserve reports had been reasonably prepared based on the current judgment of Pease's and Carpatsky's management. We assumed no responsibility for and express no view as to the forecasts and reserves or the assumptions on which they were based. We did not perform an independent evaluation or appraisal of the assets of either Pease or Carpatsky. Furthermore, we have requested and received a representation letter from Pease indicating that they have read this Opinion letter and that they believe that it is accurate and does not omit any material facts or assumptions. Our Opinion is necessarily based on economic, market, financial and other conditions as they exist on, and on the information made available to us as of, the date of this letter. We disclaim any obligation to advise the Board of Pease or any person of any change in any fact or matter affecting our Opinion, which may come or be brought to our attention after the date of this Opinion. Our Opinion does not constitute a recommendation to any stockholder of Pease or Carpatsky as to how such stockholder should vote, or as to any other actions, which such stockholder should take in conjunction with the Merger. This Opinion relates solely to the question of fairness to Pease stockholders, from a financial point of view, of the Merger as currently proposed. Further we express no opinion herein as to the structure, terms or effect of any other aspect of the Merger, including, without limitation, any effects resulting from environmental issue(s), the application of any bankruptcy proceeding, fraudulent conveyance, or other international, federal or state insolvency law, or of any pending or threatened litigation affecting Pease or Carpatsky. We are expressing no opinion as to the price at which Pease common stock will actually trade at any time. We are also expressing no opinion as to the income tax consequences of the Merger. Our Opinion does not address the relative merits of the Merger, nor does it address the Board's decision to proceed with the Merger. Richard Houlihan, a director and shareholder of Houlihan Smith & Company, Inc. ("Houlihan") served a term as a Director of Pease from August 10, 1996 to October 2, 1997. Mr. Houlihan also holds an outstanding convertible debenture of Pease with a principal balance of $17,500 maturing in April 2001 paying 10% interest quarterly and warrants to purchase 10,000 shares of Pease at $7.50 per share. Andrew D. Smith, president and shareholder of Houlihan beneficially owns an outstanding convertible debenture of Pease with a principal balance of $17,500 maturing in April 2001 paying 10% interest quarterly. A Due Diligence Study of Pease dated May 31, 1996 was prepared by the Los Angeles Office of Houlihan Valuation Advisors ("HVA"). HVA received a fee for $35,000 plus out-of-pocket expenses for this engagement. Houlihan has no direct ownership of B-3 HVA; however, Richard Houlihan, receives a royalty in conjunction with certain HVA offices in the United States. Additionally, Mr. Houlihan is a part owner of the Los Angeles HVA office. HS&Co. and HVA share office space in downtown Chicago, Illinois; however, HVA has no other economic interest or ownership in HS&Co. Neither Richard Houlihan nor any principals of HVA participated in the preparation or analysis for this Opinion. It is understood that this Opinion will be included in its entirety in an S-4 Registration Statement filed with the U.S. Securities and Exchange Commission. For purposes of this filing, no summary of or excerpt from this Opinion may be used, and no published reference to this Opinion letter other than the S-4 may be made without our prior express written approval, which shall not be unreasonably withheld. Notwithstanding this restriction, however, this report may be shared with professional advisors and / or consultants on a need -to-know basis. Houlihan, a National Association of Securities Dealers member, as part of its investment banking services, is regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Houlihan will receive a non-contingent from Pease relating to its services in providing this Opinion. In an engagement letter dated July 27, 1999, Pease has agreed to indemnify, defend and hold Houlihan harmless if Houlihan becomes involved in any way in any legal or administrative proceeding related to the services Houlihan provided in rendering the Opinion.: Based on the foregoing and such other factors as we deem relevant, we are of the opinion that the Merger as defined and described above is fair, from a financial point of view to the stockholders of Pease as of the date hereof. Very truly yours, Houlihan Smith & Company, Inc. D. Grey Merryman, CFA Vice President B-4 APPENDIX C SECTION 184 OF THE BUSINESS CORPORATIONS ACT (ALBERTA). 184(1) Subject to sections 185 and 234, a holder of shares of any class of a corporation may dissent if the corporation resolves to (a) amend its articles under section 167 or 168 to add, change or remove any provisions restricting or constraining the issue or transfer of shares of that class, (b) amend its articles under section 167 to add, change or remove any restrictions on the business or businesses that the corporation may carry on, (c) amalgamate with another corporation, otherwise than under section 178 or 180.1, (d) be continued under the laws of another jurisdiction under section 182, or (e) sell, lease or exchange all or substantially all its property under section 183. (2) A holder of shares of any class or series of shares entitled to vote under section 170, other than section 170(1)(a), may dissent if the corporation resolves to amend its articles in a manner described in that section. (3) In addition to any other right he may have, but subject to subsection (20), a shareholder entitled to dissent under this section and who complies with this section is entitled to be paid by the corporation the fair value of the shares held by him in respect of which he dissents, determined as of the close of business on the last business day before the day on which the resolution from which he dissents was adopted. (4) A dissenting shareholder may only claim under this section with respect to all the shares of a class held by him or on behalf of any one beneficial owner and registered in the name of the dissenting shareholder. (5) A dissenting shareholder shall send to the corporation a written objection to a resolution referred to in subsection (1) or (2) (a) at or before any meeting of shareholders at which the resolution is to be voted on, or (b) if the corporation did not send notice to the shareholder of the purpose of the meeting or of his right to dissent, within a reasonable time after he learns that the resolution was adopted and of his right to dissent. (6) An application may be made to the Court by originating notice after the adoption of a resolution referred to in subsection (1) or (2), (a) by the corporation, or (b) by a shareholder if he has sent an objection to the corporation under subsection (5), to fix the fair value in accordance with subsection (3) of the shares of a shareholder who dissents under this section. C-1 (7) If an application is made under subsection (6), the corporation shall, unless the Court otherwise orders, send to each dissenting shareholder a written offer to pay him an amount considered by the directors to be the fair value of the shares. (8) Unless the Court otherwise orders, an offer referred to in subsection (7) shall be sent to each dissenting shareholder (a) at least 10 days before the date on which the application is returnable, if the corporation is the applicant, or (b) within 10 days after the corporation is served with a copy of the originating notice, if a shareholder is the applicant. (9) Every offer made under subsection (7) shall (a) be made on the same terms, and (b) contain or be accompanied by a statement showing how the fair value was determined. (10) A dissenting shareholder may make an agreement with the corporation for the purchase of his shares by the corporation, in the amount of the corporation's offer under subsection (7) or otherwise, at any time before the Court pronounces an order fixing the fair value of the shares. (11) A dissenting shareholder (a) is not required to give security for costs in respect of an application under subsection (6), and (b) except in special circumstances shall not be required to pay the costs of the application or appraisal. (12) In connection with an application under subsection (6), the Court may give directions for (a) joining as parties all dissenting shareholders whose shares have not been purchased by the corporation and for the representation of dissenting shareholders who, in the opinion of the Court, are in need of representation, (b) the trial of issues and interlocutory matters, including pleadings and examinations for discovery, (c) the payment to the shareholder of all or part of the sum offered by the corporation for the shares, (d) the deposit of the share certificates with the Court or with the corporation or its transfer agent, (e) the appointment and payment of independent appraisers, and the procedures to be followed by them, (f) the service of documents, and (g) the burden of proof on the parties. (13) On an application under subsection (6), the Court shall make an order (a) fixing the fair value of the shares in accordance with subsection (3) of all dissenting shareholders who are parties to the application, C-2 (b) giving judgment in that amount against the corporation and in favor of each of those dissenting shareholders, and (c) fixing the time within which the corporation must pay that amount to a shareholder. (14) On (a) the action approved by the resolution from which the shareholder dissents becoming effective, (b) the making of an agreement under subsection (10) between the corporation and the dissenting shareholder as to the payment to be made by the corporation for his shares, whether by the acceptance of the corporation's offer under subsection (7) or otherwise, or (c) the pronouncement of an order under subsection (13), whichever first occurs, the shareholder ceases to have any rights as a shareholder other than the right to be paid the fair value of his shares in the amount agreed to between the corporation and the shareholder or in the amount of the judgment, as the case may be. (15) Subsection (14)(a) does not apply to a shareholder referred to in subsection (5)(b). (16) Until one of the events mentioned in subsection (14) occurs, (a) the shareholder may withdraw his dissent, or (b) the corporation may rescind the resolution, and in either event proceedings under this section shall be discontinued. (17) The Court may in its discretion allow a reasonable rate of interest on the amount payable to each dissenting shareholder, from the date on which the shareholder ceases to have any rights as a shareholder by reason of subsection (14) until the date of payment. (18) If subsection (20) applies, the corporation shall, within 10 days after (a) the pronouncement of an order under subsection (13), or (b) the making of an agreement between the shareholder and the corporation as to the payment to be made for his shares, notify each dissenting shareholder that it is unable lawfully to pay dissenting shareholders for their shares. (19) Notwithstanding that a judgment has been given in favor of a dissenting shareholder under subsection (13)(b), if subsection (20) applies, the dissenting shareholder, by written notice delivered to the corporation within 30 days after receiving the notice under subsection (18), may withdraw his notice of objection, in which case the corporation is deemed to consent to the withdrawal and the shareholder is reinstated to his full rights as a shareholder, failing which he retains a status as a claimant against the corporation, to be paid as soon as the corporation is lawfully able to do so or, in a liquidation, to be ranked subordinate to the rights of creditors of the corporation but in priority to its shareholders. (20) A corporation shall not make a payment to a dissenting shareholder under this section if there are reasonable grounds for believing that (a) the corporation is or would after the payment be unable to pay its liabilities as they become due, or (b) the realizable value of the corporation's assets would thereby be less than the aggregate of its liabilities. C-3 APPENDIX D DELAWARE GENERAL CORPORATION LAW SECTION 262 APPRAISAL RIGHTS (a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to Section 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder's shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in one or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to Section 251 (other than a merger effected pursuant to Section 251(g) of this title, Section 252, Section 254, Section 257, Section 258, Section 263 or Section 264 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of Section 251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to Section 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders; D-1 c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph. (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under Section 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable. (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsection (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of such stockholder's shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of such stockholder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such stockholder's shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to Section 228 or Section 253 of this title, each constituent corporation, either before the effective date of the merger or consolidation or within ten days thereafter, shall notify each of the holders of any class or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this section; provided that, if the notice is given on or after the effective date of the merger or consolidation, such notice shall be given by the surviving or resulting corporation to all such holders of any class or D-2 series of stock of a constituent corporation that are entitled to appraisal rights. Such notice may, and, if given on or after the effective date of the merger or consolidation, shall, also notify such stockholders of the effective date of the merger or consolidation. Any stockholder entitled to appraisal rights may, within twenty days after the date of mailing of such notice, demand in writing from the surviving or resulting corporation the appraisal of such holder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such holder's shares. If such notice did not notify stockholders of the effective date of the merger or consolidation, either (i) each such constituent corporation shall send a second notice before the effective date of the merger or consolidation notifying each of the holders of any class or series of stock of such constituent corporation that are entitled to appraisal rights of the effective date of the merger or consolidation or (ii) the surviving or resulting corporation shall send such a second notice to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to appraisal rights and who has demanded appraisal of such holder's shares in accordance with this subsection. An affidavit of the secretary or assistant secretary or of the transfer agent of the corporation that is required to give either notice that such notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of determining the stockholders entitled to receive either notice, each constituent corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given, provided, that if the notice is given on or after the effective date of the merger or consolidation, the record date shall be such effective date. If no record date is fixed and the notice is given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw such stockholder's demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after such stockholder's written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been D-3 reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted such stockholder's certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that such stockholder is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. D-4 (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of such stockholder's demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. D-5 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers. Article VII of the Registrant's Articles of Incorporation provides that no director or officer of the Registrant shall be personally liable to the Registrant or any of its shareholders for damages for breach of fiduciary duty as a director or officer, except that such provision will not eliminate or limit the liability of a director or officer for any act or omission which involves intentional misconduct, fraud or a knowing violation of law or for the payment of any dividend in violation of Section 78.300 of the Nevada Revised Statutes. Section 78.7532 of the Nevada Revised Statutes permits the Registrant to indemnify its directors, officers, employees and agents if such person acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, has no reasonable cause to believe his conduct was unlawful. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, the corporation must provide indemnification against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense. Section 43 of the Registrant's Bylaws provides that the Registrant shall provide indemnification to Registrant's officers, directors and employees to the fullest extent permitted under the Nevada General Corporation Law. Item 21. Exhibits and Financial statement schedules. (a) Exhibits. The following is a complete list of exhibits filed as part of this registration statement and which are incorporated in this document. Exhibit No. Document - ---------- ------- 2.1 Agreement and Plan of Merger dated August 31, 1999.(3) 2.2 First Amendment to Agreement and Plan of Merger dated December 30, 1999.(4) 2.3 Amended and Restated Agreement and Plan of Merger (draft dated August __, 2000). 3.1 Articles of Incorporation.(1) 3.2 Certificate of Amendment to the Articles of Incorporation filed on June 23, 1993.(1) 3.3 Certificate of Amendment to the Articles of Incorporation filed on June 29, 1993.(1) 3.4 Plan of Recapitalization.(1) 3.5 Certificate of Amendment to the Articles of Incorporation filed on July 5, 1994.(1) 3.6 Certificate of Amendment to the Articles of Incorporation filed on December 19, 1994.(1) II-1 3.7 Certificate of Amendment to Article IV of the Articles of Incorporation as filed with the Nevada Secretary of State, increasing the authorized shares of common stock of Registrant to 40,000,000 shares, $0.10 par value.(5) 3.8 Certificate of Change in Number of Authorized Shares of Common Stock dated November 18, 1998.(1) 3.9 Bylaws as amended and restated.(1) 3.10 Amended and Restated Articles of Incorporation in the form proposed to be amended. 3.11 Amendment to the Certificate of Designation of Series B 5% PIK Cumulative Convertible Preferred Stock.(6) 5.1 Opinion of Alan W. Peryam, LLC as to legality of Pease common and preferred stock.(2) 5.2 Opinion of McManus Thomson as to certain matters of Canadian law(2). 8.1 Opinion of Haynes and Boone, LLP as to the tax consequences of the proposed merger under the tax laws of the United States.(2) 8.2 Opinion of Feleski Flynn as to the tax consequences of the proposed merger under the tax laws of Canada.(2) 10.1 1993 Stock Option Plan.(1) 10.2 1994 Employee Stock Option Plan.(1) 10.3 Employment Agreement effective December 27, 1994 between Pease Oil and Gas Company and Patrick J. Duncan.(7) 10.4 Agreement between Beta Capital Group, Inc., and Pease Oil and Gas Company dated March 9, 1996.(1) 10.5 Form of Warrants issued to Beta Capital Group, Inc.(1) 10.6 1996 Stock Option Plan.(1) 10.7 1997 Long Term Incentive Option Plan (1) 10.8 Preferred Stock Investment Agreement dated December 31, 1997.(1) 10.9 Exploration Agreement dated 1/1/97 between Parallel Petroleum Corporation, Sue-Ann Production Company, TAC Resources, Inc., Allegro Investments, Inc., Beta Oil and Gas Company, Pease Oil and Gas Company, Meyer Financial Services, Inc., Four-Way Texas, LLC regarding the Ganado Prospect (1) 10.10 Retirement, Severance and Termination of Employment Agreement from James N. Burkhalter dated 1/1/98 (1) 10.11 Severance and Termination of Employment Agreement effective December 7, 1998 between Willard H. Pease, Jr. and Pease Oil and Gas Company.(1) 10.12 Confirmation of Employment Contract effective January 11, 1998 between Patrick J. Duncan and Pease Oil and Gas Company.(1) 10.13 Engagement Letter of San Jacinto Securities, Inc. dated September 4, 1998 with Pease Oil and Gas Company.(1) II-2 10.14 Securities Purchase Agreement between Carpatsky Petroleum Inc. and Bellwether Exploration Company, dated December 30, 1999, with exhibits. 10.15 Bellwether/Carptsky Employment Agreement with Lex Texas dated June 1, 2000. 23.1 Consent of HEIN + ASSOCIATES LLP with respect to Pease. 23.2 Consent of Ryder Scott Company, L.P. 23.3 Consent of Alan W. Peryam, LLC (included with Exhibits 5.1).(2) 23.4 Consent of Haynes and Boone, LLP (included with Exhibits 5.1 and 8.1).(2) 23.5 Consent of McManus Thomson (included with Exhibit 5.3).(2) 23.6 Consent of Houlihan Smith & Company, Inc.(2) 23.7 Consent of Feleski Flynn (Canadian counsel).(2) 23.8 Consent of Vasil Kisil & Partners.(2) 23.9 Consent of Netherland, Sewell & Associates, Inc. 24 Power of Attorney 27.1 Financial Data Schedule-Pease Oil and Gas Company 27.2 Financial Data Schedule-Carpatsky Petroleum Inc. 99 Letter dated 28 April 2000 to Registrant and Carpatsky Petroleum, Inc. from Vasil Kisil & Partners and referenced Carpatsky agreements 1-13. - --------------- (1) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. (2) To be filed by amendment. (3) Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K dated September 13, 1999. (4) Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K dated December 31, 1999. (5) Incorporated by reference to Exhibit 3(i) to Registrant's Form 8-K dated June 11, 1997. (6) Incorporated by reference to Exhibit 3.2 to Registrant's Form 8-K dated December 3, 1997. (7) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999. (b) Financial Statement Schedules. Schedules have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information is included in the financial statements or notes thereto. Item 22. Undertakings. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant II-3 has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant undertakes to respond to requests for information that is incorporated by reference into the prospectus under Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned Registrant undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it become effective. II-4 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Grand Junction, state of Colorado on August 11, 2000. PEASE OIL AND GAS COMPANY (Registrant) By: /s/ Patrick J. Duncan --------------------------------- Patrick J. Duncan, President Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Patrick J. Duncan President and director August 11, 2000 - ----------------------- (Principal Executive Patrick J. Duncan Officer, Principal Financial and Accounting Officer Director August 11, 2000 Steve A. Antry Director August 11, 2000 Stephen L. Fischer Director August 11, 2000 Homer C. Osborne Director August 11, 2000 James C. Ruane Director August 11, 2000 slemons F. Walker By: /s/ Patrick J. Duncan ------------------------ Attorney-in-Fact II-5 This registration statement constitutes the Management Information Circular of Carpatsky Petroleum Inc. provided to shareholders of Carpatsky Petroleum Inc. in connection with the solicitation of proxies for use at the special meeting of shareholders of Carpatsky Petroleum Inc. described herein. The following certificate is provided to shareholders of Carpatsky Petroleum Inc. only under the requirements of the Securities Act (Alberta). To The Shareholders of Carpatsky Petroleum Inc. The foregoing contains no untrue statement of a material fact and does not omit to state a material fact that is required to state or that is necessary to make a statement not misleading in light of the circumstances in which it was made. /s/ Doug Manner /s/ Robert Bensh Douglas G. Manner Robert Bensh Chief Executive Officer Chief Operating Officer II-6 EXHIBIT INDEX Exhibit No. Document - ---------- ------- 2.1 Agreement and Plan of Merger dated August 31, 1999.(3) 2.2 First Amendment to Agreement and Plan of Merger dated December 30, 1999.(4) 2.3 Amended and Restated Agreement and Plan of Merger (draft dated August __, 2000). 3.1 Articles of Incorporation.(1) 3.2 Certificate of Amendment to the Articles of Incorporation filed on June 23, 1993.(1) 3.3 Certificate of Amendment to the Articles of Incorporation filed on June 29, 1993.(1) 3.4 Plan of Recapitalization.(1) 3.5 Certificate of Amendment to the Articles of Incorporation filed on July 5, 1994.(1) 3.6 Certificate of Amendment to the Articles of Incorporation filed on December 19, 1994.(1) 3.7 Certificate of Amendment to Article IV of the Articles of Incorporation as filed with the Nevada Secretary of State, increasing the authorized shares of common stock of Registrant to 40,000,000 shares, $0.10 par value.(5) 3.8 Certificate of Change in Number of Authorized Shares of Common Stock dated November 18, 1998.(1) 3.9 Bylaws as amended and restated.(1) 3.10 Amended and Restated Articles of Incorporation in the form proposed to be amended. 3.11 Amendment to the Certificate of Designation of Series B 5% PIK Cumulative Convertible Preferred Stock.(6) 5.1 Opinion of Alan W. Peryam, LLC as to legality of Pease common and preferred stock.(2) 5.2 Opinion of McManus Thomson as to certain matters of Canadian law(2). 8.1 Opinion of Haynes and Boone, LLP as to the tax consequences of the proposed merger under the tax laws of the United States.(2) 8.2 Opinion of Feleski Flynn as to the tax consequences of the proposed merger under the tax laws of Canada.(2) 10.1 1993 Stock Option Plan.(1) 10.2 1994 Employee Stock Option Plan.(1) 10.3 Employment Agreement effective December 27, 1994 between Pease Oil and Gas Company and Patrick J. Duncan.(7) 10.4 Agreement between Beta Capital Group, Inc., and Pease Oil and Gas Company dated March 9, 1996.(1) 10.5 Form of Warrants issued to Beta Capital Group, Inc.(1) 10.6 1996 Stock Option Plan.(1) 10.7 1997 Long Term Incentive Option Plan (1) 10.8 Preferred Stock Investment Agreement dated December 31, 1997.(1) 10.9 Exploration Agreement dated 1/1/97 between Parallel Petroleum Corporation, Sue-Ann Production Company, TAC Resources, Inc., Allegro Investments, Inc., Beta Oil and Gas Company, Pease Oil and Gas Company, Meyer Financial Services, Inc., Four-Way Texas, LLC regarding the Ganado Prospect (1) 10.10 Retirement, Severance and Termination of Employment Agreement from James N. Burkhalter dated 1/1/98 (1) 10.11 Severance and Termination of Employment Agreement effective December 7, 1998 between Willard H. Pease, Jr. and Pease Oil and Gas Company.(1) 10.12 Confirmation of Employment Contract effective January 11, 1998 between Patrick J. Duncan and Pease Oil and Gas Company.(1) 10.13 Engagement Letter of San Jacinto Securities, Inc. dated September 4, 1998 with Pease Oil and Gas Company.(1) 10.14 Securities Purchase Agreement between Carpatsky Petroleum Inc. and Bellwether Exploration Company, dated December 30, 1999, with exhibits. 10.15 Bellwether/Carptsky Employment Agreement with Lex Texas dated June 1, 2000. 23.1 Consent of HEIN + ASSOCIATES LLP with respect to Pease. 23.2 Consent of Ryder Scott Company, L.P. 23.3 Consent of Alan W. Peryam, LLC (included with Exhibits 5.1).(2) 23.4 Consent of Haynes and Boone, LLP (included with Exhibits 5.1 and 8.1).(2) 23.5 Consent of McManus Thomson (included with Exhibit 5.3).(2) 23.6 Consent of Houlihan Smith & Company, Inc.(2) 23.7 Consent of Feleski Flynn (Canadian counsel).(2) 23.8 Consent of Vasil Kisil & Partners.(2) 23.9 Consent of Netherland, Sewell & Associates, Inc. 24 Power of Attorney 27.1 Financial Data Schedule-Pease Oil and Gas Company 27.2 Financial Data Schedule-Carpatsky Petroleum Inc. 99 Letter dated 28 April 2000 to Registrant and Carpatsky Petroleum, Inc. from Vasil Kisil & Partners and referenced Carpatsky agreements 1-13. - --------------- (1) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. (2) To be filed by amendment. (3) Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K dated September 13, 1999. (4) Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K dated December 31, 1999. (5) Incorporated by reference to Exhibit 3(i) to Registrant's Form 8-K dated June 11, 1997. (6) Incorporated by reference to Exhibit 3.2 to Registrant's Form 8-K dated December 3, 1997. (7) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999. EX-2.2 2 0002.txt FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER Final Execution Copy FIRST AMENDMENT TO MERGER AGREEMENT This first amendment (the "Amendment") to the Merger Agreement is entered into on this 3rd day of January, 2000, by and among Pease Oil and Gas Company, a Nevada corporation ("Pease"), its wholly owned Delaware subsidiary CPI Acquisition Corp. ("CPI Acquisition") and Carpatsky Petroleum Inc., an Alberta corporation ("Carpatsky"), and evidences the following: WHEREAS, Pease, CPI Acquisition and Carpatsky have entered into an Agreement and Plan of Merger ("Merger Agreement"), dated August 31, 1999, providing for, among other things, the continuance of Carpatsky into a newly formed Delaware corporation ("New Carpatsky"), and the merger of CPI Acquisition with and into New Carpatsky; WHEREAS, capitalized terms used herein have the meaning given to them in the Merger Agreement, unless otherwise provided herein; WHEREAS, Carpatsky and Bellwether Exploration Company, a Delaware corporation ("Bellwether"), have entered into a Securities Purchase Agreement, of even date herewith, ("the "Purchase Agreement"), pursuant to which Bellwether has agreed to purchase, and Carpatsky has agreed to issue and sell, a newly created series of Carpatsky convertible preferred shares (the "Carpatsky Preferred Shares"), having the rights, preferences and privileges as set forth in the Articles of Amendment attached as Exhibit A to the Purchase Agreement; WHEREAS, among other things, the Carpatsky Preferred Shares will grant to Bellwether the right to cast a majority of the votes cast at a meeting of Carpatsky shareholders; WHEREAS, in connection with the issuance of such Carpatsky Preferred Shares, (i) the parties to the Merger Agreement desire to make certain changes to the Merger Agreement to provide for the treatment of the Carpatsky Preferred Shares in the Redomestication and Merger and (ii) Pease desires to consent to the issuance of the Carpatsky Preferred Stock as required by the Merger Agreement; NOW, THEREFORE, the parties hereto, for good and valuable consideration, the receipt and sufficiency of which is acknowledged, and desiring to be legally bound, do hereby agree as follows: 1 ARTICLE I. CONSENT TO PURCHASE AGREEMENT Section 1.1 Consent of Pease and CPI Acquisition. Pease and CPI Acquisition acknowledge receipt of a copy of the Purchase Agreement and hereby consent to the issuance of the Carpatsky Preferred Stock and the other transactions contemplated by the Purchase Agreement. The issuance of the Preferred Stock pursuant to and other transactions contemplated by the Purchase Agreement shall not be a "Competing Transaction" as defined in the Merger Agreement. ARTICLE II. AMENDMENTS TO MERGER AGREEMENT Section 2.1 Amendment to Recitals of the Merger Agreement. The Section of the Merger Agreement entitled "RECITALS" is hereby amended to read in its entirety as follows: RECITALS A. Upon the terms and subject to the conditions of this Agreement, on the Effective Time (as hereinafter defined) and in accordance with the Business Corporations Act (Alberta) ("ABCA") and the General Corporation Law of the State of Delaware ("Delaware Law"), Carpatsky will effect a continuance into Delaware by filing with the Secretary of State of Delaware a Certificate of Domestication and a Certificate of Incorporation in accordance with Section 388 of the Delaware Law (the "Redomestication"), subject to the right of holders of common shares, without par value ("Old Carpatsky Common Stock") and the holders of convertible preferred shares, series A, without par value ("Old Carpatsky Preferred Shares") (each such dissenting holder, a "Dissenting Old Carpatsky Stockholder") to seek an appraisal of the fair value thereof as provided in Section 184 of the ABCA, and (i) each share of Old Carpatsky Common Stock, issued and outstanding prior to the effective time of the Redomestication not owned by Carpatsky or any subsidiary of Carpatsky, will be converted into one share of common stock, $.01 par value ("New Carpatsky Common Stock"), of Carpatsky Petroleum, Inc., a corporation redomesticated in the State of Delaware ("New Carpatsky") (Old Carpatsky Common Stock and New Carpatsky Common Stock are sometimes referred to herein collectively as "Carpatsky Common Stock"); (ii) each Old Carpatsky Preferred Share, issued and outstanding prior to the effective time of the Redomestication not owned by Carpatsky or any subsidiary of Carpatsky, will be converted into 1.073 shares of convertible preferred stock, series A, $.01 par value ("New Carpatsky Preferred Stock"), of New Carpatsky having the rights, preferences and privileges set forth in the certificate of designation attached to the First Amendment to Merger Agreement dated December 30, 1999 (the "First Amendment to Merger Agreement") as 2 Exhibit A (Old Carpatsky Preferred Shares and New Carpatsky Preferred Stock are sometimes referred to herein collectively as "Carpatsky Preferred Stock"); and (iii) each outstanding warrant, option or other right to acquire Old Carpatsky Common Stock shall be converted into an equivalent right to acquire New Carpatsky Common Stock on the terms and conditions provided for in such warrant, option or other right. B. Concurrently with the Redomestication, Acquisition Corp., upon the terms and subject to the conditions of this Agreement and in accordance with the Delaware Law, will merge with and into New Carpatsky (the "Merger"), and pursuant thereto, each share of New Carpatsky Common Stock, issued and outstanding immediately prior to the Effective Time (as defined herein) of the Merger, not owned directly or indirectly by Carpatsky or Pease or their respective subsidiaries, will be converted at the Effective Time into the right to receive 0.57842 shares of common stock, par value $.01 per share of Pease ("Pease Common Stock"), and each share of New Carpatsky Preferred Stock will be converted into one share of convertible preferred stock, series A, par value $0.01 per share of Pease ("New Pease Preferred Stock") having the rights, preferences and privileges set forth in Exhibit B to the First Amendment to Merger Agreement, subject to the right of holders of such shares of New Carpatsky Common Stock and New Carpatsky Preferred Stock (each, a "Dissenting New Carpatsky Stockholder" and together with the Dissenting Old Carpatsky Stockholders, collectively, the "Dissenting Carpatsky Stockholders") to seek an appraisal of the fair value thereof as provided in Section 262 of Delaware Law, and each share of common stock, $.01 per share par value, of Acquisition Corp. ("Acquisition Corp. Common Stock") issued and outstanding immediately prior the Effective Time, will be converted at the Effective Time into one share of New Carpatsky Common Stock. C. Pursuant to the provisions of those certain letter agreements by and between Pease and the holders (the "Pease Preferred Stockholders") of all of the issued and outstanding shares of Series B 5% PIK Cumulative Convertible Preferred Stock, par value $.01 per share ("Pease Preferred Stock"), of even date herewith in substantially the form of Exhibit A hereto (the "Pease Preferred Stockholder Agreements"), at the Effective Time and subject to the provisions of Article II hereof, each share of Pease Preferred Stock issued and outstanding immediately prior to the Effective Time (excluding any Pease Preferred Stock held in treasury or owned by Pease or any direct or indirect subsidiary of Pease immediately prior to the Effective Time which shall be canceled and extinguished) shall be exchanged (the "Exchange") into the right to receive 8,865,665 shares of Pease Common Stock (the "Pease Preferred Stock Exchange Ratio"). 3 D. Following the consummation of the Merger, the fully diluted ownership of the common stock of the Surviving Corporation will be: Number Percent Pease Common Stockholders 1,688,698 1.65% Pease Preferred Stockholders 8,865,665 8.66% Pease Option and Warrant holders 393,811 .38% Carpatsky Common Stockholders 44,959,557 43.91% Carpatsky Preferred Stockholders 28,920,984 28.25% Carpatsky Warrant holders 17,448,263 17.04% Carpatsky Option holders 115,684 .11% ------------- ----------- 102,392,662 100.0% E. In the Purchase Agreement (as defined in the Amendment) Bellwether has agreed to vote for the Redomestication and Merger, subject to the terms and conditions of the Merger Agreement, and when Bellwether votes for the Redomestication and Merger it will no longer be able to exercise its dissenters rights of appraisal; F. The Board of Directors of Pease has determined that the Exchange and the Merger, as amended by the First Amendment to Merger Agreement, are consistent with and in furtherance of the long-term business strategy of Pease and are fair to, and in the best interests of, Pease and its stockholders and has approved and adopted this Agreement, including the issuance of Pease Common Stock, and the other transactions contemplated hereby. G. The Board of Directors of Carpatsky has determined that the Redomestication and Merger, as amended by the First Amendment to Merger Agreement, are consistent with and in furtherance of the long-term business strategy of Carpatsky and are fair to, and in the best interests of, Carpatsky and its stockholders and has approved and adopted this Agreement and the transactions contemplated hereby. H. For federal income tax purposes, it is intended that the Redomestication, the Exchange and the Merger qualify as a tax-free reorganizations under the relevant provisions of the United States Internal Revenue Code of 1986, as amended (the "Code"). Section 2.2 Amendment to Article II of the Merger Agreement. Article II of the Merger Agreement entitled "CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES" is hereby amended to read in its entirety as follows: 4 ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES Section 2.01 Merger Consideration; Conversion and Cancellation of Securities. At the Effective Time, by virtue of the Redomestication and Merger and without any action on the part of Carpatsky, New Carpatsky, Pease, Acquisition Corp. or their respective stockholders: (a) Subject to the other provisions of this Article II, (i) each share of New Carpatsky Common Stock issued and outstanding immediately prior to the Effective Time (excluding any Carpatsky Common Stock described in Section 2.01(c) of this Agreement and shares held by Dissenting Carpatsky Stockholders) shall be converted into the right to receive 0.57842 shares of Pease Common Stock (the "Carpatsky Common Stock Exchange Ratio"); (ii) each share of New Carpatsky Preferred Stock issued and outstanding immediately prior to the Effective Time (excluding any Carpatsky Preferred Stock described in Section 2.01(c) of this Agreement and shares held by Dissenting Carpatsky Stockholders) shall be converted into the right to receive one share of New Pease Preferred Stock (the "Carpatsky Preferred Stock Exchange Ratio"); and (iii) each share of Acquisition Corp. Common Stock issued and outstanding at the Effective Time shall be converted into the right to receive one share of New Carpatsky Common Stock. The Carpatsky Common Stock Exchange Ratio, the Carpatsky Preferred Stock Exchange Ratio and the Pease Preferred Stock Exchange Ratio are referred to herein collectively as the "Exchange Ratios". Notwithstanding the foregoing, except as contemplated by this Agreement, if between the date of this Agreement and the Effective Time the outstanding shares of Old or New Carpatsky Common Stock, Old Carpatsky Preferred Shares, New Carpatsky Preferred Stock or Pease Common Stock or Pease Preferred Stock shall have been changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, conversion, recapitalization, split, combination or exchange of shares, the Exchange Ratios shall be correspondingly adjusted to reflect such stock dividend, subdivision, reclassification, conversion, recapitalization, split, combination or exchange of shares. (b) Subject to the other provisions of this Article II, the rights to acquire shares of Carpatsky Common Stock previously granted and to be granted pursuant to the Carpatsky Options (as hereinafter defined) and the Carpatsky Warrants (as hereinafter defined) and to certain other persons and in the amounts identified in Schedule 4.03(b)(i) of the Carpatsky Disclosure Schedule (as hereinafter defined) shall be adjusted as of and at the Effective 5 Time, in accordance with the provisions of such agreements, to reflect the Carpatsky Common Stock Exchange Ratio. (c) Notwithstanding any provision of this Agreement to the contrary, each share of Carpatsky Common Stock or Carpatsky Preferred Stock held in the treasury of Carpatsky and each share of Carpatsky Common Stock or Carpatsky Preferred Stock owned by Pease or Acquisition Corp., respectively, or any direct or indirect wholly owned subsidiary of Carpatsky or of Pease, immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof and no payment shall be made with respect thereto. (d) Subject to the provisions of Section 2.01(f), all shares of Carpatsky Common Stock (other than shares of New Carpatsky Common Stock held by Pease at the Effective Time), Carpatsky Preferred Stock, Pease Preferred Stock and Acquisition Corp. Common Stock shall cease to be outstanding and shall automatically be canceled and retired, and each certificate previously evidencing Carpatsky Common Stock, Carpatsky Preferred Stock and Pease Preferred Stock immediately prior to the Effective Time (the "Converted Shares" or "Converted Share Certificates," as the case may be) shall thereafter represent the right to receive, subject to Section 2.02(g) of this Agreement, that number of shares of Pease Common Stock or New Pease Preferred Stock determined pursuant to Section 2.01(a) hereof or, if applicable, cash pursuant to Sections 2.01(f) or 2.02(f) of this Agreement (the "Merger Consideration"). The holders of Converted Share Certificates shall cease to have any rights with respect to such Converted Shares except as otherwise provided herein or by law. Such Converted Share Certificates shall be exchanged for certificates evidencing whole shares of Pease Common Stock or New Pease Preferred Stock upon the surrender of such Converted Share Certificates in accordance with the provisions of Section 2.02 of this Agreement, without interest. No fractional shares of Pease Common Stock or New Pease Preferred Stock shall be issued in connection with the Merger and, in lieu thereof, a cash payment shall be made pursuant to Section 2.02(f) of this Agreement. Each share of Acquisition Corp. Common Stock shall be automatically converted into one share of New Carpatsky Common Stock. (e) All shares of Pease Common Stock and New Pease Preferred Stock issued to the former holders of Carpatsky Common Stock, Carpatsky Preferred Stock and Pease Preferred Stock in the Merger shall be registered under the Securities Act of 1933, as amended (the "Securities Act"). (f) Notwithstanding anything in this Agreement to the contrary, any issued and outstanding shares of capital stock of Carpatsky held by a Dissenting Carpatsky Stockholder who has not voted in favor of nor consented to the Redomestication or the Merger and who complies with all the provisions of the ABCA or Delaware Law concerning the right of holders of such stock to dissent from the Redomestication or the Merger and to require appraisal of their shares, shall not be converted as described in Section 2.01(a) but shall become, at the Effective Time, by virtue of the Merger and without any further action, the right to receive such consideration as may be determined to be due to such Dissenting Carpatsky Stockholder pursuant to the ABCA or Delaware 6 Law, as the case may be; provided, however, that shares of Carpatsky Common Stock or Carpatsky Preferred Stock outstanding immediately prior to the Effective Time and held by a Dissenting Carpatsky Stockholder who shall, after the Effective Time, withdraw his demand for appraisal or lose his right of appraisal, in either case pursuant to the ABCA or Delaware Law, as the case may be, shall be deemed to be converted as of the Effective Time, into the right to receive Pease Common Stock or New Pease Preferred Stock, respectively. Section 2.02 Exchange and Surrender of Certificates. (a) Subject to Section 2.02(h) below, as of the Effective Time, Pease shall deposit, or shall cause to be deposited with American Securities Transfer & Trust, Inc., 12039 West Alameda Parkway, Lakewood, CO 80228 (the "US Exchange Agent") and, if required by regulatory authorities, CIBC Mellon Trust Company (the "Canadian Exchange Agent"; the US Exchange and the Canadian Exchange Agent are collectively referred to herein as the "Exchange Agents"), for the benefit of the holders of Converted Share Certificates, for exchange in accordance with this Article II, the Merger Consideration, together with any dividends, distributions or payments pursuant to Section 2.02(e) with respect thereto (hereinafter referred to as the "Exchange Fund"). (b) As soon as reasonably practicable after the Effective Time, the Exchange Agents shall mail to each holder of record of shares of Carpatsky Common Stock, Carpatsky Preferred Stock and Pease Preferred Stock who have not exchanged their Converted Share Certificates as contemplated by Section 2.02(h), immediately prior to the Effective Time a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Converted Share Certificates shall pass, only upon delivery of the Converted Share Certificates to the Exchange Agents, and which shall be in such form and have such other provisions as Pease may reasonably specify) and instructions for use in effecting the surrender of the Converted Share Certificates in exchange for certificates representing shares of Pease Common Stock or New Pease Preferred Stock issuable pursuant to Section 2.01 in exchange for such Converted Share Certificates. Upon surrender of a Converted Share Certificate for cancellation to the Exchange Agents, together with such letter of transmittal, duly executed, the holder of such Converted Share Certificate shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of Pease Common Stock or New Pease Preferred Stock (as the case may be) which such holder has the right to receive in exchange for the Converted Share Certificate surrendered pursuant to the provisions of this Article II (after taking into account all Converted Shares then held by such holder), and the Converted Share Certificates so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Carpatsky Common Stock, Carpatsky Preferred Stock or Pease Preferred Stock which is not registered in the transfer records of Carpatsky or Pease as the case may be, a certificate representing the proper number of shares of Pease Common Stock or New Pease Preferred Stock may be issued to a transferee if the Converted Share Certificate representing such Carpatsky Common Stock, Carpatsky Preferred Stock or Pease Preferred Stock is presented to the Exchange Agents, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock 7 transfer taxes have been paid. Until surrendered as contemplated by this Section 2.02, each Converted Share Certificate shall be deemed at any time after the Effective Time to represent only the Pease Common Stock or New Pease Preferred Stock into which the Converted Shares represented by such Converted Share Certificate have been converted as provided in this Article II and the right to receive upon such surrender cash in lieu of any fractional shares of Pease Common Stock or New Pease Preferred Stock as contemplated by Section 2.02(f). (c) After the Effective Time, there shall be no further registration of transfers of Carpatsky Common Stock, Carpatsky Preferred Stock or Pease Preferred Stock. If, after the Effective Time, certificates representing shares of Carpatsky Common Stock, Carpatsky Preferred Stock or Pease Preferred Stock are presented to Pease or the Exchange Agents, they shall be canceled and exchanged for the Merger Consideration provided for in this Agreement in accordance with the procedures set forth herein. (d) Any portion of the Merger Consideration or the Exchange Fund made available to the Exchange Agents pursuant to Section 2.02(a) that remains unclaimed by the holders of shares of Carpatsky Common Stock, Carpatsky Preferred Stock or Pease Preferred Stock one year after the Effective Time shall be returned to Pease upon demand, and any such holder who has not exchanged its shares of Carpatsky Common Stock, Carpatsky Preferred Stock or Pease Preferred Stock in accordance with this Section 2.02 prior to that time shall thereafter look only to Pease for payment of the Merger Consideration in respect of its shares of Carpatsky Common Stock, Carpatsky Preferred Stock or Pease Preferred Stock. Notwithstanding the foregoing, Pease shall not be liable to any holder of Converted Shares for any amount paid to a public official pursuant to applicable abandoned property, escheat or similar laws. (e) No dividends, interest or other distributions with respect to shares of Pease Common Stock or New Pease Preferred Stock shall be paid to the holder of any unsurrendered Converted Share Certificates unless and until such Converted Share Certificates are surrendered as provided in this Section 2.02. Upon such surrender, Pease shall pay, without interest, all dividends and other distributions payable in respect of such shares of Pease Common Stock or New Pease Preferred Stock on a date subsequent to, and in respect of a record date after, the Effective Time. (f) No certificates or scrip evidencing fractional shares of Pease Common Stock or New Pease Preferred Stock shall be issued upon the surrender for exchange of Converted Share Certificates, and such fractional share interests shall not entitle the owner thereof to any rights as a stockholder of Pease. In lieu of any such fractional interests, each holder of a Converted Share Certificate shall, upon surrender of such certificate for exchange pursuant to this Article II, be paid an amount in cash (without interest), rounded to the nearest cent, determined by multiplying the last sale price of the Pease Common Stock in the Over-the-Counter market prior to the Closing Date by the fractional share of Pease Common Stock or New Pease Preferred Stock (on an as converted basis) to which such holder would otherwise be entitled (after taking into account all Converted Shares held of record by such holder at the Effective Time). 8 (g) Pease shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any former holder of Carpatsky Common Stock, Carpatsky Preferred Stock or Pease Preferred Stock such amounts as Pease (or any affiliate thereof) is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Pease, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of the Carpatsky Common Stock, Carpatsky Preferred Stock or Pease Preferred Stock in respect of which such deduction and withholding was made. In the event the amount withheld is insufficient so to satisfy the withholding obligations of Pease, (or any affiliate thereof), such former stockholder shall reimburse Pease (or such affiliate), at its request, the amount of any such insufficiency. Notwithstanding the foregoing, no such withholding shall be required with respect to any shares of Carpatsky Preferred Stock or New Pease Preferred Stock issued or issuable in the Merger to Bellwether Exploration Company ("Bellwether"). (h) Bellwether shall be entitled, at its election, to attend the Closing of the Merger and to tender at such Closing to Pease the Converted Share Certificates held by Bellwether duly endorsed for transfer to New Carpatsky, and shall be entitled to receive certificates registered in Bellwether's name representing the number of shares of Pease Common Stock and New Pease Preferred Stock to which Bellwether is entitled under this Agreement. Section 2.03 Amendment to Article III. The following amendments are hereby made to the Sections of Article III of the Merger Agreement as indicated: (a) Section 3.03(d) is amended to add the words "and New Pease Preferred Stock" after the words "Pease Common Stock" in the first sentence thereof. (b) Section 3.04 is amended to add the words "and New Pease Preferred Stock" after the words "Pease Common Stock" in the first and second sentence thereof. (c) Section 3.12(b) is amended to add the words "or New Pease Preferred Stock" after the words "Pease Common Stock." Section 2.04 Amendment to Article IV. The following amendments are hereby made to the Sections of Article IV of the Merger Agreement as indicated: (a) Section 4.03(a) is amended to replace the number 77,728,263 for 40,796,246; and to add the words ", and an unlimited number of shares of Old Carpatsky Preferred Stock" after the words "issued and outstanding". (b) Section 4.03(b) is amended to add the words "or Preferred Stock" after the words "Common Stock" in the second sentence thereof. 9 (c) Section 4.04 is amended to add the words "and Preferred Stock" after the words "Common Stock" in the second sentence thereof. (d) Section 4.11(c) is amended to add the words "and Old Carpatsky Preferred Shares" after the words "Old Carpatsky Common Stock" in the two locations where such words appear, to add the words "and New Pease Preferred Stock" after the words "Pease Common Stock" in the two locations where such words appear and to add the words "and Preferred Stock" after the words "Common Stock" in the two locations where such words appear in the parenthetical to such sentence. (e) Section 4.12 is amended to add the words "and Preferred Shares voting together as a class" after "Old Carpatsky Common Stock" in clause (i) and to add the words "and Preferred Stock voting together as a class" after the words "New Carpatsky Common Stock" in clause (ii). Section 2.05 Amendment to Article VI. Section 6.02(a) of Article VI of the Merger Agreement is hereby amended to add the words "and New Pease Preferred Stock" after the words "Pease Common Stock" in the first and second sentences thereof. Section 2.06 Amendment to Article VII. The following amendments are hereby made to the Sections of Article VII the Merger Agreement as indicated. (a) The first sentence of Section 7.01(b) is amended to read as follows: "(b) Stockholder Approval. The Amendment, this Agreement and the issuance of the Pease shares described in this Agreement in connection with the Merger shall have been approved and adopted by the requisite vote of the stockholders of Pease, and the Redomestication, this Agreement and the Merger shall have been approved and adopted by the requisite vote of the stockholders of Carpatsky." (b) Section 7.02(e)(2) is amended to read in its entirety as follows: "(2) Carpatsky shall have received the written opinion of Messrs. Feleski Flynn, Calgary, Alberta dated the Closing Date, the effect that the tax consequences to Canadian stockholder of Carpatsky under Canadian income tax laws shall be consistent with the description thereof included in Form S-4 at the time the Form S-4 is declared effective." (c) Section 7.02(h) and 7.03(g), requiring "comfort letters" from auditors of Pease and Carpatsky, are deleted. (d) Section 7.03(h) is amended to add the words "and Preferred Stock" after the words "Carpatsky Common Stock" in the two places where such words appear. 10 (e) Section 7.03(l) is amended to read in its entirety as follows: "(l) Carpatsky Financial Statements. Carpatsky shall have completed and obtained audits of its financial statements for the years ended December 31, 1997 and 1998 and completed its financial statements for the fiscal periods ended September 30, 1998 and 1999, all by December 31, 1999. Assuming such financial statements have accounted for the Ukrainian joint ventures using proportionate consolidation, they shall reflect the following (to the extent provided below): (i) A working capital deficit for Carpatsky, on a proportionately consolidated basis, as of September 30, 1999 no greater than $5,000,000. For purposes of this calculation, any amount received under Carpatsky's $1.0 private placement of securities may be added to current assets as at September 30, 1999 and debt actually converted into equity may be deleted as at September 30, 1999, on a pro forma basis. (ii) Total long term liabilities, on a proportionately consolidated basis, as at September 30, 1999 shall not exceed $550,000 (excluding accrued interest payable). (iii) The balance due to the joint account as at September 30, 1999 for Carpatsky's working interest in the RC Field in the Ukraine does not exceed $6.75 million. (iv) Carpatsky's net revenue interest in the RC Field shall not be less than 19.7% on October 1, 1999. (v) Carpatsky or its subsidiaries is delivering gas for sale by Closing of the Merger under such reasonable gas sales arrangements as Pease shall have approved in writing, which approval shall not be unreasonably withheld. (vi) Carpatsky, its subsidiaries or Ukrainian joint ventures have commenced receiving payment for at least 90% of the gas sold pursuant to 7.03(l)(v) above by the Closing of the Merger and that reasonable assurance can be given that future payments will continue to be received. (vii) [This subsection has been deleted.]" Section 2.07 Amendment to Section 8.01 of Article VIII. Section 8.01 is amended by changing the words "December 31, 1999" to "March 31, 2000" and changing the words "March 31, 2000" to "April 30, 2000" and the last clause of such section, ("to receive . . . merger") shall be deleted. 11 ARTICLE III. AMENDMENTS TO EXHIBITS AND SCHEDULES Section 3.1 Amendments to Exhibits. The following Exhibits to the Merger Agreement are added or amended as indicated below: (a) The following Exhibits to are added to the Merger Agreement in the form attached to this Amendment: Exhibit A Preferred Stock Designation for New Carpatsky Exhibit B Preferred Stock Designation for Pease (b) The following amendments are made to the Exhibits attached to the Merger Agreement: Exhibit A to the Merger Agreement (changes to Pease preferred stockholder agreements) is amended as reflected on the attachment hereto. Exhibit B-4 is amended to read in its entirety as Exhibit B-4 attached hereto. Section 3.2 Amendment to Schedules. The following Schedules to the Merger Agreement are hereby amended as follows: (a) Schedule 1.05 is amended to read in its entirety as Schedule 1.05 attached hereto. (b) Schedules 4.01, 4.03(b)(iii), 4.07(ii), 4.08, 4.11, 4.17 and 4.19 are amended to add the following language: "The letter from Krug & Sobel, LLC addressed to the Pease Board of Directors, dated August 19, 1999, is incorporated into this Schedule and the entire text of such letter is deemed to be included herein." (c) Schedules 4.01(c), 4.03(b)(iii), 4.03(c)B (regarding Melman Shares), 4.08 and 4.11 (regarding taxes), 4.19(A) are modified or replaced as reflected on the attachments to this Amendment: ARTICLE IV. GENERAL PROVISIONS Section 4.1 No Other Changes. Except as otherwise changed by this Amendment, the Merger Agreement shall remain in full force and effect, unaltered by this Amendment. 12 Section 4.2 Multiple Counterparts. This Amendment may be executed in multiple counterparts, each of which shall be an original, and all of which taken together shall be one instrument. IN WITNESS WHEREOF, this Amendment was executed as of the date above first written. PEASE OIL AND GAS COMPANY By: ---------------------------------------- Name: Patrick J. Duncan Title: President CPI ACQUISISTION CORP. By: ---------------------------------------- Name: Title: CARPATSKY PETROLEUM, INC. By: ---------------------------------------- Name: David A. Melman Title: Chief Corporate Officer 13 Exhibit A to First Amendment to Merger Agreement dated December 30, 1999 [NEW CARPATSKY PETROLEUM, INC.] CERTIFICATE OF DESIGNATION OF CONVERTIBLE PREFERRED STOCK, SERIES A SETTING FORTH THE POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF SUCH PREFERRED STOCK Pursuant to the Delaware General Corporation Law, [NEW CARPATSKY PETROLEUM, INC.], a Delaware corporation (the "Corporation"), DOES HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors of the Corporation by the Articles of Incorporation of the Corporation (the "Charter"), the Board of Directors of the Corporation on [ ], 2000 duly adopted the following resolution creating a series of Preferred Stock designated as Convertible Preferred Stock, Series A and such resolution has not been modified and is in full force and effect on the date hereof: RESOLVED that, pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of the Charter, a series of authorized Preferred Stock, without par value, of the Corporation are hereby created and that the designation and number of shares thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series of Preferred Stock, and the qualifications, limitations and restrictions thereof are as follows: Section 1. Designation and Number. (a) The shares of such series of Preferred Stock shall be designated as "Convertible Preferred Stock, Series A" ("Preferred Stock"). The number of shares initially constituting the Preferred Stock shall be 102,410,000 shares, which number may be increased or decreased by the Board of Directors without a vote of stockholders; provided, however, that such number may not be decreased below the number of then outstanding shares of such series of Preferred Stock. (b) The Preferred Stock shall, with respect to rights on liquidation, dissolution or winding up, rank prior to all other classes and series of Junior Stock of the Corporation now or hereafter authorized including, without limitation, the Common Stock. (c) Capitalized terms used herein and not otherwise defined shall have the meanings set forth in Section 10 below. Section 2. Dividends and Distributions. In the event that the Corporation shall declare a cash dividend to holders of Common Stock, then the Board of Directors shall declare, and the holder of each share of Preferred Stock shall be entitled to receive, a dividend in an amount equal to the amount of such dividend received by a holder of the number of shares of Common Stock for which such share of Preferred Stock is convertible on the record date for such dividend. Any such amount shall be paid to the holders of shares of Preferred Stock at the same time such dividend is made to holders of Common Stock. The holders of shares of Preferred Stock shall not be entitled to receive any dividends or other distributions except as provided herein. Section 3. Voting Rights. In addition to any voting rights provided by law and except where only a specified class or series of shares is entitled to vote, the holders of shares of Preferred Stock shall have the following voting rights: (a) Except as otherwise required by applicable law and so long as the Preferred Stock is outstanding, each share of Preferred Stock shall entitle the holder thereof to vote, in person or by proxy or written consent, at a special or annual meeting of stockholders or in connection with any stockholder action taken in lieu of a meeting of stockholders, on all matters voted on by holders of Common Stock, including the election of directors, voting together as a single class with all other shares entitled to vote thereon. With respect to any such vote, each share of Preferred Stock shall entitle the holder thereof to cast one vote for each share of Preferred Stock standing in his or her name on the transfer books of the Corporation as of the record date for determining the stockholders of the Corporation eligible to vote on any such matters. (b) Unless the consent or approval of a greater number of shares shall then be required by law, the affirmative vote of the holders of at least 66-2/3% of the outstanding shares of Preferred Stock, voting separately as a single class, in person or by proxy, at a special or annual meeting of stockholders called for the purpose, shall be necessary to (i) authorize, adopt or approve an amendment to the Charter that would increase or decrease the par value of the shares of Preferred Stock, or alter or change the powers, preferences or special rights of the shares of Preferred Stock, (ii) amend, alter or repeal the Charter so as to affect the shares of Preferred Stock adversely, including, without limitation, by granting any voting right to any holder of notes, bonds, debentures or other debt obligations of the Corporation, or (iii) authorize, increase the authorized number of shares of, or issue (including on conversion or exchange of any convertible or exchangeable securities or by reclassification) any additional shares of Preferred Stock except under Section 9. (c) For so long as the shares of Preferred Stock are outstanding, the Corporation shall not issue any capital stock entitling the holder thereof to vote generally under ordinary circumstances in the election of directors, other than (i) Common Stock and (ii) Preferred Stock issued pursuant to Section 9. Section 4. Redemption. The Corporation shall not have any right to redeem any shares of Preferred Stock. Section 5. Reacquired Shares. Any shares of Preferred Stock converted, exchanged, redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares of Preferred Stock shall upon their cancellation become authorized but unissued shares of preferred stock. Section 6. Liquidation, Dissolution or Winding Up. (a) If the Corporation shall commence a voluntary case under the United States bankruptcy laws or any applicable bankruptcy, insolvency or similar law of any other country, or consent to the entry of an order for relief in an involuntary case under any such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due (any such event, a "Voluntary Liquidation Event"), or if a decree or order for relief in respect of the Corporation shall be entered by a court having jurisdiction in the premises in an involuntary case under the United States bankruptcy laws or any applicable bankruptcy, insolvency or similar law of any other country, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and on account of any such event the Corporation shall liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve or wind up, the holders of the Preferred Stock shall be entitled to receive the Liquidation Amount prior to any payment being made or any property of the Corporation being distributed to the holders of the Common Stock or the holders of any Junior Stock. After payment to the holders of the Preferred Stock of the Liquidation Amount, the holders of the Preferred Stock shall be entitled to receive (rateably with the holders of the Common Shares) for each share of Preferred Stock held, the amount which would have been received by the Holder of such Preferred Stock if on the record date for such distribution, the holder of such Preferred Stock had converted such Preferred Stock into the number of shares of Common Stock into which such Preferred Stock was convertible on the record date for such distribution. (b) Neither the consolidation or merger of the Corporation with or into any other Person nor the sale or other distribution to another Person of all or substantially all the assets, property or business of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 6. Section 7. Conversion. (a) Subject to the terms and conditions set forth herein, each share of Preferred Stock shall be convertible into a number of fully paid and non-assessable shares of Common Stock as is equal, subject to Section 7(g), to a fraction, the numerator of which shall be the Common Stock Conversion Number and the denominator of which shall be the number of shares of Preferred Stock issued and outstanding on the date of conversion. The Common Stock Conversion Number shall initially be 50,000,000, and shall be subject to adjustment as set forth in this Section. Such conversion right may only be exercised by the holders of a majority of the outstanding shares of Preferred Stock surrendering certificates ("Surrendered Certificates") representing a majority of the outstanding shares of Preferred Stock to the Corporation at any time during usual business hours at its principal place of business to be maintained by it, accompanied by written notice that the holders of a majority of the outstanding shares of Preferred Stock elect to convert such shares and specifying the name or names (with address) in which a certificate or certificates for shares of Common Stock are to be issued and (if so required by the Corporation) by a written instrument or instruments of transfer in form reasonably satisfactory to the Corporation duly executed by the holder or its duly authorized legal representative and transfer tax stamps or funds therefor, if required pursuant to Section 7(j). Upon such surrender, all shares of Preferred Stock shall automatically be converted into Common Stock as provided in this Section. Notwithstanding the foregoing provisions or anything set forth herein or in the Certificate, any shares of Preferred Stock remaining outstanding on December 28, 2004 shall be and be deemed to have been converted into Common Stock at the Conversion Number then in effect. (b) As promptly as practicable after the surrender, as herein provided, of shares of Preferred Stock for conversion pursuant to Section 7(a), the Corporation shall deliver to all holders of Preferred Stock a written notice informing such holders (i) that the holders of a majority of the outstanding shares of Preferred Stock have delivered their certificates for such shares to the Corporation in satisfactory form for conversion into Common Shares pursuant to the requirements of this Section 7, (ii) that, as result of such delivery, all outstanding Preferred Stock has been converted into the right to receive Common Stock and (iii) of the Common Stock Conversion Number and instructing such holders to surrender the certificates representing their Preferred Stock to the Corporation in the manner specified in Section 7(a) above in order to receive certificates representing the Common Stock deliverable upon the conversion of their Preferred Stock. As promptly as practicable after the surrender of any certificates representing Preferred Stock in accordance with the requirements of this Section 7, the Corporation shall deliver to or upon the written order of the holder of such shares so surrendered a certificate or certificates representing the number of fully paid and non-assessable shares of Common Stock into which such shares of Preferred Stock may be or have been converted in accordance with the provisions of this Section 7. Subject to the following provisions of this paragraph and of Section 7(d), such conversion shall be deemed to have been made immediately prior to the close of business on the date that such shares of Preferred Stock shall have been surrendered in satisfactory form for conversion, and the Person or Persons entitled to receive the Common Stock deliverable upon conversion of such shares of Preferred Stock shall be treated for all purposes as having become the record holder or holders of such Common Stock at such appropriate time, and such conversion shall be based on the Common Stock Conversion Number in effect at such time; provided, however, that no surrender shall be effective to constitute the Person or Persons entitled to receive the Common Stock deliverable upon such conversion as the record holder or holders of such Common Stock while the share transfer books of the Corporation shall be closed (but not for any period in excess of five days), but such surrender shall be effective to constitute the Person or Persons entitled to receive such Common Stock as the record holder or holders thereof for all purposes immediately prior to the close of business on the next succeeding day on which such share transfer books are open, and such conversion shall be deemed to have been made at, and shall be based on the Common Stock Conversion Number in effect at, such time on such next succeeding day. (c) To the extent permitted by law, when shares of Preferred Stock are converted, all dividends declared and unpaid on the Preferred Stock so converted to the date of conversion shall be immediately due and payable and must accompany the shares of Common Stock issued upon such conversion. (d) The Common Stock Conversion Number shall be subject to adjustment as follows: (i) In case the Corporation shall at any time or from time to time (A) pay a dividend or make a distribution on the outstanding shares of Common Stock in capital stock (which, for purposes of this Section 7(d) shall include, without limitation, any dividends or distributions in the form of options, warrants or other rights to acquire capital stock) of the Corporation, (B) subdivide the outstanding shares of Common Stock into a larger number of shares, (C) combine the outstanding shares of Common Stock into a smaller number of shares, or (D) issue any shares of its capital stock in a reclassification of the Common Stock then, and in each such case, the Common Stock Conversion Number in effect immediately prior to such event shall be adjusted to equal the Common Stock Conversion Number in effect immediately prior to such action multiplied by a fraction, the numerator of which is the number of shares of Common Stock outstanding after the action described in clauses (A) through (D) and the denominator of which is the number of shares of Common Stock outstanding immediately prior to such action. An adjustment made pursuant to this Section 7(d)(i) shall become effective retroactively (A) in the case of any such dividend or distribution, to a date immediately following the close of business on the record date for the determination of holders of Common Stock entitled to receive such dividend or distribution or (B) in the case of any such subdivision, combination or reclassification, to the close of business on the day upon which such corporate action becomes effective. (ii) In case the Corporation shall at any time or from time to time issue shares of Common Stock (or securities convertible into or exchangeable for Common Stock, or any options, warrants or other rights to acquire shares of Common Stock) for a consideration per share less than the Current Market Price per share of Common Stock then in effect at the record date or issuance date, as the case may be (the "Date"), referred to in the following sentence (treating the consideration per share of any security convertible or exchangeable or exercisable into Common Stock as equal to (A) the sum of the price for such security convertible, exchangeable or exercisable into Common Stock plus any additional consideration payable (without regard to any anti-dilution adjustments) upon the conversion, exchange or exercise of such security into Common Stock divided by (B) the number of shares of Common Stock initially underlying such convertible, exchangeable or exercisable security), then, and in each such case, the Common Stock Conversion Number in effect shall be adjusted by multiplying the Common Stock Conversion Number in effect on the day immediately prior to the Date by a fraction (x) the numerator of which shall be the sum of the number of shares of Common Stock outstanding on the Date plus the number of additional shares of Common Stock issued or to be issued (or the maximum number into which such convertible or exchangeable securities initially may convert or exchange or for which such options, warrants or other rights initially may be exercised) and (y) the denominator of which shall be the sum of the number of shares of Common Stock outstanding on the Date plus the number of shares of Common Stock which the aggregate consideration for the total number of such additional shares of Common Stock (or securities convertible into or exchangeable for Common Stock, or any options, warrants or other rights to acquire shares of Common Stock) plus the aggregate amount of any additional consideration initially payable (without regard to any anti-dilution adjustments) upon such conversion, exchange or exercise of such security into Common Stock would purchase at the Current Market Price per share of Common Stock on the Date. Such adjustment shall be made whenever such shares, securities, options, warrants or other rights are issued, and shall become effective retroactively to a date immediately following the close of business (i) in the case of issuance to stockholders of the Corporation, as such, on the record date for the determination of stockholders entitled to receive such shares, securities, options, warrants or other rights and (ii) in all other cases, on the date ("issuance date") of such issuance; provided that: (A) the determination as to whether an adjustment is required to be made pursuant to this Section 7(d)(ii) shall be made upon the issuance of such shares or such convertible or exchangeable securities, options, warrants or other rights; (B) if any convertible or exchangeable securities, options, warrants or other rights (or any portions thereof) which shall have given rise to an adjustment pursuant to this Section 7(d)(ii) shall have expired or terminated without the exercise thereof and/or if by reason of the terms of such convertible or exchangeable securities, options, warrants or other rights there shall have been an increase or increases or decrease or decreases, with the passage of time or otherwise, in the price payable upon the exercise or conversion thereof, then the Common Stock Conversion Number hereunder shall be readjusted (but to no greater extent than originally adjusted) on the basis of (x) eliminating from the computation any additional shares of Common Stock corresponding to such convertible or exchangeable securities, options, warrants or other rights as shall have expired or terminated, (y) treating the additional shares of Common Stock, if any, actually issued or issuable pursuant to the previous exercise of such convertible or exchangeable securities, options, warrants or other rights as having been issued for the consideration actually received and receivable therefor and (z) treating any of such convertible or exchangeable securities, options, warrants or other rights which remain outstanding as being subject to exercise or conversion on the basis of such exercise or conversion price as shall be in effect at the time of adjustment; and (C) no adjustment in the Common Stock Conversion Number shall be made pursuant to this Section 7(d)(ii) as a result of any issuance of securities by the Corporation in respect of which an adjustment to the Common Stock Conversion Number is made pursuant to Section 7(d)(i). (iii) In the case the Corporation, at any time or from time to time, shall take any action affecting its Common Stock similar to or having an effect similar to any of the actions described in any of Section 7(d)(i) and Section 7(d)(ii), or Section 7(h) (but not including any action described in any such Section) and the Board of Directors of the Corporation in good faith determines that it would be equitable in the circumstances to adjust the Common Stock Conversion Number as a result of such action, then, and in each such case, the Common Stock Conversion Number shall be adjusted in such manner and at such time as the Board of Directors of the Corporation in good faith determines would be equitable in the circumstances (such determination to be evidenced in a resolution, a certified copy of which shall be mailed to the holders of the Preferred Stock). (iv) Notwithstanding anything herein to the contrary, no adjustment under this Section 7(d) shall be made upon the grant of options to employees or directors of the Corporation pursuant to benefit plans approved by the Board of Directors of the Corporation or upon the issuance of shares of Common Stock upon exercise of such options if the exercise price thereof was not less than the Market Price of the Common Stock on the date such options were granted. (e) If the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, and shall thereafter and before the distribution to stockholders thereof legally abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment in the Common Stock Conversion Number then in effect shall be required by reason of the taking of such record. (f) Upon any increase or decrease in the Common Stock Conversion Number, then, and in each such case, the Corporation promptly shall deliver to each registered holder of Preferred Stock at least 10 Business Days prior to effecting any of the foregoing transactions a certificate, signed by the President or a Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated and specifying the increased or decreased Common Stock Conversion Number then in effect following such adjustment. (g) No fractional shares or scrip representing fractional shares shall be issued upon the conversion of any shares of Preferred Stock. If more than one share of Preferred Stock shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Preferred Stock so surrendered. If the conversion of any share or shares of Preferred Stock results in a fraction, an amount equal to such fraction multiplied by the Current Market Price of the Common Stock on the Business Day preceding the day of conversion shall be paid to such holder in cash by the Corporation. (h) In case of any capital reorganization or reclassification or other change of outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value), or in case of any consolidation or merger of the Corporation with or into another Person (other than a consolidation or merger in which the Corporation is the resulting or surviving Person and which does not result in any reclassification or change of outstanding Common Stock), or in case of any sale or other disposition to another Person of all or substantially all of the assets of the Corporation (any of the foregoing, a "Transaction"), the Corporation, or such successor or purchasing Person, as the case may be, shall execute and deliver to each holder of Preferred Stock at least 10 Business Days prior to effecting any of the foregoing Transactions a certificate that the holder of each share of Preferred Stock then outstanding shall have the right thereafter to convert such share of Preferred Stock into the kind and amount of shares of stock or other securities (of the Corporation or another issuer, the "Other Securities")) or property or cash receivable upon such Transaction by a holder of the number of shares of Common Stock into which such share of Preferred Stock could have been converted immediately prior to such Transaction. Such certificate shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. If, in the case of any such Transaction, the Other Securities, cash or property receivable thereupon by a holder of Common Stock includes shares of stock or other securities of a Person other than the successor or purchasing Person and other than the Corporation, which controls or is controlled by the successor or purchasing Person or which, in connection with such Transaction, issues Other Securities, other property or cash to holders of Common Stock, then such certificate also shall be executed by such Person, and such Person shall, in such certificate, specifically acknowledge the obligations of such successor or purchasing Person and acknowledge its obligations to issue such Other Securities, other property or cash to the holders of Preferred Stock upon conversion of the shares of Preferred Stock as provided above. The provisions of this Section 7(h) and any equivalent thereof in any such certificate similarly shall apply to successive Transactions. (i) The Corporation shall at all times reserve and keep available for issuance upon the conversion of the Preferred Stock, such number of its authorized but unissued shares of Common Stock as will from time to time be sufficient to permit the conversion of all outstanding shares of Preferred Stock, and shall take all action required to increase the authorized number of shares of Common Stock if at any time there shall be insufficient authorized but unissued shares of Common Stock to permit such reservation or to permit the conversion of all outstanding shares of Preferred Stock. (j) The issuance or delivery of certificates for Common Stock upon the conversion of shares of Preferred Stock shall be made without charge to the converting holder of shares of Preferred Stock for such certificates or for any tax in respect of the issuance or delivery of such certificates or the securities represented thereby, and such certificates shall be issued or delivered in the respective names of, or (subject to compliance with the applicable provisions of federal and state securities laws) in such names as may be directed by, the holders of the shares of Preferred Stock converted; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the holder of the shares of Preferred Stock converted, and the Corporation shall not be required to issue or deliver such certificate unless or until the Person or Persons requesting the issuance or delivery thereof shall have paid to the Corporation the amount of such tax or shall have established to the reasonable satisfaction of the Corporation that such tax has been paid. (k) If an offer is made to purchase Common Stock and the offer must, by reason of applicable securities legislation or the requirements of a stock exchange on which the Common Stock is listed, be made to all or substantially all holders of Common Stock located in a province of Canada in which the requirement applies, the holders of Preferred Stock shall be given the opportunity to participate in the offer through conversion of the Preferred Stock into Common Stock; unless (i) an identical offer (in terms of price per security and percentage of outstanding securities to be taken upon, exclusive of securities owned immediately prior to the bid by the offeror, or associates or affiliates of the offeror, and in all other material respects) is made concurrently to purchase Preferred Stock, which offer has no condition attached other than the right not to take up and pay for securities tendered if no securities are purchased pursuant to the offer for Common Stock; or (ii) less than 50% of the Common Stock outstanding immediately prior to the offer, other than Common Stock owned by the offeror, or associates or affiliates of the offeror, are deposited pursuant to the offer. Section 8. Certain Remedies. Any registered holder of Preferred Stock shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Certificate of Designation and to enforce specifically the terms and provisions of this Certificate of Designation in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which such holder may be entitled at law or in equity. Section 9. Additional Shares of Preferred Stock. While any shares of Preferred Stock are outstanding, the Corporation shall not issue any additional shares of Common Stock or convertible securities, rights, warrants, options or other commitments to issue Common Stock unless, prior to such issuance, the Corporation declares and pays a dividend on the Preferred Stock of a number of shares of Preferred Stock equal to the number of shares of Common Stock being issued or the maximum number of shares of Common Stock which may be issued pursuant to such convertible securities, rights, warrants, options or commitments; provided, however, the Corporation shall not be required to issue additional shares of Preferred Stock in connection with the issuance of Common Stock pursuant to agreements described in a Schedule to the Purchase Agreement. Section 10. Definitions. For the purposes of this Certificate of Designation of Preferred Stock, the following terms shall have the meanings indicated: "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law or executive order to close. "Common Stock" shall mean and include the Common Stock, without par value, of the Corporation and each other class of capital stock of the Corporation that does not have a preference over any other class of capital stock of the Corporation as to dividends or upon liquidation, dissolution or winding up of the Corporation and, in each case, shall include any other class of capital stock of the Corporation into which such stock is reclassified or reconstituted. "Current Market Price" per share shall mean, on any date specified herein for the determination thereof, (a) the average daily Market Price of the Common Stock for those days during the period of 20 days, ending on such date, which are Trading Days, and (b) if the Common Stock is not then listed or admitted to trading on any national securities exchange or quoted in the over-the-counter market, the Market Price on such date. "Junior Stock" shall mean any capital stock of the Corporation ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Stock including, without limitation, the Common Stock. "Liquidation Amount" with respect to a share of Preferred Stock shall mean the sum of (a) all declared and unpaid dividends on such Preferred Stock, and (b) the sum of $10.00 divided by the number of shares of Preferred Stock outstanding on the applicable date. "Market Price" shall mean, per share of Common Stock on any date specified herein: (a) the closing price per share of the Common Stock on the Alberta Stock Exchange or other principal Canadian stock exchange on which the Common Stock is traded, stated in U.S. dollars at the then current exchange ratio of Canadian dollars into U.S. dollars or (b) if there shall have been no trading on such date or if the Common Stock is not so designated, the average of the reported closing bid and asked prices of the Common Stock on such date as shown by any reputable dealer in Common Stock as selected by the Board of Directors of the Corporation. If none of (a) or (b) is applicable, Market Price shall mean a market price per share determined at the Corporation's expense by an appraiser chosen by the holders of a majority of the shares of Preferred Stock or, if no such appraiser is so chosen more than twenty business days after notice of the necessity of such calculation shall have been delivered by the Corporation to the holders of Preferred Stock, then by an appraiser chosen by the Corporation. "Person" shall mean any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, limited liability company, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger) of such entity. "Purchase Agreement" shall mean the Securities Purchase Agreement, dated December 30, 1999, between the Corporation and Bellwether Exploration Company. "Trading Day" shall mean a day on which the national securities exchanges are open for trading. IN WITNESS WHEREOF, CARPATSKY PETROLEUM, INC. has caused this Certificate to be duly executed in its corporate name on this [ ]th day of [ ], 2000. [NEW CARPATSKY PETROLEUM, INC.] By ------------------------------------- Name: Title: President ATTEST: By ---------------------------------- Name: Title: Secretary Exhibit B to First Amendment to Merger Agreement dated December 30, 1999 [PEASE OIL AND GAS COMPANY] CERTIFICATE OF DESIGNATION OF CONVERTIBLE PREFERRED STOCK, SERIES A SETTING FORTH THE POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF SUCH PREFERRED STOCK Pursuant to the Nevada Business Corporations Act, [PEASE OIL AND GAS COMPANY], a Nevada corporation (the "Corporation"), DOES HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors of the Corporation by the Articles of Incorporation of the Corporation (the "Charter"), the Board of Directors of the Corporation on [ ], 2000 duly adopted the following resolution creating a series of Preferred Stock designated as Convertible Preferred Stock, Series A and such resolution has not been modified and is in full force and effect on the date hereof: RESOLVED that, pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of the Charter, a series of authorized Preferred Stock, without par value, of the Corporation are hereby created and that the designation and number of shares thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series of Preferred Stock, and the qualifications, limitations and restrictions thereof are as follows: Section 1. Designation and Number. (a) The shares of such series of Preferred Stock shall be designated as "Convertible Preferred Stock, Series A" ("Preferred Stock"). The number of shares initially constituting the Preferred Stock shall be 102,410,000 shares, which number may be increased or decreased by the Board of Directors without a vote of stockholders; provided, however, that such number may not be decreased below the number of then outstanding shares of such series of Preferred Stock. (b) The Preferred Stock shall, with respect to rights on liquidation, dissolution or winding up, rank prior to all other classes and series of Junior Stock of the Corporation now or hereafter authorized including, without limitation, the Common Stock. 1 (c) Capitalized terms used herein and not otherwise defined shall have the meanings set forth in Section 10 below. Section 2. Dividends and Distributions. In the event that the Corporation shall declare a cash dividend to holders of Common Stock, then the Board of Directors shall declare, and the holder of each share of Preferred Stock shall be entitled to receive, a dividend in an amount equal to the amount of such dividend received by a holder of the number of shares of Common Stock for which such share of Preferred Stock is convertible on the record date for such dividend. Any such amount shall be paid to the holders of shares of Preferred Stock at the same time such dividend is made to holders of Common Stock. The holders of shares of Preferred Stock shall not be entitled to receive any dividends or other distributions except as provided herein. Section 3. Voting Rights. In addition to any voting rights provided by law and except where only a specified class or series of shares is entitled to vote, the holders of shares of Preferred Stock shall have the following voting rights: (a) Except as otherwise required by applicable law and so long as the Preferred Stock is outstanding, each share of Preferred Stock shall entitle the holder thereof to vote, in person or by proxy or written consent, at a special or annual meeting of stockholders or in connection with any stockholder action taken in lieu of a meeting of stockholders, on all matters voted on by holders of Common Stock, including the election of directors, voting together as a single class with all other shares entitled to vote thereon. With respect to any such vote, each share of Preferred Stock shall entitle the holder thereof to cast one vote for each share of Preferred Stock standing in his or her name on the transfer books of the Corporation as of the record date for determining the stockholders of the Corporation eligible to vote on any such matters. (b) Unless the consent or approval of a greater number of shares shall then be required by law, the affirmative vote of the holders of at least 66-2/3% of the outstanding shares of Preferred Stock, voting separately as a single class, in person or by proxy, at a special or annual meeting of stockholders called for the purpose, shall be necessary to (i) authorize, adopt or approve an amendment to the Charter that would increase or decrease the par value of the shares of Preferred Stock, or alter or change the powers, preferences or special rights of the shares of Preferred Stock, (ii) amend, alter or repeal the Charter so as to affect the shares of Preferred Stock adversely, including, without limitation, by granting any voting right to any holder of notes, bonds, debentures or other debt obligations of the Corporation, or (iii) authorize, increase the authorized number of shares of, or issue (including on conversion or exchange of any convertible or exchangeable securities or by reclassification) any additional shares of Preferred Stock except under Section 9. 2 (c) For so long as the shares of Preferred Stock are outstanding, the Corporation shall not issue any capital stock entitling the holder thereof to vote generally under ordinary circumstances in the election of directors, other than (i) Common Stock and (ii) Preferred Stock issued pursuant to Section 9. Section 4. Redemption. The Corporation shall not have any right to redeem any shares of Preferred Stock. Section 5. Reacquired Shares. Any shares of Preferred Stock converted, exchanged, redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares of Preferred Stock shall upon their cancellation become authorized but unissued shares of preferred stock. Section 6. Liquidation, Dissolution or Winding Up. (a) If the Corporation shall commence a voluntary case under the United States bankruptcy laws or any applicable bankruptcy, insolvency or similar law of any other country, or consent to the entry of an order for relief in an involuntary case under any such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due (any such event, a "Voluntary Liquidation Event"), or if a decree or order for relief in respect of the Corporation shall be entered by a court having jurisdiction in the premises in an involuntary case under the United States bankruptcy laws or any applicable bankruptcy, insolvency or similar law of any other country, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and on account of any such event the Corporation shall liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve or wind up, the holders of the Preferred Stock shall be entitled to receive the Liquidation Amount prior to any payment being made or any property of the Corporation being distributed to the holders of the Common Stock or the holders of any Junior Stock. After payment to the holders of the Preferred Stock of the Liquidation Amount, the holders of the Preferred Stock shall be entitled to receive (rateably with the holders of the Common Shares) for each share of Preferred Stock held, the amount which would have been received by the Holder of such Preferred Stock if on the record date for such distribution, the holder of such Preferred Stock had converted such Preferred Stock into the number of shares of Common Stock into which such Preferred Stock was convertible on the record date for such distribution. 3 (b) Neither the consolidation or merger of the Corporation with or into any other Person nor the sale or other distribution to another Person of all or substantially all the assets, property or business of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 6. Section 7. Conversion. (a) Subject to the terms and conditions set forth herein, each share of Preferred Stock shall be convertible into a number of fully paid and non-assessable shares of Common Stock as is equal, subject to Section 7(g), to a fraction, the numerator of which shall be the Common Stock Conversion Number and the denominator of which shall be the number of shares of Preferred Stock issued and outstanding on the date of conversion. The Common Stock Conversion Number shall initially be 50,000,000, and shall be subject to adjustment as set forth in this Section. Such conversion right may only be exercised by the holders of a majority of the outstanding shares of Preferred Stock surrendering certificates ("Surrendered Certificates") representing a majority of the outstanding shares of Preferred Stock to the Corporation at any time during usual business hours at its principal place of business to be maintained by it, accompanied by written notice that the holders of a majority of the outstanding shares of Preferred Stock elect to convert such shares and specifying the name or names (with address) in which a certificate or certificates for shares of Common Stock are to be issued and (if so required by the Corporation) by a written instrument or instruments of transfer in form reasonably satisfactory to the Corporation duly executed by the holder or its duly authorized legal representative and transfer tax stamps or funds therefor, if required pursuant to Section 7(j). Upon such surrender, all shares of Preferred Stock shall automatically be converted into Common Stock as provided in this Section. Notwithstanding the foregoing provisions or anything set forth herein or in the Certificate, any shares of Preferred Stock remaining outstanding on December 28, 2004 shall be and be deemed to have been converted into Common Stock at the Conversion Number then in effect. (b) As promptly as practicable after the surrender, as herein provided, of shares of Preferred Stock for conversion pursuant to Section 7(a), the Corporation shall deliver to all holders of Preferred Stock a written notice informing such holders (i) that the holders of a majority of the outstanding shares of Preferred Stock have delivered their certificates for such shares to the Corporation in satisfactory form for conversion into Common Shares pursuant to the requirements of this Section 7, (ii) that, as result of such delivery, all outstanding Preferred Stock has been converted into the right to receive Common Stock and (iii) of the Common Stock Conversion Number and instructing such holders to surrender the certificates representing their Preferred Stock to the Corporation in the manner specified in Section 7(a) above in order to receive certificates representing the Common Stock deliverable upon the conversion of their Preferred Stock. As promptly as practicable after the surrender of any certificates representing Preferred Stock in accordance with the requirements of this Section 7, the Corporation shall deliver to or upon the written order of the holder of such shares so surrendered a certificate or 4 certificates representing the number of fully paid and non-assessable shares of Common Stock into which such shares of Preferred Stock may be or have been converted in accordance with the provisions of this Section 7. Subject to the following provisions of this paragraph and of Section 7(d), such conversion shall be deemed to have been made immediately prior to the close of business on the date that such shares of Preferred Stock shall have been surrendered in satisfactory form for conversion, and the Person or Persons entitled to receive the Common Stock deliverable upon conversion of such shares of Preferred Stock shall be treated for all purposes as having become the record holder or holders of such Common Stock at such appropriate time, and such conversion shall be based on the Common Stock Conversion Number in effect at such time; provided, however, that no surrender shall be effective to constitute the Person or Persons entitled to receive the Common Stock deliverable upon such conversion as the record holder or holders of such Common Stock while the share transfer books of the Corporation shall be closed (but not for any period in excess of five days), but such surrender shall be effective to constitute the Person or Persons entitled to receive such Common Stock as the record holder or holders thereof for all purposes immediately prior to the close of business on the next succeeding day on which such share transfer books are open, and such conversion shall be deemed to have been made at, and shall be based on the Common Stock Conversion Number in effect at, such time on such next succeeding day. (c) To the extent permitted by law, when shares of Preferred Stock are converted, all dividends declared and unpaid on the Preferred Stock so converted to the date of conversion shall be immediately due and payable and must accompany the shares of Common Stock issued upon such conversion. (d) The Common Stock Conversion Number shall be subject to adjustment as follows: (i) In case the Corporation shall at any time or from time to time (A) pay a dividend or make a distribution on the outstanding shares of Common Stock in capital stock (which, for purposes of this Section 7(d) shall include, without limitation, any dividends or distributions in the form of options, warrants or other rights to acquire capital stock) of the Corporation, (B) subdivide the outstanding shares of Common Stock into a larger number of shares, (C) combine the outstanding shares of Common Stock into a smaller number of shares, or (D) issue any shares of its capital stock in a reclassification of the Common Stock then, and in each such case, the Common Stock Conversion Number in effect immediately prior to such event shall be adjusted to equal the Common Stock Conversion Number in effect immediately prior to such action multiplied by a fraction, the numerator of which is the number of shares of Common Stock outstanding after the action described in clauses (A) through (D) and the denominator of which is the number of shares of Common Stock outstanding immediately prior to such action. An adjustment made pursuant to this Section 7(d)(i) shall become effective retroactively (A) in the case of any such dividend or distribution, to a date immediately following the close of business on the record date for the 5 determination of holders of Common Stock entitled to receive such dividend or distribution or (B) in the case of any such subdivision, combination or reclassification, to the close of business on the day upon which such corporate action becomes effective. (ii) In case the Corporation shall at any time or from time to time issue shares of Common Stock (or securities convertible into or exchangeable for Common Stock, or any options, warrants or other rights to acquire shares of Common Stock) for a consideration per share less than the Current Market Price per share of Common Stock then in effect at the record date or issuance date, as the case may be (the "Date"), referred to in the following sentence (treating the consideration per share of any security convertible or exchangeable or exercisable into Common Stock as equal to (A) the sum of the price for such security convertible, exchangeable or exercisable into Common Stock plus any additional consideration payable (without regard to any anti-dilution adjustments) upon the conversion, exchange or exercise of such security into Common Stock divided by (B) the number of shares of Common Stock initially underlying such convertible, exchangeable or exercisable security), then, and in each such case, the Common Stock Conversion Number in effect shall be adjusted by multiplying the Common Stock Conversion Number in effect on the day immediately prior to the Date by a fraction (x) the numerator of which shall be the sum of the number of shares of Common Stock outstanding on the Date plus the number of additional shares of Common Stock issued or to be issued (or the maximum number into which such convertible or exchangeable securities initially may convert or exchange or for which such options, warrants or other rights initially may be exercised) and (y) the denominator of which shall be the sum of the number of shares of Common Stock outstanding on the Date plus the number of shares of Common Stock which the aggregate consideration for the total number of such additional shares of Common Stock (or securities convertible into or exchangeable for Common Stock, or any options, warrants or other rights to acquire shares of Common Stock) plus the aggregate amount of any additional consideration initially payable (without regard to any anti-dilution adjustments) upon such conversion, exchange or exercise of such security into Common Stock would purchase at the Current Market Price per share of Common Stock on the Date. Such adjustment shall be made whenever such shares, securities, options, warrants or other rights are issued, and shall become effective retroactively to a date immediately following the close of business (i) in the case of issuance to stockholders of the Corporation, as such, on the record date for the determination of stockholders entitled to receive such shares, securities, options, warrants or other rights and (ii) in all other cases, on the date ("issuance date") of such issuance; provided that: (A) the determination as to whether an adjustment is required to be made pursuant to this Section 7(d)(ii) shall be made upon the issuance of such shares or such convertible or exchangeable securities, options, warrants or other rights; (B) if any convertible or exchangeable 6 securities, options, warrants or other rights (or any portions thereof) which shall have given rise to an adjustment pursuant to this Section 7(d)(ii) shall have expired or terminated without the exercise thereof and/or if by reason of the terms of such convertible or exchangeable securities, options, warrants or other rights there shall have been an increase or increases or decrease or decreases, with the passage of time or otherwise, in the price payable upon the exercise or conversion thereof, then the Common Stock Conversion Number hereunder shall be readjusted (but to no greater extent than originally adjusted) on the basis of (x) eliminating from the computation any additional shares of Common Stock corresponding to such convertible or exchangeable securities, options, warrants or other rights as shall have expired or terminated, (y) treating the additional shares of Common Stock, if any, actually issued or issuable pursuant to the previous exercise of such convertible or exchangeable securities, options, warrants or other rights as having been issued for the consideration actually received and receivable therefor and (z) treating any of such convertible or exchangeable securities, options, warrants or other rights which remain outstanding as being subject to exercise or conversion on the basis of such exercise or conversion price as shall be in effect at the time of adjustment; and (C) no adjustment in the Common Stock Conversion Number shall be made pursuant to this Section 7(d)(ii) as a result of any issuance of securities by the Corporation in respect of which an adjustment to the Common Stock Conversion Number is made pursuant to Section 7(d)(i). (iii) In the case the Corporation, at any time or from time to time, shall take any action affecting its Common Stock similar to or having an effect similar to any of the actions described in any of Section 7(d)(i) and Section 7(d)(ii), or Section 7(h) (but not including any action described in any such Section) and the Board of Directors of the Corporation in good faith determines that it would be equitable in the circumstances to adjust the Common Stock Conversion Number as a result of such action, then, and in each such case, the Common Stock Conversion Number shall be adjusted in such manner and at such time as the Board of Directors of the Corporation in good faith determines would be equitable in the circumstances (such determination to be evidenced in a resolution, a certified copy of which shall be mailed to the holders of the Preferred Stock). (iv) Notwithstanding anything herein to the contrary, no adjustment under this Section 7(d) shall be made upon the grant of options to employees or directors of the Corporation pursuant to benefit plans approved by the Board of Directors of the Corporation or upon the issuance of shares of Common Stock upon exercise of such options if the exercise price thereof was not less than the Market Price of the Common Stock on the date such options were granted. (e) If the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, and shall thereafter and before the distribution to stockholders 7 thereof legally abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment in the Common Stock Conversion Number then in effect shall be required by reason of the taking of such record. (f) Upon any increase or decrease in the Common Stock Conversion Number, then, and in each such case, the Corporation promptly shall deliver to each registered holder of Preferred Stock at least 10 Business Days prior to effecting any of the foregoing transactions a certificate, signed by the President or a Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated and specifying the increased or decreased Common Stock Conversion Number then in effect following such adjustment. (g) No fractional shares or scrip representing fractional shares shall be issued upon the conversion of any shares of Preferred Stock. If more than one share of Preferred Stock shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Preferred Stock so surrendered. If the conversion of any share or shares of Preferred Stock results in a fraction, an amount equal to such fraction multiplied by the Current Market Price of the Common Stock on the Business Day preceding the day of conversion shall be paid to such holder in cash by the Corporation. (h) In case of any capital reorganization or reclassification or other change of outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value), or in case of any consolidation or merger of the Corporation with or into another Person (other than a consolidation or merger in which the Corporation is the resulting or surviving Person and which does not result in any reclassification or change of outstanding Common Stock), or in case of any sale or other disposition to another Person of all or substantially all of the assets of the Corporation (any of the foregoing, a "Transaction"), the Corporation, or such successor or purchasing Person, as the case may be, shall execute and deliver to each holder of Preferred Stock at least 10 Business Days prior to effecting any of the foregoing Transactions a certificate that the holder of each share of Preferred Stock then outstanding shall have the right thereafter to convert such share of Preferred Stock into the kind and amount of shares of stock or other securities (of the Corporation or another issuer, the "Other Securities")) or property or cash receivable upon such Transaction by a holder of the number of shares of Common Stock into which such share of Preferred Stock could have been converted immediately prior to such Transaction. Such certificate shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. If, in the case of any such Transaction, the Other Securities, cash or property receivable thereupon by a holder of Common Stock includes shares of stock or other securities of a Person other than the successor or purchasing Person and other than the Corporation, which controls or is controlled by the successor or purchasing Person or which, in connection with such Transaction, issues Other Securities, other property or cash to holders of Common Stock, then such certificate also shall be executed by 8 such Person, and such Person shall, in such certificate, specifically acknowledge the obligations of such successor or purchasing Person and acknowledge its obligations to issue such Other Securities, other property or cash to the holders of Preferred Stock upon conversion of the shares of Preferred Stock as provided above. The provisions of this Section 7(h) and any equivalent thereof in any such certificate similarly shall apply to successive Transactions. (i) The Corporation shall at all times reserve and keep available for issuance upon the conversion of the Preferred Stock, such number of its authorized but unissued shares of Common Stock as will from time to time be sufficient to permit the conversion of all outstanding shares of Preferred Stock, and shall take all action required to increase the authorized number of shares of Common Stock if at any time there shall be insufficient authorized but unissued shares of Common Stock to permit such reservation or to permit the conversion of all outstanding shares of Preferred Stock. (j) The issuance or delivery of certificates for Common Stock upon the conversion of shares of Preferred Stock shall be made without charge to the converting holder of shares of Preferred Stock for such certificates or for any tax in respect of the issuance or delivery of such certificates or the securities represented thereby, and such certificates shall be issued or delivered in the respective names of, or (subject to compliance with the applicable provisions of federal and state securities laws) in such names as may be directed by, the holders of the shares of Preferred Stock converted; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the holder of the shares of Preferred Stock converted, and the Corporation shall not be required to issue or deliver such certificate unless or until the Person or Persons requesting the issuance or delivery thereof shall have paid to the Corporation the amount of such tax or shall have established to the reasonable satisfaction of the Corporation that such tax has been paid. (k) If an offer is made to purchase Common Stock and the offer must, by reason of applicable securities legislation or the requirements of a stock exchange on which the Common Stock is listed, be made to all or substantially all holders of Common Stock located in a province of Canada in which the requirement applies, the holders of Preferred Stock shall be given the opportunity to participate in the offer through conversion of the Preferred Stock into Common Stock; unless (i) an identical offer (in terms of price per security and percentage of outstanding securities to be taken upon, exclusive of securities owned immediately prior to the bid by the offeror, or associates or affiliates of the offeror, and in all other material respects) is made concurrently to purchase Preferred Stock, which offer has no condition attached other than the right not to take up and pay for securities tendered if no securities are purchased pursuant to the offer for Common Stock; or 9 (ii) less than 50% of the Common Stock outstanding immediately prior to the offer, other than Common Stock owned by the offeror, or associates or affiliates of the offeror, are deposited pursuant to the offer. Section 8. Certain Remedies. Any registered holder of Preferred Stock shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Certificate of Designation and to enforce specifically the terms and provisions of this Certificate of Designation in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which such holder may be entitled at law or in equity. Section 9. Additional Shares of Preferred Stock. While any shares of Preferred Stock are outstanding, the Corporation shall not issue any additional shares of Common Stock or convertible securities, rights, warrants, options or other commitments to issue Common Stock unless, prior to such issuance, the Corporation declares and pays a dividend on the Preferred Stock of a number of shares of Preferred Stock equal to the number of shares of Common Stock being issued or the maximum number of shares of Common Stock which may be issued pursuant to such convertible securities, rights, warrants, options or commitments; provided, however, the Corporation shall not be required to issue additional shares of Preferred Stock in connection with the issuance of Common Stock pursuant to agreements described in a Schedule to the Purchase Agreement. Section 10. Definitions. For the purposes of this Certificate of Designation of Preferred Stock, the following terms shall have the meanings indicated: "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law or executive order to close. "Common Stock" shall mean and include the Common Stock, without par value, of the Corporation and each other class of capital stock of the Corporation that does not have a preference over any other class of capital stock of the Corporation as to dividends or upon liquidation, dissolution or winding up of the Corporation and, in each case, shall include any other class of capital stock of the Corporation into which such stock is reclassified or reconstituted. "Current Market Price" per share shall mean, on any date specified herein for the determination thereof, (a) the average daily Market Price of the Common Stock for those days during the period of 20 days, ending on such date, which are Trading Days, and (b) if the Common Stock is not then listed or 10 admitted to trading on any national securities exchange or quoted in the over-the-counter market, the Market Price on such date. "Junior Stock" shall mean any capital stock of the Corporation ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Stock including, without limitation, the Common Stock. "Liquidation Amount" with respect to a share of Preferred Stock shall mean the sum of (a) all declared and unpaid dividends on such Preferred Stock, and (b) the sum of $10.00 divided by the number of shares of Preferred Stock outstanding on the applicable date. "Market Price" shall mean, per share of Common Stock on any date specified herein: (a) the closing price per share of the Common Stock on the Alberta Stock Exchange or other principal Canadian stock exchange on which the Common Stock is traded, stated in U.S. dollars at the then current exchange ratio of Canadian dollars into U.S. dollars or (b) if there shall have been no trading on such date or if the Common Stock is not so designated, the average of the reported closing bid and asked prices of the Common Stock on such date as shown by any reputable dealer in Common Stock as selected by the Board of Directors of the Corporation. If none of (a) or (b) is applicable, Market Price shall mean a market price per share determined at the Corporation's expense by an appraiser chosen by the holders of a majority of the shares of Preferred Stock or, if no such appraiser is so chosen more than twenty business days after notice of the necessity of such calculation shall have been delivered by the Corporation to the holders of Preferred Stock, then by an appraiser chosen by the Corporation. "Person" shall mean any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, limited liability company, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger) of such entity. "Purchase Agreement" shall mean the Securities Purchase Agreement, dated December 30, 1999, between the Corporation and Bellwether Exploration Company. "Trading Day" shall mean a day on which the national securities exchanges are open for trading. 11 IN WITNESS WHEREOF, PEASE OIL AND GAS COMPANY has caused this Certificate to be duly executed in its corporate name on this [ ]th day of [ ], 2000. [PEASE OIL AND GAS COMPANY] By --------------------------------------- Name: Title: President ATTEST: By ------------------------------------- Name: Title: Secretary 12 Amended Exhibit A to Agreement and Plan of Merger dated August 31, 1999 [PEASE LETTERHEAD] August __, 1999 Each Holder of Series B Convertible Preferred Stock Re: Exchange Agreement and Irrevocable Proxy Gentlemen: This letter agreement ("Agreement") is intended to set forth the understandings, representations and agreements by and among Pease Oil and Gas Company, a Nevada corporation ("Company"), Carpatsky Petroleum, Inc., a corporation organized under the laws of the Province of Alberta, Canada ("Carpatsky"), and the undersigned holder (the "Holder") of the Company's Series B 5% PIK Cumulative Convertible Preferred Stock ("Series B Preferred") and is made with reference to the following agreed facts. A. Holder is the record and beneficial owner of the number of shares (the "Shares") of the Company's Series B Preferred set forth on Exhibit A attached hereto. There are 105,828 shares of Series B Preferred issued and outstanding. B. The Company and Carpatsky have entered into a Agreement and Plan of Merger dated as of August __, 1999, of which this Letter Agreement is Exhibit A (the "Merger Agreement"). C. The Merger Agreement provides that all outstanding Series B Preferred shall be exchanged for a total of 8,865,664 shares of Company common stock at the time of closing of the Merger Agreement. D. Under agreements dated effective May 24, 1999, the undersigned Holder and each other holder of outstanding Series B Preferred agreed not to buy or sell or to convert Company securities, including the Series B Preferred, until the earlier of: (i) closing of the Merger Agreement, (ii) termination or abandonment of the Merger Agreement by the parties, or (iii) November 15, 1999 (the "Lock-Up Agreement"). E. The Company, Carpatsky and the undersigned holder intend to set forth terms and conditions of the agreement of the Holder to exchange all shares of Series B Preferred held by Holder at the time of the closing of the Merger Agreement for shares of Company common stock, as set forth on Exhibit A. FOR CONSIDERATION, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Merger Agreement. The Company and Carpatsky shall diligently pursue the closing of the Merger Agreement and completion of the transactions described therein (the "Closing"). 2. Representations and Warranties to Holder. The Representations and Warranties of Pease as set forth in Article III of the Merger Agreement, and the Representations and Warranties of Carpatsky, as set forth in Article IV of the Merger Agreement, shall be extended to Holder and Holder shall be entitled to rely upon such representations and warranties to the same extent as if Holder was a party to the Merger Agreement. All such representations and warranties shall not survive the Closing except as provided in the Merger Agreement. 3. Exchange of Series B Preferred. At or before the Closing of the Merger Agreement, the Holder and each other holder of outstanding Series B Preferred shall exchange all Series B Preferred then held, together with all other dividend rights, conversion rights, voting rights or other rights which may be applicable to the Series B Preferred, for that number of shares of Company common stock set forth on Exhibit A attached hereto and incorporated herein by reference. At or before the Closing of the Merger Agreement, Holder shall deliver to the Company, for exchange, each certificate held by Holder representing Series B Preferred. At the time of exchange, and no later than the Closing of the Merger Agreement, the Company shall cause to be issued one certificate representing the appropriate number of shares of Company common stock as set forth on Exhibit A in exchange for Holder's Series B Preferred and the Series B Preferred shall be canceled. 4. Post-Merger Limitations. Holder agrees not to effect any sales of the Company common stock to be issued in exchange for the Series B Preferred in a manner which does not comply with applicable provisions of Rule 145 promulgated under the Securities Act of 1933. An appropriate legend reflecting this restriction may be placed on certificates representing the Company common stock to be issued in exchange for the Series B Preferred. 5. Termination of Certain Rights. Upon the completion of the Exchange, the rights and privileges of the Holder as described in the Preferred Stock Purchase Agreement dated effective December 31, 1997 and the Certificate of Designation of Series B 5% PIK Cumulative Convertible Preferred Stock, as amended, as filed with the Secretary of State of Nevada, which designated a total of 145,300 shares of the Company's Series B Preferred and set forth the rights and privileges applicable thereto (the "Series B Preferred Designation") shall be terminated. Following the Exchange, holders' rights as a security holder of the Company shall be as the holder of common stock of the Company and Company's Articles of Incorporation shall be amended to delete the Series B Preferred Designation. 2 6. Irrevocable Proxy. The undersigned Holder who holds the number of shares of Series B Preferred set forth on Exhibit A, hereby makes, constitutes and appoints the President of Pease Oil and Gas Company, or his designee, as the true and lawful attorney and proxy of the undersigned Holder, for, and in its name, place and stead, to attend any and all meetings of the shareholders of Pease Oil and Gas Company and to vote any and all shares of Series B 5% PIK Cumulative Convertible Preferred Stock of Pease Oil and Gas Company standing in the name of the undersigned Holder at any meeting of stockholders or any adjournments thereof for the following purposes only: (1) To vote to approve the Agreement and Plan of Merger dated effective August __, 1999 between Pease Oil and Gas Company and Carpatsky Petroleum, Inc. ("Merger Agreement"); (2) To approve the Amendment and Restatement of the Articles of Incorporation of the Company as contemplated by the Agreement and Plan of Reorganization; and (3) To approve, ratify and adopt any and all actions heretofore or hereafter taken by the Company and its management to implement the transactions contemplated by the Merger Agreement and this Agreement. The undersigned Holder confirms that this proxy is given in connection with a reorganization of Pease Oil and Gas Company and that this proxy is coupled with an interest, is binding on the Holder and its successors and assigns and is irrevocable while the Lock Up Agreement is in effect, as described in Section 8 below, provided, however, that this proxy shall be deemed canceled if the parties terminate the Merger Agreement before Closing. The undersigned Holder hereby represents and warrants that the execution, delivery and performance of this Agreement has been duly authorized and is a legally binding obligation of the Holder enforceable in accordance with its terms. The Holder hereby represents and acknowledges that it is familiar with the business and financial condition of the Company and Carpatsky and has had access to such information as it has requested to enable it to make an informed decision to acquire the Company common stock in exchange for its shares of Series B Preferred Stock. The Holder hereby represents and warrants that it is an "accredited investor," as defined in Rule 501 under the Securities Act of 1933, as amended, and hereby ratifies and confirms all that the said proxy lawfully may do or cause to be done by virtue of this authorization. 7. Other Series B Preferred Holders. This Agreement shall be effective and binding upon the Holder provided that holders of at least 95% of the outstanding Series B Preferred, as identified on Exhibit A, enter into this Agreement with the Company and Carpatsky. 3 8. Lock-Up Agreement. The Lock-Up Agreement between the Company and Holder shall remain in full force and effect and shall be enforceable in accordance with its terms, provided, that the date through which Holder shall not buy or sell or convert Series B Preferred shall be extended to the later of (i) Closing of the Merger Agreement, (ii) termination or abandonment of the Merger Agreement, or (iii) November 15, 1999. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of August __, 1999. PEASE OIL AND GAS COMPANY, a Nevada corporation By _________________________________ Patrick J. Duncan, President CARPATSKY PETROLEUM, INC. an Alberta, Canada corporation By _________________________________ Fred Hofheinz, Director and authorized signatory HOLDER: ------------------------------------ Name ------------------------------------ Signature ------------------------------------ Name and Title of Person Signing ------------------------------------ Number of Shares of Series B Preferred Held 4 EXHIBIT A Shares of Company Common Stock to be Issued and Shares of Exchange for Name of Holder Series B Preferred Held Series B Preferred - -------------- ----------------------- ------------------ Arbco Associates, L.P. 16,000 1,340,388 Kayne Anderson Non-Traditional Investments, L.P. 18,000 1,507,936 Offense Group Associates, L.P. 19,503 1,633,850 Opportunity Associates, L.P. 6,000 502,646 Marine Crew & Co. 14,000 1,172,840 Sandpiper & Co. 26,000 2,178,131 Howard Amster IRA 1,000 83,774 The Madav IX Foundation 2,000 167,549 Ramat securities, Ltd. 325 27,227 Tamar Securities, Inc. 3,000 251,323 --------- ---------- Total: 105,828 8,865,664 ======== ========== 5 EX-2.3 3 0003.txt AMENDED AND RESTATED MERGER AGREEMENT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER among PEASE OIL AND GAS COMPANY CPI ACQUISITION CORP. and CARPATSKY PETROLEUM INC. August 11, 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 TABLE OF CONTENTS ARTICLE I THE CONTINUANCE AND MERGER................................. 1 SECTION 1.01 The Continuance...................................... 1 SECTION 1.02 The Merger........................................... 2 SECTION 1.03 Closing; Closing Date; Effective Time................ 2 SECTION 1.04 Effect of the Continuance and Merger................. 3 SECTION 1.05 Certificate of Incorporation; Bylaws................. 3 SECTION 1.06 Directors and Officers............................... 3 ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES......... 3 SECTION 2.01 Merger Consideration; Conversion and Cancellation of Securities........................................... 3 SECTION 2.02 Exchange and Surrender of Certificates............... 5 SECTION 2.03 Lost Certificates.................................... 7 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PEASE.................... 7 SECTION 3.01 Organization and Qualification; Subsidiaries......... 7 SECTION 3.02 Articles of Incorporation and Bylaws................. 8 SECTION 3.03 Capitalization....................................... 8 SECTION 3.04 Authority............................................ 10 SECTION 3.05 No Conflict; Required Filings and Consents........... 10 SECTION 3.06 Reports; Financial Statements........................ 11 SECTION 3.07 Absence of Litigation................................ 12 SECTION 3.08 Employee Benefit Plans; Labor Matters................ 12 SECTION 3.09 Taxes................................................ 15 SECTION 3.10 Certain Business Practices........................... 15 SECTION 3.11 Environmental Matters................................ 15 SECTION 3.12 Vote Required........................................ 17 SECTION 3.13 Brokers.............................................. 17 SECTION 3.14 Certain Contracts and Restrictions................... 17 SECTION 3.15 Futures Trading and Fixed Price Exposure............. 17 SECTION 3.16 Opinion of Financial Advisor......................... 17 SECTION 3.17 Information Supplied................................. 18 SECTION 3.18 Absence of Certain Changes or Events................. 18 SECTION 3.19 Permits; Compliance............18 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CARPATSKY................ 19 SECTION 4.01 Organization and Qualifications; Subsidiaries........ 19 SECTION 4.02 Charter and Bylaws................................... 19 SECTION 4.03 Capitalization....................................... 19 SECTION 4.04 Authority............................................ 20 SECTION 4.05 No Conflict: Required Filings and Consents........... 21 SECTION 4.06 Permits; Compliance.................................. 22 SECTION 4.07 Financial Statements................................. 22 SECTION 4.08 Absence of Certain Changes or Events.................22 SECTION 4.09 Absence of Litigation................................ 23 SECTION 4.10 Tax Matters.......................................... 23 SECTION 4.11 Taxes...23 SECTION 4.12 Vote Required........................................ 23 SECTION 4.13 Brokers.24 SECTION 4.14 Information Supplied................................. 24 SECTION 4.15 Employee Benefit Plans; Labor Matters................ 24 SECTION 4.16 Certain Business Practices........................... 25 SECTION 4.17 Environmental Matters................................ 25 SECTION 4.18 Certain Contracts and Restrictions................... 26 SECTION 4.19 Futures Trading and Fixed Price Exposure............. 26 i ARTICLE V COVENANTS.................................................. 26 SECTION 5.01 Affirmative Covenants of Pease....................... 26 SECTION 5.02 Negative Covenants of Pease.......................... 27 SECTION 5.03 Affirmative Covenants of Carpatsky................... 30 SECTION 5.04 Negative Covenants of Carpatsky...................... 31 SECTION 5.05 Access and Information............................... 33 SECTION 5.06 The Exchange......................................... 34 SECTION 5.07 Further Assurances................................... 34 ARTICLE VI ADDITIONAL AGREEMENTS...................................... 34 SECTION 6.01 Meetings of Stockholders............................. 34 SECTION 6.02 Registration Statement............................... 35 SECTION 6.03 Appropriate Action; Consents; Filings................ 36 SECTION 6.04 Tax Treatment........................................ 38 SECTION 6.05 Public Announcements................................. 38 SECTION 6.06 Amendment............................................ 38 SECTION 6.07 Stock Resale Agreement............................... 38 SECTION 6.08 SEC Reports and Registration Statements.............. 38 ARTICLE VII CLOSING CONDITIONS......................................... 39 SECTION 7.01 Conditions to Obligations of Each Party Under This Agreement....................................... 39 SECTION 7.02 Additional Conditions to Obligations of Carpatsky.... 39 SECTION 7.03 Additional Conditions to Obligations of Pease........ 40 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER.......................... 42 SECTION 8.01 Termination.......................................... 42 SECTION 8.02 Effect of Termination................................ 43 SECTION 8.03 Amendment............................................ 44 SECTION 8.04 Waiver............................................... 44 SECTION 8.05 Fees, Expenses and Other Payments.................... 44 ARTICLE IX GENERAL PROVISIONS......................................... 46 SECTION 9.01 Effectiveness of Representations, Warranties and Agreements....................................... 46 SECTION 9.02 Notices.47 SECTION 9.03 Certain Definitions.................................. 48 SECTION 9.04 Headings49 SECTION 9.05 Severability......................................... 49 SECTION 9.06 Entire Agreement; Effect of Amendment................ 49 SECTION 9.07 Assignment........................................... 49 SECTION 9.08 Parties in Interest.................................. 49 SECTION 9.09 Specific Performance................................. 49 SECTION 9.10 Failure or Indulgence Not Waiver; Remedies Cumulative........................................... 50 SECTION 9.11 Governing Law........................................ 50 SECTION 9.12 Counterparts......................................... 50 SCHEDULES Schedule 1.06 Officers and Directors of Pease and the Surviving Corporation Pease Disclosure Schedule Schedule 3.01 Subsidiaries Schedule 3.03(a) Reservation of Pease Common Stock Schedule 3.03(b)(i) Options, Warrants and Rights Schedule 3.03(b)(ii) Repurchase and Redemption Obligations, etc. Schedule 3.03(b)(iii) Investments Schedule 3.03(b)(iv) Revenue Sharing Agreements ii Schedule 3.03(c) Outstanding Stock Awards Schedule 3.05 Conflicts Schedule 3.07 Litigation Schedule 3.08(a) Employee Benefit Plans Schedule 3.08(b) Exceptions to Benefit Plan Compliance Schedule 3.08(c) Collective Bargaining Agreements Schedule 3.08(d) Severance Agreements Schedule 3.08(e) Retiree Benefits Schedule 3.08(f) Multiemployer Contributions Schedule 3.08(g) Amendments to Employee Benefit Plans Schedule 3.13 Brokers Schedule 3.14 Material Contracts Schedule 3.18 Certain Changes Schedule 3.19 Notifications from Governmental Authorities Schedule 5.02(e) Asset Dispositions Schedule 5.02(o) Exceptions to Negative Covenants Carpatsky Disclosure Schedule Schedule 4.01 Subsidiaries Schedule 4.03(a) Reservation of Pease Common Stock Schedule 4.03(b)(i) Options, Warrants and Rights Schedule 4.03(b)(ii) Repurchase and Redemption Obligations, etc. Schedule 4.03(b)(iii) Investments Schedule 4.03(b)(iv) Revenue Sharing Agreements Schedule 4.03(b)(v) Voting Trusts, Proxies Schedule 4.03(c) Outstanding Stock Awards Schedule 4.05 Conflicts Schedule 4.06 Notifications from Governmental Authorities Schedule 4.07(ii) Financial Statement Exceptions Schedule 4.08 Certain Changes Schedule 4.09 Litigation Schedule 4.13 Brokers Schedule 4.15(a) Employee Benefit Plans Schedule 4.15(c) Multiemployer Plans Schedule 4.15(f) Ukraine Employee Benefits Schedule 4.18 Material Contracts Schedule 5.04(m) Affiliate Transactions EXHIBITS Exhibit A Pease Preferred Stockholder Agreement Exhibit B-1 Certificate of Domestication Exhibit B-2 Certificate of Incorporation of New Carpatsky Exhibit B-3 Certificate of Merger Exhibit B-4 Amended and Restated Articles of Pease iii AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of August 11, 2000 (this "Agreement"), is by and among Pease Oil and Gas Company, a Nevada corporation ("Pease"), its wholly owned Delaware subsidiary CPI Acquisition Corp. ("Acquisition Corp.") and Carpatsky Petroleum Inc., a corporation organized under the laws of the Province of Alberta, Canada ("Carpatsky"). RECITALS WHEREAS, The Board of Directors of Pease has determined that the combination of the business of Pease and Carpatsky are consistent with and in furtherance of the long-term business strategy of Pease and are fair to, and in the best interests of, Pease and its stockholders and has approved and adopted this Agreement, including the issuance of Pease Common Stock and Pease Preferred Stock, and the other transactions contemplated hereby; WHEREAS, The Board of Directors of Carpatsky has determined that the combination of the business of Pease and Carpatsky are consistent with and in furtherance of the long-term business strategy of Carpatsky and are fair to, and in the best interests of, Carpatsky and its shareholders and has approved and adopted this Agreement and the transactions contemplated hereby; and WHEREAS, the parties had previously entered into a merger agreement, dated August 31, 1999 that was amended on January 3, 2000 (the "Original Agreement"), which the parties are amending and restating in its entirety by this Agreement. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confirmed, the parties hereto agree as follows: ARTICLE I THE CONTINUANCE AND MERGER SECTION 1.01 The Continuance. Upon the terms and subject to the conditions set forth in this Agreement, in accordance with Alberta Law and Delaware Law, on the Closing Date, Carpatsky will be continued (the "Continuance") as a corporation in the State of Delaware pursuant to Section 388 Alberta Business Corporations Act (the "ABCA"). Pursuant to the Continuance, Carpatsky will become a Delaware corporation, and the shareholders of Carpatsky will become shareholders in the continued Delaware corporation, as if such shareholders had been shareholders of a Delaware corporation since the date Carpatsky was initially formed. As used herein, "Carpatsky" refers to the Alberta corporation prior to the Continuance and to the Delaware corporation thereafter. SECTION 1.02 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with Delaware Law, immediately following the Continuance, Acquisition Corp. shall be merged (the "Merger") with and into Carpatsky (Carpatsky and Acquisition Corp. are each referred to herein as a "Constituent Corporation"). As a result of the Merger, the separate corporate existence of Carpatsky and Acquisition Corp. shall cease and Carpatsky shall continue as the surviving corporation of the Merger (the "Surviving Corporation"). Certain terms used in this Agreement are defined in Section 9.03 hereof. SECTION 1.03 Closing; Closing Date; Effective Time. Unless this Agreement shall have been terminated pursuant to Section 8.01, and subject to the satisfaction or, if permissible, waiver of the conditions set forth in Article VII, the consummation of the Continuance and Merger and the closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Haynes and Boone, LLP, 1000 Louisiana, Suite 4300, Houston, Texas 77002 as soon as practicable (but in any event within two business days) after the satisfaction or, if permissible, waiver of the conditions set forth in Article VII, or at such other date, time and place as Carpatsky and Pease may agree. The date on which the Closing takes place is referred to herein as the "Closing Date." On the Closing Date, the parties hereto shall file the Certificate of Continuance, Certificate of Incorporation of Carpatsky, the Certificate of Merger and the Amended and Restated Articles of Pease, in the respective forms of Exhibits B-1, B-2, B-3 and B-4 attached hereto, with the Delaware Secretary of State and Nevada Secretary of State (the date and time of filing the Certificate of Merger, or such later date or time agreed upon by Carpatsky and Pease and set forth therein, being the "Effective Time") and by filing a notice contemplated by Section 182(6) of the ABCA with the Commissioner of Corporations of the Province of Alberta. The parties hereto shall file the various certificates and articles with the Governmental Entities to cause the Continuance, stockholders' meetings and Merger to occur in the following order: (i) The Carpatsky Shareholders Agreement to approve the Continuance; (ii) The Pease Stockholders Meeting to approve the Amended and Restated Articles of Pease set forth in Exhibit B-4; (iii) The filing of a Certificate of Continuance with the Delaware Secretary of State; (iv) The Carpatsky Stockholder Meeting to approve and adopt the Merger and the Merger Agreement; and (v) The filing of the Certificates of Merger with the Delaware and Nevada Secretaries of State. For all tax purposes, the Closing shall be effective at the end of the day on the Closing Date. SECTION 1.04 Effect of the Continuance and Merger. The Continuance shall have the effects specified in [Section 182] of the ABCA and Section 388 of the DGCL, and the Merger shall have the effects specified in Section 251 of the DGCL. SECTION 1.05 Certificate of Incorporation; Bylaws. At the Effective Time, the certificate of incorporation of Carpatsky, with such amendments thereto as provided in the Certificate of Merger attached hereto as Exhibit B-3, shall be the certificate of incorporation of the Surviving Corporation and thereafter shall continue to be its certificate of incorporation until amended as provided therein and pursuant to Delaware Law. The bylaws of Carpatsky, as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation and thereafter shall continue to be its bylaws until amended as provided therein and in the certificate of incorporation and pursuant to Delaware Law. 2 SECTION 1.06 Directors and Officers. The directors of the Surviving Corporation immediately after the Effective Time shall be the individuals identified in Schedule 1.06, each to hold office until the next annual meeting of stockholders and in accordance with the certificate of incorporation and bylaws of the Surviving Corporation, and the officers of the Surviving Corporation immediately after the Effective Time shall be the individuals identified in Schedule 1.06, each to hold office in accordance with the bylaws of the Surviving Corporation, and until their respective successors are duly elected or appointed and qualified. ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES SECTION 2.01 Merger Consideration; Conversion and Cancellation of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of Carpatsky, Pease, Acquisition Corp. or their respective stockholders: (a) Subject to the other provisions of this Article II, each share of Carpatsky Common Stock issued and outstanding immediately prior to the Effective Time (excluding any Carpatsky Common Stock described in Section 2.01(c) of this Agreement and shares held by Dissenting Carpatsky Stockholders) shall be converted into the right to receive .57842 shares of Pease Common Stock; each share of Carpatsky Preferred Stock shall be converted into the right to receive 1.07291776 shares of Pease Preferred Stock; and each share of Acquisition Corp. Common Stock issued and outstanding at the Effective Time shall be converted into one share of Carpatsky Common Stock. Notwithstanding the foregoing, except as contemplated by this Agreement, if between the date of this Agreement and the Effective Time the outstanding shares of Carpatsky Common Stock or Pease Common or Preferred Stock shall have been changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, conversion, recapitalization, split, combination or exchange of shares, the exchange ratios shall be correspondingly adjusted to reflect such stock dividend, subdivision, reclassification, conversion, recapitalization, split, combination or exchange of shares. (b) To the extent the applicable agreements governing Carpatsky Options and Carpatsky Warrants require Pease to assume such Carpatsky Options and Carpatsky Warrants, the rights to acquire shares of Carpatsky Common Stock pursuant to Carpatsky Options (as defined in Section 4.03) and Carpatsky Warrants (as defined in Section 4.03) outstanding at the Effective Time shall, following the Effective Time, reflect the right to receive Pease Common Stock as provided in such Carpatsky Options and Carpatsky Warrants. At the Effective Time, Pease shall assume such Carpatsky Options and Carpatsky Warrants and Pease shall reserve a sufficient number of shares of Pease Common Stock for issuance pursuant to such Carpatsky Options and Carpatsky Warrants. (c) Notwithstanding any provision of this Agreement to the contrary, each share of Carpatsky Common Stock held in the treasury of Carpatsky and each share of Carpatsky Common Stock owned by Pease or Acquisition Corp., respectively, or any direct or indirect wholly owned subsidiary of Carpatsky or of Pease, immediately prior to the Effective Time shall be canceled. (d) Subject to the provisions of Section 2.01(e), all shares of Carpatsky Common Stock and Carpatsky Preferred Stock shall cease to be outstanding and shall automatically be canceled and retired, and each certificate previously evidencing Carpatsky Common Stock or Carpatsky Preferred Stock immediately prior to the Effective Time (the "Converted Shares" or "Converted Share Certificates," as the case may be) shall thereafter represent the right to receive, subject to Section 2.02(e) of this Agreement, that number of shares of Pease Common Stock or Pease Preferred Stock determined pursuant to Section 2.01(a) hereof or, if applicable, cash pursuant to Sections 2.01(f) or 2.02(g) of this Agreement (the "Merger Consideration"). The holders of Converted Share Certificates shall cease to have any rights with respect to such Converted Shares except as otherwise provided herein or by law. Such Converted Share 3 Certificates shall be exchanged for certificates evidencing whole shares of Pease Common Stock or Pease Preferred Stock upon the surrender of such Converted Share Certificates in accordance with the provisions of Section 2.02 of this Agreement, without interest. No fractional shares of Pease Common Stock or Pease Preferred Stock shall be issued in connection with the Merger and, in lieu thereof, a cash payment shall be made pursuant to Section 2.02(g) of this Agreement. Each share of Acquisition Corp. Common Stock shall be automatically converted into one share of Carpatsky Common Stock. (e) Notwithstanding anything in this Agreement to the contrary, any issued and outstanding shares of capital stock of Carpatsky held by a Dissenting Carpatsky Stockholder who has not voted in favor of or consented to the Continuance or the Merger and who complies with all the provisions of the ABCA or Delaware Law concerning the right of holders of such stock to dissent from the Continuance or the Merger and to require appraisal of their shares, shall not be converted as described in Section 2.01(a) but shall become, at the Effective Time, by virtue of the Merger and without any further action, the right to receive such consideration as may be determined to be due to such Dissenting Carpatsky Stockholder pursuant to the ABCA or Delaware Law, as the case may be; provided, however, that shares of Carpatsky Common Stock outstanding immediately prior to the Effective Time and held by a Dissenting Carpatsky Stockholder who shall, after the Effective Time, withdraw his demand for appraisal or lose his right of appraisal, in either case pursuant to the ABCA or Delaware Law, as the case may be, shall be deemed to be converted as of the Effective Time, into the right to receive Pease Common Stock. SECTION 2.02 Exchange and Surrender of Certificates. (a) Prior to the Effective Time, Pease shall appoint Computershare Trust Company, Inc. or another or additional agent reasonably acceptable to Carpatsky (the "Exchange Agent") for the purpose of exchanging Converted Share Certificates for the Merger Consideration. Pease will make available to the Exchange Agent, as needed, the Merger Consideration to be paid in respect of the Converted Shares. Promptly after the Effective Time, Pease will send, or will cause the Exchange Agent to send, to each holder of record at the Effective Time of Carpatsky Common Stock a letter of transmittal for use in such exchange (which shall specify that the delivery shall be effected, and risk of loss and title shall pass, only upon proper delivery of the Canceled Certificates to the Exchange Agent) in such form as Carpatsky and Pease may reasonably agree, for use in effecting delivery of Converted Share Certificates to the Exchange Agent. (b) Each holder of Carpatsky Common Stock and Carpatsky Preferred Stock that has been converted into a right to receive the Merger Consideration, upon surrender to the Exchange Agent of a Canceled Share Certificate, together with a properly completed letter of transmittal, will be entitled to receive the Merger Consideration in respect of the Converted Shares represented by such Certificate. Until so surrendered, each such Canceled Share Certificate shall, after the Effective Time, represent for all purposes only the right to receive such Merger Consideration. (c) If any portion of the Merger Consideration is to be paid to a Person other than the Person in whose name the Canceled Certificate is registered, it shall be a condition to such payment that the Canceled Certificate so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the Person requesting such payment shall pay to the Exchange Agent any transfer or other taxes required as a result of such payment to a Person other than the registered holder of such Canceled Certificate or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. 4 (d) After the Effective Time, there shall be no further registration of transfers of Carpatsky Common Stock. If, after the Effective Time, Canceled Certificates are presented to the Surviving Corporation, they shall be canceled and exchanged for the consideration provided for, and in accordance with the procedures set forth, in this Section 2.02. (e) Any portion of the Merger Consideration made available to the Exchange Agent pursuant to Section 2.02(a) that remains unclaimed by the holders of Converted Shares one year after the Effective Time shall be returned to Pease, upon demand, and any such holder who has not exchanged his Converted Shares for the Merger Consideration in accordance with this Section prior to that time shall thereafter look only to Pease for payment of the Merger Consideration in respect of his Converted Shares. Notwithstanding the foregoing, Pease shall not be liable to any holder of Converted Shares for any amount paid to a public official pursuant to applicable abandoned property laws. Any amounts remaining unclaimed by holders of Converted Shares three years after the Effective Time (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental entity) shall, to the extent permitted by applicable law, become the property of Pease free and clear of any claims or interest of any Person previously entitled thereto. (f) No dividends or other distributions with respect to Pease Common Stock issued in the Merger shall be paid to the holder of any unsurrendered Canceled Share Certificates until such Canceled Share Certificates are surrendered as provided in this Section. Subject to the effect of applicable laws, following such surrender, there shall be paid, without interest, to the record holder of the Pease Common Stock, issued in exchange therefor (i) at the time of such surrender, all dividends and other distributions payable in respect of such Pease Common Stock with a record date after the Effective Time and a payment date on or prior to the date of such surrender and not previously paid and (ii) at the appropriate payment date, the dividends or other distributions payable with respect to such Pease Common Stock with a record date after the Effective Time but with a payment date subsequent to such surrender. For purposes of dividends or other distributions in respect of Pease Common Stock, all Pease Common Stock to be issued pursuant to the Merger (but not options unless actually exercised at the Effective Time) shall be entitled to dividends pursuant to the immediately preceding sentence as if issued and outstanding as of the Effective Time. (g) No certificates or scrip evidencing fractional shares of Pease Common Stock shall be issued upon the surrender for exchange of Converted Share Certificates, and such fractional share interests shall not entitle the owner thereof to any rights as a stockholder of Pease. In lieu of any such fractional interests, each holder of a Converted Share Certificate shall, upon surrender of such certificate for exchange pursuant to this Article II, be paid an amount in cash (without interest), rounded to the nearest cent, determined by multiplying the last sale price of the Pease Common Stock in the Over-the-Counter market prior to the Closing Date by the fractional share of Pease Common Stock to which such holder would otherwise be entitled (after taking into account all Converted Shares held of record by such holder at the Effective Time). (h) Pease shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any former holder of Carpatsky Common or Pease Preferred Stock such amounts as Pease (or any affiliate thereof) is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Pease, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of the Carpatsky Common or Pease Preferred Stock in respect of which such deduction and withholding was made. In the event the amount withheld is insufficient so to satisfy the withholding obligations of Pease, (or any affiliate thereof), such former stockholder shall reimburse Pease (or such affiliate), at its request, the amount of any such insufficiency. 5 (i) At the Closing, Pease shall deliver to Bellwether Exploration Company a certificate representing the number of shares of Pease Preferred Stock to which Bellwether is entitled, such certificate to be executed and otherwise in such form as to comply with the requirements of Nevada law and the Pease Articles of Incorporation and bylaws for certificates representing duly authorized, validly issued fully paid and non-assessable shares of its preferred stock. SECTION 2.03 Lost Certificates. If any Converted Share Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Converted Share Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond, in such reasonable amount as the Surviving Corporation may direct, as indemnity against any claim that may be made against it with respect to such Converted Share Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Converted Share Certificate the Merger Consideration to be paid in respect of the Converted Shares represented by such Converted Share Certificates as contemplated by this Article. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PEASE Pease and Acquisition Corp. hereby jointly and severally represent and warrant to Carpatsky that: SECTION 3.01 Organization and Qualification; Subsidiaries. Each of Pease, Acquisition Corp. and their respective subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, has all requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted and is duly qualified and in good standing to do business in each jurisdiction in which the nature of the business conducted by it or the ownership or leasing of its properties makes such qualification necessary, other than where the failure to be so duly qualified and in good standing would not have a Pease Material Adverse Effect. The term "Pease Material Adverse Effect" as used in this Agreement shall mean any change or effect that, individually or when taken together with all other such changes or effects, would be reasonably likely to be materially adverse to the assets, liabilities, financial condition, results of operations or current or future business of Pease and its subsidiaries, taken as a whole. Schedule 3.01 of the disclosure schedule delivered to Carpatsky by Pease and attached hereto and made a part hereof (the "Pease Disclosure Schedule") sets forth, as of the date hereof, a true and complete list of all Pease's directly or indirectly owned subsidiaries, together with (A) the jurisdiction of incorporation or organization of each subsidiary and the percentage of each subsidiary's outstanding capital stock or other equity interests owned by Pease or another subsidiary of Pease, and (B) an indication of whether each such subsidiary is a "Significant Subsidiary" as defined in Section 9.03(h) of this Agreement. Except as set forth in Schedule 3.01 to the Pease Disclosure Schedule, neither Pease nor any of its subsidiaries owns an equity interest in any other partnership or joint venture arrangement or other business entity that is material to the assets, liabilities, financial condition, results of operations or current or future business of Pease and its subsidiaries, taken as a whole. SECTION 3.02 Articles of Incorporation and Bylaws. Pease has heretofore furnished to Carpatsky complete and correct copies of the articles of incorporation and the bylaws or the equivalent organizational documents as presently in effect of Pease and Acquisition Corp. and each of their subsidiaries. Neither Pease, Acquisition Corp. nor any of their subsidiaries are in violation of any of the provisions of its articles or any material provision of its bylaws (or equivalent organizational documents). 6 SECTION 3.03 Capitalization. (a) The authorized capital stock of Pease consists of 4,000,000 shares of Pease Common Stock, of which 1,688,698 shares are issued and outstanding, no shares are held in treasury by Pease and 11,806,834 shares are reserved for future issuance pursuant to outstanding stock options or other contractual arrangements and which will be reserved for issuance as at the Effective Time; 830,000 shares of authorized preferred stock, par value $.01 per share of which 145,300 shares are designated as Series B 5% PIK cumulative convertible preferred stock, par value $.01 per share, of which 105,828 shares are issued and outstanding, no shares are held in treasury and 39,472 shares are reserved for future issuance pursuant to outstanding stock options or other contractual arrangements and 684,700 shares remain undesignated. The authorized capital stock of Acquisition Corp. consists of 100 shares of common stock, par value $.01 per share of which 100 shares are issued and outstanding. Except as described in this Section 3.03 or in Schedule 3.03(a) to the Pease Disclosure Schedule, no shares of capital stock of Pease are reserved for any purpose. Each of the outstanding shares of capital stock of, or other equity interests in, each of Pease and its subsidiaries, including Acquisition Corp., is duly authorized, validly issued, and, in the case of shares of capital stock, fully paid and nonassessable, and has not been issued in violation of (nor are any of the authorized shares of capital stock of, or other equity interests in, such entities subject to) any preemptive or similar rights created by statute, the charter or bylaws (or the equivalent organizational documents) of Pease or any of its subsidiaries, including Acquisition Corp., or any agreement to which Pease or any of its subsidiaries, including Acquisition Corp., is a party or bound, and such outstanding shares or other equity interests owned by Pease or a subsidiary, including Acquisition Corp., of Pease are owned free and clear of all security interests, liens, claims, pledges, agreements, limitations on Pease's or such subsidiaries' voting rights, charges or other encumbrances of any nature whatsoever. (b) Except as set forth in Schedule 3.03(b)(i) to the Pease Disclosure Schedule, there are no options, warrants or other rights (including registration rights), agreements, arrangements or commitments of any character to which Pease or any of its subsidiaries is a party relating to the issued or unissued capital stock of Pease or any of its subsidiaries or obligating Pease or any of its subsidiaries to grant, issue or sell any shares of the capital stock of Pease or any of its subsidiaries, by sale, lease, license or otherwise. Except as set forth in Schedule 3.03(b)(ii) to the Pease Disclosure Schedule, there are no obligations, contingent or otherwise, of Pease or any of its subsidiaries to repurchase, redeem or otherwise acquire any shares of Pease Common or Preferred Stock or other capital stock of Pease, or the capital stock or other equity interests of any subsidiary of Pease; or provide material funds to, or make any material investment in (in the form of a loan, capital contribution or otherwise), or provide any guarantee with respect to the obligations of, any subsidiary of Pease or any other person. Except as described in Schedule 3.03(b)(iii) to the Pease Disclosure Schedule, neither Pease nor any of its subsidiaries (x) directly or indirectly owns, (y) has agreed to purchase or otherwise acquire or (z) holds any interest convertible into or exchangeable or exercisable for, 5% or more of the capital stock of any corporation, partnership, joint venture or other business association or entity (other than the subsidiaries of Pease set forth in Schedule 3.01 to the Pease Disclosure Schedule). Except as set forth in Schedule 3.03(b)(iv) to the Pease Disclosure Schedule, there are no agreements, arrangements or commitments of any character (contingent or otherwise) pursuant to which any person is or may be entitled to receive any payment based on the revenues or earnings, or calculated in accordance therewith, of Pease or any of its subsidiaries. Except as contemplated hereby, there are no voting trusts, proxies or other agreements or understandings to which Pease or any of its subsidiaries is or will be a party or by which Pease or any of its subsidiaries is or will be bound with respect to the voting of any shares of capital stock of Pease or any of its subsidiaries. 7 (c) Pease has made available to Carpatsky complete and correct copies of its existing (i) stock option plans (collectively, the "Pease Option Plans") and the forms of options issued pursuant to the Pease Option Plans, including all amendments thereto, and (ii) all options and warrants that are not in the form specified under clause (i) above. Schedule 3.03(c) to the Pease Disclosure Schedule sets forth a complete and correct list of all outstanding warrants and options, restricted stock or any other stock awards (the "Pease Stock Awards") granted under the Pease Option Plans or otherwise, setting forth as of the date hereof (i) the number and type of Pease Stock Awards, (ii) the exercise price of each outstanding stock option or warrant, (iii) the number of stock options and warrants presently exercisable, and (iv) any other material terms and conditions thereof. (d) The shares of Pease Common Stock and Preferred Stock to be issued pursuant to the Merger (i) will be duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights created by statute, Pease's articles of incorporation or bylaws or any agreement to which Pease is a party or by which it is bound, (ii) will be registered under the U.S. Securities Act of 1933, as amended ("Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and (iii) will be registered or exempt from registration under applicable Canadian federal and provincial securities laws ("Canadian Securities Laws") and United States state securities or blue sky laws ("Blue Sky Laws"). SECTION 3.04 Authority. Each of Pease and Acquisition Corp. has all requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby (subject to, with respect to the Merger, the Conversion and the issuance of the Pease Common Stock and Pease Preferred Stock pursuant to the Merger and Conversion, the approval of an amendment to and restatement of the articles of incorporation by the stockholders of Pease as described in Section 3.12 hereof and the approval and adoption of this Agreement and Merger as provided by Section 3.12 hereof). The execution and delivery of this Agreement by Pease and Acquisition Corp. and the consummation by Pease and Acquisition Corp. of the transactions contemplated hereby have been duly authorized by all necessary corporate action and no other corporate proceedings on the part of Pease are necessary to authorize this Agreement or to issue the Pease Common Stock and Pease Preferred Stock, with the exception of the approval and adoption of this Agreement and the Merger by the stockholders of Pease as described in Section 3.12 hereof. This Agreement has been duly executed and delivered by Pease and Acquisition Corp. and, assuming the due authorization, execution and delivery thereof by Carpatsky, constitutes the legal, valid and binding obligation of Pease and Acquisition Corp. enforceable against Pease and Acquisition Corp. in accordance with its terms, except that such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. SECTION 3.05 No Conflict; Required Filings and Consents. (a) The execution and delivery of this Agreement by Pease and Acquisition Corp. does not, and the consummation of the transactions contemplated hereby in accordance with its terms will not (i) conflict with or violate the articles of incorporation or bylaws, or the equivalent organizational documents, in each case as amended or restated, of Pease or any of its subsidiaries, including Acquisition Corp., (ii) conflict with or violate any federal, provincial, state, or local law, statute, ordinance, rule, regulation, order, judgment or decree, domestic or foreign, (collectively, "Laws") applicable to Pease or any of its subsidiaries, including Acquisition Corp., or by or to which any of their respective properties is bound or subject or (iii) except as described in Schedule 3.05 to the Pease Disclosure Schedule, result in any breach of or constitute a default (or an event that with notice or 8 lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or require payment under, or result in the creation of a lien or encumbrance on any of the properties or assets of Pease or any of its subsidiaries, including Acquisition Corp., pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Pease or any of its subsidiaries, including Acquisition Corp., is a party or by or to which Pease or any of its subsidiaries, including Acquisition Corp., or any of their respective properties is bound or subject, except for any such conflicts or violations described in clause (ii) or breaches, defaults, events, rights of termination, amendment, acceleration or cancellation, payment obligations or liens or encumbrances described in clause (iii) that would not have a Pease Material Adverse Effect. (b) The execution and delivery of this Agreement by each of Pease and Acquisition Corp. does not, and consummation of the transactions contemplated hereby will not, require Pease or Acquisition Corp. to obtain any consent, license, permit, approval, waiver, authorization or order of, or to make any filing with or notification to, any court or governmental or regulatory authority, domestic or foreign (collectively, "Governmental Authorities"), except (i) for filing (A) a registration statement on Form S-4 (the "Form S-4") under the Securities Act, (B) preliminary and definitive proxy materials under the Exchange Act, (C) registrations, qualifications and claims for exemptions under Canadian Securities Laws and Blue Sky Laws, and (D) appropriate merger documents as required by Delaware Law and the General Corporations Law of the State of Nevada ("Nevada Law"), and (ii) where the failure to obtain such consents, licenses, permits, approvals, waivers, authorizations or orders, or to make such filings or notifications, would not, either individually or in the aggregate, materially interfere with Pease's and Acquisition Corp.'s performance of their obligations under this Agreement and would not have a Pease Material Adverse Effect. SECTION 3.06 Reports; Financial Statements. (a) Since December 31, 1997, Pease and its subsidiaries have filed all forms, reports, statements and other documents required to be filed with (A) the Securities and Exchange Commission (the "SEC") including, without limitation, (1) all Registration Statements filed under the Securities Act, (2) all Annual Reports on Form 10-K or 10-KSB, (3) all Quarterly Reports on Form 10-Q or 10-QSB, (4) all proxy statements relating to meetings of stockholders (whether annual or special), (5) all Current Reports on Form 8-K and (6) all other reports, schedules, registration statements or other documents (collectively referred to as the "Pease SEC Reports") and (B) any applicable state securities authorities and all forms, reports, statements and other documents required to be filed with any other applicable federal or state regulatory authorities, except where the failure to file any such forms, reports, statements or other documents would not have a Pease Material Adverse Effect (all such forms, reports, statements and other documents in clauses (i) and (ii) of this Section 3.06(a) being referred to herein, collectively, as the "Pease Reports"). The Pease Reports, including all Pease Reports filed after the date of this Agreement and prior to the Effective Time, including, without limitation, the Form S-4 relating to the Merger, (x) were or will be prepared in accordance with the requirements of applicable Law (including, with respect to Pease SEC Reports, the Securities Act and the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Pease SEC Reports) and (y) did not at the time they were filed, or will not at the time they are filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. 9 (b) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in Pease SEC Reports filed prior to the Effective Time, including, without limitation, the Form S-4 (as regards Pease), have been or will be prepared in accordance with the published rules and regulations of the SEC and U.S. generally accepted accounting principles applied on a consistent basis throughout the periods involved (except (a) to the extent required by changes in generally accepted accounting principles; (b) with respect to Pease SEC Reports filed prior to the date of this Agreement, as may be indicated in the notes thereto; and (c) with respect to interim financial statements as may be permitted by Article 10 of Regulation S-X) and fairly present or will fairly present the consolidated financial position of Pease and its subsidiaries as of the respective dates thereof and the consolidated results of operations and cash flows for the periods indicated (including reasonable estimates of normal and recurring year-end adjustments), except that (x) any unaudited interim financial statements were or will be subject to normal and recurring year-end adjustments and (y) any pro forma financial statements contained in such consolidated financial statements are not necessarily indicative of the consolidated financial position of Pease and its subsidiaries as of the respective dates thereof and the consolidated results of operations and cash flows for the periods indicated. SECTION 3.07 Absence of Litigation. Except as disclosed in the Pease SEC Reports filed prior to the date of this Agreement or as set forth in Schedule 3.07 to the Pease Disclosure Schedule, there is no claim, action, suit, litigation, proceeding, arbitration or, to the knowledge of Pease, investigation of any kind, at law or in equity (including actions or proceedings seeking injunctive relief), pending or, to the knowledge of Pease, threatened against Pease or any of its subsidiaries or any properties or rights of Pease or any of its subsidiaries (except for claims, actions, suits, litigation, proceedings, arbitrations or investigations which if adversely determined would not have a Pease Material Adverse Effect), and neither Pease nor any of its subsidiaries is subject to any continuing order of, consent decree, settlement agreement or other similar written agreement with, or, to the knowledge of Pease, continuing investigation by, any Governmental Authority, or any judgment, order, writ, injunction, decree or award of any Government Entity or arbitrator, including, without limitation, cease-and-desist or other orders, except for matters that would not have a Pease Material Adverse Effect. SECTION 3.08 Employee Benefit Plans; Labor Matters. (a) Schedule 3.08(a) to the Pease Disclosure Schedule sets forth each employee benefit plan (as such term is defined in ERISA Section 3(3)) maintained or contributed to during the past five years by Pease or any member of its ERISA Group or with respect to which Pease or any member of its ERISA Group could incur liability under Sections 4063, 4069, 4212(c) or 4204 of ERISA, and any other retirement, pension, stock option, stock appreciation rights, profit sharing, incentive compensation, deferred compensation, savings, thrift, vacation pay, severance pay, or other employee compensation or benefit plan, agreement, practice, or arrangement, whether written or unwritten, whether or not legally binding (collectively, the "Pease Benefit Plans"). For purposes of this Agreement, "ERISA Group" means a controlled or affiliated group within the meaning of Code Section 414(b), (c), (m), or (o) of which Pease is a member. Pease has made available to Carpatsky correct and complete copies of all Pease Benefit Plans (including a detailed written description of any Pease Benefit Plan that is unwritten, including a description of eligibility criteria, participation, vesting, benefits, funding arrangements and assets and any other provisions relating to Pease) and, with respect to each Pease Benefit Plan, a copy of each of the following, to the extent each is applicable to each Pease Benefit Plan: the most recent favorable determination letter, materials submitted to the Internal Revenue Service in support of a pending determination letter request, the most recent letter issued by the Internal Revenue Service recognizing tax exemption, each insurance contract, trust agreement, or other funding vehicle, the three most recently filed Forms 5500 plus all schedules and attachments, the three most recent actuarial valuations, and each summary plan description or other general explanation or communication distributed or otherwise provided to employees with respect to each Pease Benefit Plan that describes the terms of the Pease Benefit Plan. 10 (b) With respect to the Pease Benefit Plans, no event has occurred and, to the knowledge of Pease, there exists no condition or set of circumstances, in connection with which Pease or any member of its ERISA Group could be subject to any liability under the terms of such Pease Benefit Plans, ERISA, the Code or any other applicable Law which would have a Pease Material Adverse Effect. Except as otherwise set forth on Schedule 3.08(b) to the Pease Disclosure Schedule: (i) As to any Pease Benefit Plan intended to be qualified under Section 401 of the Code, such Pease Benefit Plan satisfies the requirements of such Section and there has been no termination or partial termination of such Pease Benefit Plan within the meaning of Section 411(d)(3) of the Code and Pease has administered all such Plans in accordance with all applicable Laws; (ii) There are no actions, suits or claims pending (other than routine claims for benefits) or, to the knowledge of Pease, threatened against, or with respect to, any of the Pease Benefit Plans or their assets, any plan sponsor, or any fiduciary (as such term is defined in Section 3(21) of ERISA), and Pease has no knowledge of any facts that could give rise to any actions, suits or claims; (iii) All contributions required to be made to the Pease Benefit Plans pursuant to their terms and provisions have been made timely; (iv) As to any Pease Benefit Plan subject to Title IV of ERISA, there has been no event or condition which presents the material risk of plan termination, no accumulated funding deficiency, whether or not waived, within the meaning of Section 302 of ERISA or Section 412 of the Code has been incurred, no reportable event within the meaning of Section 4043 of ERISA has occurred, no notice of intent to terminate the Pease Benefit Plan has been given under Section 4041 of ERISA, no proceeding has been instituted under Section 4042 of ERISA to terminate the Pease Benefit Plan, and no liability to the Pension Benefit Guaranty Corporation or to the Plan has been incurred; (v) Neither Pease nor any party in interest (as such term is defined in ERISA Section 3(14)) nor any disqualified person has engaged in any prohibited transaction within the meaning of ERISA Section 406 or Code Section 4975 that would subject Pease to any liability; and (vi) The consummation of the transactions contemplated by this Agreement will not give rise to any acceleration of vesting of payments or options, the acceleration of the time of making any payments, or the making of any payments, which in the aggregate would result in an "excess parachute payment" within the meaning of Section 280G of the Code and the imposition of the excise under Section 4999 of the Code. (c) Except as set forth in Schedule 3.08(c) to the Pease Disclosure Schedule, neither Pease nor any member of its ERISA Group, including, without limitation, any of its subsidiaries, is or has ever been a party to any collective bargaining or other labor union contracts. No collective bargaining agreement is being negotiated by Pease or any of its subsidiaries. There is no pending or threatened labor dispute, strike or work stoppage against Pease or any of its subsidiaries which may interfere with the respective business activities of Pease or any of its subsidiaries. None of Pease, any of its subsidiaries or any of their respective representatives or employees has committed any unfair labor practices in connection with the operation of the respective businesses of Pease or its subsidiaries, and there is no pending or threatened charge or complaint against Pease or any of its subsidiaries by the National Labor Relations Board or any comparable state agency. 11 (d) Except as disclosed in Schedule 3.08(d) to the Pease Disclosure Schedule and as contemplated by this Agreement, neither Pease nor any of its subsidiaries is a party to or is bound by any severance agreements, programs or policies. Schedule 3.08(d) to the Pease Disclosure Schedule sets forth, and Pease has made available to Carpatsky true and correct copies of, all employment agreements with officers or Pease or its subsidiaries; all agreements with consultants of Pease or its subsidiaries obligating Pease or any subsidiary to make annual cash payments in an amount exceeding $25,000; all non-competition agreements with Pease or a subsidiary executed by officers of Pease; and all plans, programs, agreements and other arrangements of Pease or its subsidiaries with or relating to its directors. (e) Except as provided in Schedule 3.08(e) to the Pease Disclosure Schedule, (x) no Pease Benefit Plan provides retiree medical or retiree life insurance benefits to any person and (y) neither Pease nor any of its subsidiaries is contractually or otherwise obligated (whether or not in writing) to provide any person with life insurance or medical benefits upon retirement or termination of employment, other than as required by the provisions of Sections 601 through 608 of ERISA and Section 4980B of the Code and each such Pease Benefit Plan or arrangement may be amended or terminated by Pease or its subsidiaries at any time without liability. (f) Except as set forth in Schedule 3.08(f) to the Pease Disclosure Schedule, neither Pease nor any member of its ERISA Group including, without limitation, any of its subsidiaries, contributes to or has an obligation to contribute to, and has not within six years prior to the date of this Agreement contributed to or had an obligation to contribute to or has any secondary liability under ERISA Section 4204 to, a multiemployer plan within the meaning of Section 3(37) of ERISA. (g) Except as contemplated by this Agreement or as set forth in Schedule 3.08(g), Pease has not amended, or taken any actions with respect to, any of the Pease Benefit Plans or any of the plans, programs, agreements, policies or other arrangements described in Section 3.08(d) of this Agreement since December 31, 1998. (h) With respect to each Pease Benefit Plan that is a "group health plan" within the meaning of Section 5000(b) of the Code, each such Pease Benefit Plan complies and has complied with the requirements of Part 6 of Title I of ERISA and Sections 4980B and 5000 of the Code, except where the failure to so comply would not have a Pease Material Adverse Effect. SECTION 3.09 Taxes. Except as set forth in the Pease SEC Reports or as otherwise set forth in the Pease Disclosure Schedule and except as would not, individually or in the aggregate, have a Pease Material Adverse Effect, (i) all Pease Tax Returns required to be filed with any taxing authority by, or with respect to, Pease have been filed in accordance with all applicable laws; (ii) Pease has timely paid all Taxes shown as due and payable on Pease Tax Returns that have been so filed, and, as of the time of filing, Pease Tax Returns correctly reflected the facts regarding the income, business, assets, operations, activities and the status of Pease and its subsidiaries (other than Taxes which are being contested in good faith and for which adequate reserves are reflected on the Pease Balance Sheet); (iii) Pease and its subsidiaries have made provision for all Taxes payable by Pease and its subsidiaries for which no Pease Tax Return has yet been filed; (iv) the charges, accruals and reserves for Taxes with respect to Pease and its subsidiaries reflected on the Pease Balance Sheet are adequate under GAAP to cover the Tax liabilities accruing through the date thereof; (v) there is no action, suit, proceeding, audit or claim now proposed or pending against or with respect to Pease or any of its subsidiaries in respect of any Tax where there is a reasonable possibility of an adverse determination; and (vi) to the best of Pease's knowledge and belief, neither Pease nor any of its subsidiaries is liable for any Tax imposed on any entity other than such Person. 12 SECTION 3.10 Certain Business Practices. None of Pease, any of its subsidiaries, including Acquisition Corp., or any directors, officers, agents or employees of Pease or any of its subsidiaries has used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, or made any other unlawful payment. SECTION 3.11 Environmental Matters. (a) Except as set forth in the Pease SEC Reports filed prior to the date hereof and with such exceptions as, individually or in the aggregate, have not had, and would not reasonably be expected to have, a Pease Material Adverse Effect, (i) no notice, notification, demand, request for information, citation, summons, complaint or order has been received by, and no investigation, action, claim, suit, proceeding or review is pending or, to the knowledge of Pease or any of its subsidiaries, threatened by any Person against, Pease or any of its subsidiaries, and no penalty has been assessed against Pease or any of its subsidiaries, in each case, with respect to any matters relating to or arising out of any Environmental Law; (ii) Pease and its subsidiaries are and have been in compliance with all Environmental Laws; (iii) there are no liabilities of or relating to Pease or any of its subsidiaries relating to or arising out of any Environmental Law of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a liability; and (iv) there has been no environmental investigation, study, audit, test, review or other analysis conducted of which Pease has knowledge in relation to the current or prior business of Pease or any of its subsidiaries or any property or facility now or previously owned, leased or operated by Pease or any of its subsidiaries which has not been delivered to Carpatsky at least five days prior to the date hereof. (b) For purposes of this Agreement, the following terms shall be defined as follows: (i) "Environmental Laws" shall mean any and all laws, statutes, ordinances, rules, regulations or orders of any Governmental Authority pertaining to pollution, health, safety, or the environment, including, without limitation, the Clean Air Act, the Comprehensive Environmental, Response, Compensation, and Liability Act ("CERCLA"), the Clean Water Act, the Occupational Safety and Health Act, the Resource Conservation and Recovery Act, the Solid Waste Disposal Act, the Emergency Planning and Community Right-To- Know Act, the Safe Drinking Water Act, the Toxic Substances Control Act, the Hazardous Materials Transportation Act, the Oil Pollution Act, all as amended, any state laws implementing the foregoing federal laws, any state laws pertaining to, health, safety and waste management including, without limitation, the handling of asbestos, medical waste or disposable products, hydrocarbon products, PCBs or other Hazardous Materials or processing or disposing of wastes or the use, maintenance and closure of pits and impoundments, all other federal, provincial, state or local environmental conservation or protection and health and safety laws, domestic and foreign, and any common law creating liability for environmental conditions. Environmental Laws shall include, without limitation, all restrictions, conditions, standards, limitations, prohibitions, requirements, guidelines, obligations, schedules and timetables contained in Environmental Laws or contained in any regulation, plan, code, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder 13 (ii) "Hazardous Materials" shall mean any materials that are regulated by or form the basis of liability under Environmental Laws, and include, without limitation, asbestos, wastes, including, without limitation, medical wastes or disposable products, hazardous substances, pollutants or contaminants, hazardous or solid wastes, hazardous constituents, hazardous materials, toxic substances, petroleum, including crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas) SECTION 3.12 Vote Required. The only vote of the holders of any class or series of Pease capital stock necessary to authorize restatement and amendment to Pease's articles of incorporation in the form of Exhibit B-4 (the "Amended and Restated Articles of Pease") is the affirmative vote of the holders of at least a majority of the outstanding shares of Pease Common Stock. The Merger and this Agreement do not require the approval of any class or series of Pease capital stock. SECTION 3.13 Brokers. Except as set forth in Schedule 3.13 to the Pease Disclosure Schedule, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Pease. Prior to the date of this Agreement, Pease has made available to Carpatsky a complete and correct copy of all agreements referenced in Schedule 3.13 to the Pease Disclosure Schedule pursuant to which such firm will be entitled to any payment relating to the transactions contemplated by this Agreement. SECTION 3.14 Certain Contracts and Restrictions. Other than agreements, contracts or commitments listed elsewhere in the Pease Disclosure Schedule, Schedule 3.14 to the Pease Disclosure Schedule lists, as of the date hereof, each agreement, contract or commitment (including any amendments thereto) to which Pease or any of its subsidiaries is a party or by which Pease or any of its subsidiaries is bound (i) involving consideration during the next twelve months in excess of $10,000 or (ii) which is otherwise material to the assets, liabilities, financial condition, results of operations or current or future business of Pease and its subsidiaries, taken as a whole. As of the date of this Agreement and except as indicated on the Pease Disclosure Schedule, (i) Pease has fully complied with all material terms and conditions of all agreements, contracts and commitments listed in the Pease Disclosure Schedule and all such agreements, contracts and commitments are in full force and effect, (ii) Pease has no knowledge of any defaults thereunder or any cancellations or modifications thereof, and (iii) such agreements, contracts and commitments are not subject to any memorandum or other written document or understanding permitting cancellation. SECTION 3.15 Futures Trading and Fixed Price Exposure. None of Pease or any of its subsidiaries is presently engaged in any futures or options trading or is a party to any price, interest rate or currency swaps, hedges, futures or other derivative instruments. SECTION 3.16 Opinion of Financial Advisor. Pease has received the opinion of Houlihan Smith & Company, Inc., to the effect that, as of the date of such opinion, the Merger is fair from a financial point of view to the holders of Pease Common Stock, and as of the date hereof, such opinion has not been withdrawn. SECTION 3.17 Information Supplied. Without limiting any of the representations and warranties contained herein, the representations and warranties of Pease contained in this Agreement and the information set forth in the Pease Disclosure Schedule is complete and accurate and does not contain any untrue statement of material fact, or omit a material fact necessary in order to make the statements contained therein, in light of the circumstances under which such statements are or were made, not misleading. 14 SECTION 3.18 Absence of Certain Changes or Events. Except as disclosed in the Pease Disclosure Schedule or as contemplated by this Agreement or as set forth in Schedule 3.18 to the Pease Disclosure Schedule, since December 31, 1999, each of Pease and its subsidiaries has conducted its business in the ordinary course of business consistent with past practice. Except as disclosed in Schedule 3.18 to the Pease Disclosure Schedule, since December 31, 1999, there has not been (i) any event, change, or effect (including the occurrence of any liabilities of any nature, whether or not accrued, contingent or otherwise) having or, which would be reasonably likely to have, individually or in the aggregate, a Pease Material Adverse Effect; (ii) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to the equity interests of Pease or any redemption, purchase or other acquisition by Pease of any of Pease's securities; (iii) any revaluation by Pease of its assets, including the writing down of the value of inventory or the writing down or off of its proven reserves or notes or accounts receivable, other than in the ordinary course of business and consistent with past practices; (iv) any change by Pease in accounting principles or methods, except insofar as may be required by a change in U.S. generally accepted accounting principles; (v) a fundamental change in the nature of Pease's business; or (vi) a Pease Material Adverse Effect. SECTION 3.19 Permits; Compliance. Each of Pease and its subsidiaries is in possession of all franchises, grants, authorizations, leases, agreements, licenses, permits, easements, variances, exemptions, consents, registrations, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the "Pease Permits"), and there is no action, proceeding or investigation pending or, to the knowledge of Pease, threatened regarding suspension or cancellation of any of the Pease Permits, except where the failure to possess, or the suspension or cancellation of, such Pease Permits would not have a Pease Material Adverse Effect. Except as set forth in Schedule 3.19 to the Pease Disclosure Schedule, Pease has not received from any Governmental Authority any written notification with respect to possible conflicts, defaults or violations of Laws, except for written notices relating to possible conflicts, defaults or violations that would not have a Pease Material Adverse Effect. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CARPATSKY Carpatsky hereby represents and warrants to Pease that: SECTION 4.01 Organization and Qualifications; Subsidiaries. Each of Carpatsky and its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and Carpatsky's Representative Office in the Republic of Ukraine ("Representative Office") is duly organized, validly existing and in good standing under the current laws of the Republic of Ukraine ("Ukraine") and each has all requisite legal power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted and is duly qualified and in good standing to do business in each jurisdiction in which the nature of the business conducted by it or the ownership or leasing of its properties makes such qualification necessary, other than where the failure to be so duly qualified and in good standing would not have a Carpatsky Material Adverse Effect. The term "Carpatsky Material Adverse Effect" as used in this Agreement shall mean any change or effect that, individually or when taken together with all such other changes or effects, would be reasonably likely to be materially adverse to the assets, liabilities, financial condition, results of operations or current or future business of Carpatsky and its subsidiaries taken as a whole. Except as set forth in Schedule 4.01 to the disclosure schedule delivered to Pease by Carpatsky and which is attached hereto and is made a part hereof (the "Carpatsky 15 Disclosure Schedule"), Carpatsky does not own, directly or indirectly, any subsidiaries and Carpatsky does not own an equity interest in any other partnership or joint venture arrangement or other business entity that is material to the assets, liabilities, financial condition, results of operations or current or future business of Carpatsky and its subsidiaries, taken as a whole. SECTION 4.02 Charter and Bylaws. Carpatsky has heretofore furnished to Pease a complete and correct copy of the certificate of incorporation and bylaws or the equivalent organizational documents as presently in effect of Carpatsky and each of its subsidiaries and for the Representative Office. Carpatsky and its subsidiaries are not in violation of any of the provisions of their respective charters or any material provision of their respective bylaws. SECTION 4.03 Capitalization. (a) The authorized capital stock of Carpatsky consists of an unlimited number of shares of Carpatsky Common Stock, of which 77,728,263 shares are issued and outstanding and an unlimited number of shares of Carpatsky Preferred Stock, of which 95,450,000 shares are issued and outstanding. Except as set forth in Schedule 4.03(a), there are no shares liable for future issuance pursuant to outstanding stock options (the "Carpatsky Options") and warrants ("Carpatsky Warrants") or any other purpose. Each of the outstanding shares of capital stock of, or other equity interests in, Carpatsky and its subsidiaries is duly authorized, validly issued, and, in the case of shares of capital stock, fully paid and nonassessable, and has not been issued in violation of (nor are any of the authorized shares of capital stock of, or other equity interests in, such entities subject to) any preemptive or similar rights created by statue, the charter or bylaws (or the equivalent organizational documents) of Carpatsky and its subsidiaries, or any agreement to which Carpatsky and its subsidiaries is a party or bound, and such outstanding shares or other equity interests owned by Carpatsky and its subsidiaries are owned free and clear of all security interests, liens, claims, pledges, agreements, limitations on Carpatsky's or its subsidiaries' voting rights, charges or other encumbrances of any nature whatsoever. (b) Except as set forth in Schedule 4.03(b)(i) to the Carpatsky Disclosure Schedule, there are no options, warrants or other rights (including registration rights), agreements, arrangements or commitments of any character to which Carpatsky is a party relating to the issued or unissued capital stock of Carpatsky or obligating Carpatsky to grant, issue or sell any shares of the capital stock of Carpatsky, by sale, leases, license or otherwise. Except as set forth in Schedule 4.03(b)(ii) to the Carpatsky Disclosure Schedule, there are no obligations, contingent or otherwise, of Carpatsky to (i) repurchase, redeem or otherwise acquire any shares of Carpatsky Common Stock or other capital stock of Carpatsky; or (ii) provide material funds to, or make any material investment in (in the form of a loan, capital contribution or otherwise), or provide any guarantee with respect to the obligations of any other person. Except as described in Schedule 4.03(b)(iii) to the Carpatsky Disclosure Schedule, Carpatsky (x) does not directly or indirectly own, (y) has not agreed to purchase or otherwise acquire or (z) does not holds any interest convertible into or exchangeable or exercisable for, 5% or more of the capital stock of any corporation, partnership, joint venture or other business association or entity. Except as set forth in Schedule 4.03(b)(iv) to the Carpatsky Disclosure Schedule, there are no agreements, arrangements or commitments of any character (contingent or otherwise) pursuant to which any person is or may be entitled to receive any payment based on the revenues or earnings or calculated in accordance therewith, of Carpatsky or any of its subsidiaries. Except as set forth in Schedule 4.03(b)(v), there are no voting trusts, proxies or other agreements or understanding to which Carpatsky is a party or by which Carpatsky is bound with respect to the voting of any shares of capital stock of Carpatsky. 16 (c) Carpatsky has made available to Pease complete and correct copies of (i) the forms of the Carpatsky Options including all amendments thereto and (ii) all warrants that are not in the form specified under clause (i) above. Schedule 4.03(c) to the Carpatsky Disclosure Schedule sets forth a complete and correct list of all outstanding warrants and options, restricted stock or any other stock awards (the "Carpatsky Stock Awards") setting forth as of the date hereof (i) the number of type of Carpatsky Stock Awards, (ii) the exercise price of each outstanding stock option or warrants, and (iii) the number of stock options and warrants presently exercisable. SECTION 4.04 Authority. Carpatsky has all requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby (subject to, with respect to the Continuance and Merger, the adoption of this Agreement by the stockholders of Carpatsky as described in Section 4.12 hereof). The execution and delivery of this Agreement by Carpatsky and the consummation by Carpatsky of the transactions contemplated hereby had been duly authorized by all necessary corporate action and no other corporate proceedings on the part of Carpatsky are necessary to authorize this Agreement or to consummate the transactions contemplated hereby (subject to, with respect to the approval and adoption of this Agreement, the Continuance, the Merger, the approval thereof by the holders of Carpatsky Common Stock and Carpatsky Preferred Stock as described in Section 4.12). This Agreement has been duly executed and delivered by Carpatsky and, assuming the due authorization, execution and delivery thereof by Pease, constitutes the legal, valid and binding obligation of Carpatsky enforceable against Carpatsky in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. SECTION 4.05 No Conflict: Required Filings and Consents. (a) Except as set forth in Schedule 4.05 to the Carpatsky Disclosure Schedule, the execution and delivery of this Agreement by Carpatsky does not, and the consummation of the transaction contemplated hereby will not (i) conflict with or violate the certificate of incorporation or bylaws, or the equivalent organizational documents, in each case as amended or restated, of Carpatsky, (ii) conflict with or violate any Laws applicable to Carpatsky or by which any of their properties are bound or subject, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the properties or assets of Carpatsky pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Carpatsky is, or upon consummation of the Continuance, will be a party or by or to which Carpatsky or any of its respective properties is, or upon consummation of the Continuance, will be bound or subject, except for any such conflicts or violations described in clause (ii) or breaches, defaults, events, rights of termination, amendment, acceleration or cancellation, payments obligations or liens or encumbrances described in clause (iii) that would not have a Carpatsky Material Adverse Effect. (b) The execution and delivery of this Agreement by Carpatsky does not, and consummation of the transactions contemplated hereby will not, require Carpatsky to obtain any consent, re-registration, license, permit, approval, waiver, authorization or order of, or to make any filing with or notification to, any Governmental Authority, except for filing (A) preliminary and definitive proxy materials and a registration statement on Form S-4 under 17 applicable Canadian Laws and the Securities Act, (B) appropriate documents as required under Delaware Law and Canadian Law in connection with the Continuance in Delaware, (C) appropriate merger documents as required by Delaware Law and (D) appropriate documents as required under the laws of Ukraine; and where the failure to obtain such consents, licenses, permits, approvals, waivers, authorizations or orders, or to make such filings or notifications, would not, either individually or in the aggregate, materially interfere with Carpatsky's performance of its obligations under this Agreement and would not have a Carpatsky Material Adverse Effect. SECTION 4.06 Permits; Compliance. Each of Carpatsky and its subsidiaries is in possession of all franchises, grants, authorizations, leases, agreements, licenses, permits, easements, variances, exemptions, consents, registrations, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the "Carpatsky Permits"), and there is no action, proceeding or investigation pending or, to the knowledge of Carpatsky, threatened regarding suspension or cancellation of any of the Carpatsky Permits, except where the failure to possess, or the suspension or cancellation of, such Carpatsky Permits would not have a Carpatsky Material Adverse Effect. Except as set forth in Schedule 4.06 to the Carpatsky Disclosure Schedule, Carpatsky has not received from any Governmental Authority any written notification with respect to possible conflicts, defaults or violations of Laws, except for written notices relating to possible conflicts, defaults or violations that would not have a Carpatsky Material Adverse Effect. SECTION 4.07 Financial Statements. Carpatsky's audited consolidated financial statements (including the related notes thereto) for the year ended December 31, 1999 and for the three month period ended March 31, 2000 (i) have been prepared in accordance with U.S. generally accepted accounting principles applied on a consistent basis throughout the periods involved (except (A) to the extent required by changes in U.S. generally accepted accounting principles and (B) as may be indicated in the notes thereto) and (ii) except as set forth in Schedule 4.07(ii), fairly present the consolidated financial position of Carpatsky as of the respective dates thereof and the result of operations and cash flows for the periods indicated (including reasonable estimates of normal and recurring year-end adjustments), except that (x) any unaudited interim financial statements were or will be subject to normal and recurring year-end adjustments and (y) any pro forma financial information contained in such financial statements is not necessarily indicative of the consolidated financial position of Carpatsky as of the respective dates thereof and the results of operations and cash flows for the periods indicated. SECTION 4.08 Absence of Certain Changes or Events. Except as disclosed in the Carpatsky Disclosure Schedule or as contemplated by this Agreement or as set forth in Schedule 4.08 to the Carpatsky Disclosure Schedule, since December 31, 1999, each of Carpatsky and its subsidiaries, including the Representative Office, has conducted its business in the ordinary course of business consistent with past practice. Except as disclosed in Schedule 4.08 to the Carpatsky Disclosure Schedule, since December 31, 1999, there has not been (i) any event, change, or effect (including the occurrence of any liabilities of any nature, whether or not accrued, contingent or otherwise) having or, which would be reasonably likely to have, individually or in the aggregate, a Carpatsky Material Adverse Effect; (ii) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to the equity interests of Carpatsky or any redemption, purchase or other acquisition by Carpatsky of any of Carpatsky's securities; (iii) any revaluation by Carpatsky of its assets, including the writing down of the value of inventory or the writing down or off of its proven reserves or notes or accounts receivable, other than in the ordinary course of business and consistent with past practices; (iv) any change by Carpatsky in accounting principles or methods, except insofar as may be required by a change in U.S. generally accepted accounting principles; (v) a fundamental change in the nature of Carpatsky's business; or (vi) a Carpatsky Material Adverse Effect. 18 SECTION 4.09 Absence of Litigation. Except as set forth in Schedule 4.09 to the Carpatsky Disclosure Schedule, there is no claim, suit, litigation, proceeding, arbitration or, to the knowledge of Carpatsky, investigation of any kind, at law or in equity (including actions or proceedings against Carpatsky, its subsidiaries or any of their respective properties (except for claims, actions, suits, litigation, proceedings, arbitrations or investigations which would not have a Carpatsky Material Adverse Effect), and neither Carpatsky nor any of its subsidiaries are subject to any continuing order of, consent decree, settlement agreement or other similar written agreement with, or, to the knowledge of Carpatsky, continuing investigation by, any Governmental Authority, or any judgment, order, writ, injunction, decree or award of any Government Authority or arbitrator, including, without limitation, cease-and-desist or other orders, except for matters that would not have a Carpatsky Material Adverse Effect. SECTION 4.10 Tax Matters. Neither Carpatsky nor, to the knowledge of Carpatsky, any of its affiliates has taken or agreed to take any action that would prevent the Continuance and the Merger from constituting tax-free reorganizations qualifying under relevant provisions of the Code. SECTION 4.11 Taxes. Except as set forth in the Carpatsky Reports or as otherwise set forth in the Carpatsky Disclosure Schedule and except as would not, individually or in the aggregate, have a Carpatsky Material Adverse Effect, (i) all Carpatsky Tax Returns required to be filed with any taxing authority by, or with respect to, Carpatsky have been filed in accordance with all applicable laws; (ii) Carpatsky has timely paid all Taxes shown as due and payable on Carpatsky Tax Returns that have been so filed, and, as of the time of filing, Carpatsky Tax Returns correctly reflected the facts regarding the income, business, assets, operations, activities and the status of Carpatsky and its subsidiaries (other than Taxes which are being contested in good faith and for which adequate reserves are reflected on the Carpatsky Balance Sheet); (iii) Carpatsky and its subsidiaries have made provision for all Taxes payable by Carpatsky and its subsidiaries for which no Carpatsky Tax Return has yet been filed; (iv) the charges, accruals and reserves for Taxes with respect to Carpatsky and its subsidiaries reflected on the Carpatsky Balance Sheet are adequate under GAAP to cover the Tax liabilities accruing through the date thereof; (v) there is no action, suit, proceeding, audit or claim now proposed or pending against or with respect to Carpatsky or any of its subsidiaries in respect of any Tax where there is a reasonable possibility of an adverse determination; and (vi) to the best of Carpatsky's knowledge and belief, neither Carpatsky nor any of its subsidiaries is liable for any Tax imposed on any entity other than such Person. SECTION 4.12 Vote Required. The affirmative vote of the holders (present in person or by proxy at the special meeting of stockholders to be called for the purpose of approving the transactions contemplated herein) of at least (i) two-thirds of the issued and outstanding shares of Carpatsky Common Stock and Carpatsky Preferred Stock, voting together as a class, is required to approve the Continuance and (ii) a majority of the issued and outstanding shares of Carpatsky Common Stock and Carpatsky Preferred Stock, voting together as a class, is required to approve the Merger. SECTION 4.13 Brokers. Except as set forth in Schedule 4.13 of the Carpatsky Disclosure Schedule, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Carpatsky. Prior to the date of this Agreement, Carpatsky has made available to Pease a complete and correct copy of all agreements referenced in Schedule 4.13 pursuant to which any such firm will be entitled to any payment related to the transactions contemplated by this Agreement. 19 SECTION 4.14 Information Supplied. Without limiting any of the representations and warranties contained herein, no representation or warranty of Carpatsky and no statement by Carpatsky or other information contained in or documents referred to in the Carpatsky Disclosure Schedule, as of the date of such representation, warranty, statement or document, contains or contained any untrue statement of material fact, or, at the date thereof, omits or omitted to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which such statements are or were made, not misleading. SECTION 4.15 Employee Benefit Plans; Labor Matters. (a) Except as set forth in Schedule 4.15(a) to the Carpatsky Disclosure Schedule, Carpatsky does not maintain nor has it contributed during the past five years to any employee benefit plan (as such term is defined in ERISA Section 3(s)) or with respect to which Carpatsky or any member of its ERISA Group would incur liability under Sections 4065, 4069, 4212 (c) or 4204 of ERISA, or any analogous federal or provincial law of Canada, and any other retirement, pension, stock option, stock application rights, profit sharing, incentive compensation, deferred compensation, savings, thrift, vacation pay, severance pay, or other employee compensation or benefit plan, agreement, practice or arrangement, whether written or unwritten, whether or not legally binding (collectively, the "Carpatsky Benefit Plans"). As of the date of this Agreement, except as would not have a Carpatsky Material Adverse Effect, the material Carpatsky Benefit Plans maintained by Carpatsky, or any member of its ERISA Group, or with respect to which Carpatsky has or may have a liability are in substantial compliance with applicable laws. Schedule 4.15(a) sets forth a list of all Carpatsky Plans, true and complete copies of which have been furnished to Pease. (b) With respect to the Carpatsky Plans, no event has occurred and, to the knowledge of Carpatsky, there exists no condition or set of circumstances, in connection with which Carpatsky or any member of its ERISA Group could be subject to any liability under the terms of such Carpatsky Plans or other applicable Law which would have a Carpatsky Material Adverse Effect. (c) Except as otherwise set forth on Schedule 4.15(c) to the Carpatsky Disclosure Schedule, neither Carpatsky nor any member of its ERISA Group contributes to or has an obligation to contribute to, and has not within five years prior to the date of this Agreement contributed to or had an obligation to contribute to or has any secondary liability to a multiemployer plan within the meaning of Section 3(37) of ERISA. (d) Neither Carpatsky nor any member of its ERISA Group, is or has ever been a party to any collective bargaining or other labor union contracts. No collective bargaining agreement is being negotiated by Carpatsky. There is no pending or threatened labor dispute, strike or work stoppage against Carpatsky or any of its subsidiaries which may interfere with the business activities of Carpatsky. None of Carpatsky or any of its representatives or employees has committed any unfair labor practices in connection with the operation of the business of Carpatsky, and there is no pending or threatened charge or complaint against Carpatsky by any governmental authority. (e) With respect to each Carpatsky Benefit Plan that is a "group health plan" as defined in Section 5000(b) of the Code, each such Carpatsky Benefit Plan complies and has complied with the requirements of applicable laws, except where the failure to so comply would not have a Carpatsky Material Adverse Effect. (f) Except as disclosed in Schedule 4.15(f), through the date of this Agreement, Carpatsky and its subsidiaries are not obligated nor responsible for benefit plans, pensions, employee taxes, employer's taxes or similar obligations with respect to citizens or residents of Ukraine who may be employed, directly or indirectly, by any subsidiary of Carpatsky, Ukrcarpatoil or the Representative Office. 20 SECTION 4.16 Certain Business Practices. None of Carpatsky, its subsidiaries and its Representative Office or any directors, offices, agents or employees of any of them has used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns. SECTION 4.17 Environmental Matters. Except as set forth in the Carpatsky Reports filed prior to the date hereof and with such exceptions as, individually or in the aggregate, have not had, and would not reasonably be expected to have, a Carpatsky Material Adverse Effect, (i) no notice, notification, demand, request for information, citation, summons, complaint or order has been received by, and no investigation, action, claim, suit, proceeding or review is pending or, to the knowledge of Carpatsky or any of its subsidiaries, threatened by any Person against, Carpatsky or any of its subsidiaries, and no penalty has been assessed against Carpatsky or any of its subsidiaries, in each case, with respect to any matters relating to or arising out of any Environmental Law; (ii) Carpatsky and its subsidiaries are and have been in compliance with all Environmental Laws; (iii) there are no liabilities of or relating to Carpatsky or any of its subsidiaries relating to or arising out of any Environmental Law of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a liability; and (iv) there has been no environmental investigation, study, audit, test, review or other analysis conducted of which Carpatsky has knowledge in relation to the current or prior business of Carpatsky or any of its subsidiaries or any property or facility now or previously owned, leased or operated by Carpatsky or any of its subsidiaries which has not been delivered to Pease at least five days prior to the date hereof. SECTION 4.18 Certain Contracts and Restrictions. Other than agreements, contracts or commitments listed elsewhere in the Carpatsky Disclosure Schedule, Schedule 4.18 to the Carpatsky Disclosure Schedule lists, as of the date hereof, each agreement, contract or commitment (including any amendments thereto) to which Carpatsky is a party or by which Carpatsky is bound involving consideration during the next twelve months in excess of $10,000 or which is otherwise material to the assets, liabilities, financial condition, results of operations or current or future business of Carpatsky and its subsidiaries, taken as a whole. As of the date of this Agreement and except as indicated on the Carpatsky Disclosure Schedule, (i) Carpatsky and its subsidiaries each has fully complied with all material terms and conditions of all agreements, contracts and commitments that will be listed in the Carpatsky Disclosure Schedule and all such agreements, contracts and commitments are in full force and effect, Carpatsky has no knowledge of any defaults thereunder or any cancellations or modifications thereof, and such agreements, contracts and commitments are not subject to any memorandum or other written document or understanding permitting cancellation. SECTION 4.19 Futures Trading and Fixed Price Exposure. Neither Carpatsky nor any of its subsidiaries is presently engaged in any futures or options trading nor are they party to any price, interest rate or currency swaps, hedges, futures or other derivative instruments. ARTICLE V COVENANTS SECTION 5.01 Affirmative Covenants of Pease. Pease hereby covenants and agrees that, at or prior to the Effective Time, unless otherwise expressly contemplated by this Agreement or consented to in writing by Carpatsky, Pease will and will cause its subsidiaries to: 21 (a) Use all reasonable efforts to preserve substantially intact its business organization, maintain its material rights and franchises, retain the services of its respective officers and employees and maintain its relationships with its material customers and suppliers; (b) maintain and keep its material properties and assets in as good repair and conditions as at present, ordinary wear and tear excepted; (c) use all reasonable efforts to keep in full force and effect insurance and bonds comparable in amount and scope of coverage to that currently maintained; (d) furnish to Carpatsky the most recent reserve report regarding Pease's interests in its oil and gas properties prepared by Netherland, Sewell & Associates, Inc. in accordance with Reg. S-X; (e) take all such steps as are commercially reasonable in order to consummate the Exchange and the Merger and all other transactions contemplated hereby, including, without limitation, securing all requisite consents thereto; and (f) operate its business in all material respects in the usual and ordinary course. SECTION 5.02 Negative Covenants of Pease. Except as expressly contemplated by this Agreement or otherwise consented to in writing by Carpatsky, from the date of this Agreement until the Effective Time, Pease will not do, and will not permit any of its subsidiaries to do, any of the foregoing: (a) declare or pay any dividend on, or make any other distribution in respect of, outstanding shares of capital stock, except for dividends by a wholly owned subsidiary of Pease to Pease or another wholly owned subsidiary of Pease; (b) except as contemplated by this Agreement or as described in Schedule 3.03(b)(ii) to the Pease Disclosure Schedule, (i) redeem, purchase or otherwise acquire any shares of its or any of its subsidiaries' capital stock or any securities or obligations convertible into or exchangeable for any shares of its or its subsidiaries' capital stock (other than pursuant to the Exchange or any such acquisitions directly from any wholly owned subsidiary of Pease in exchange for capital contributions or loans to such subsidiary), or any options, warrants or conversion or other rights to acquire any shares of its or its subsidiaries' capital stock or any such securities or obligations (except in connection with the exercise of outstanding stock options in accordance with their terms); effect any reorganization or recapitalization (other than the Exchange); or split, combine or reclassify any of its or its subsidiaries' capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for, shares of its or its subsidiaries' capital stock; (c) except as described in Schedule 3.03(b)(i) to the Pease Disclosure Schedule or as contemplated by the Exchange and this Agreement, issue, deliver, award, grant or sell, or authorize or propose the issuance, delivery, award, grant or sale (including the grant of any security interests, liens, claims, pledges, limitations in voting rights, charges or other encumbrances) of, any shares of any class of its or its subsidiaries' capital stock (including shares held in treasury), any securities convertible into or exercisable or exchangeable for any such shares, or any rights, warrants or options to acquire any such shares (except as permitted pursuant to Sections 2.01(a), 2.01(b) and 2.01(e) of this Agreement or for the issuance of shares upon the exercise of outstanding stock options or the vesting of restricted stock in accordance with the terms of outstanding Pease Stock Awards); amend or otherwise modify the terms of any such rights, warrants or options the effect of which shall be to make such terms more favorable to the holders thereof; or take any action to accelerate the exercisability of stock options; 22 (d) except as contemplated by this Agreement, acquire or agree to acquire, by merging or consolidating with, by purchasing any equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets of any other person (other than the purchase of assets from suppliers or vendors in the ordinary course of business and consistent with past practice); (e) except as disclosed in Schedule 5.02(e) to the Pease Disclosure Schedule, sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, any of its material assets or any material assets of any of its subsidiaries, except for the sale of inventory or other dispositions in the ordinary course; (f) initiate, solicit or encourage (including by way of furnishing information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal relating to, or that may reasonably be expected to lead to, any Competing Transaction (as defined below), or enter into discussions or negotiate with any person or entity in furtherance of such inquiries or to obtain a Competing Transaction, or agree to or endorse any Competing Transaction, or authorize or permit any of the officers, directors or employees of Pease or any of its subsidiaries or any investment banker, financial advisor, attorney, accountant or other representative retained by Pease or any of Pease's subsidiaries to take any such action, and Pease shall promptly notify Carpatsky of all relevant terms of any such inquiries and proposals received by Pease or any of its subsidiaries or by any such officer, director, investment banker, financial advisor, attorney, accountant or other representative relating to any of such matters and if such inquiry or proposal is in writing, Pease shall promptly deliver or cause to be delivered to Carpatsky a copy of such inquiry or proposal. For purposes of this Agreement, "Competing Transaction" shall mean any of the following (other than the transactions contemplated by this Agreement, including, without limitation, the Exchange) involving a party hereto or any of its subsidiaries: (i) any merger, consolidation, share exchange, business combination or similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 20% or more of the assets of a party hereto and its subsidiaries, taken as a whole, (iii) any tender offer or exchange offer for 20% or more of the outstanding shares of capital stock of a party hereto or the filing of a registration statement under the Securities Act in connection therewith; (iv) any person (other than stockholders as of the date of this Agreement) having acquired beneficial ownership of, or any group (as such term is defined under Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder) having been formed which beneficially owns or has the right to acquire beneficial ownership of, 20% or more of the outstanding shares of capital stock of a party hereto; or (v) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing; (g) except as contemplated by this Agreement, adopt or propose to adopt any amendments to its articles of incorporation or bylaws, which would alter the terms of its capital stock or would have an adverse impact on the consummation of the transactions contemplated by this Agreement; (h) (A) change any of its methods of accounting in effect at December 31, 1999, or (B) make or rescind any express or deemed election relating to Taxes, settle or compromise any claim, action, suit, litigation, audit or controversy relating to Taxes (except where the amount of such settlements or controversies, individually or in the aggregate, does not exceed $10,000), or change any of its methods of reporting income or deductions for federal income tax purposes from those employed in the preparation of the federal income tax returns for the taxable year ended December 31, 1998, except in each case, as may be required by Law or generally accepted accounting principles; 23 (i) incur any obligations for borrowed money or purchase money indebtedness or guarantee, whether or not evidenced by a note, bond, debenture or similar instrument, except in the ordinary course of business consistent with past practice and in no event in excess of $10,000 in the aggregate; (j) enter into any material arrangement, agreement or contract with any third party which provides for an exclusive arrangement with that third party or is substantially more restrictive on Pease or substantially less advantageous to Pease than arrangements, agreements or contracts existing on the date hereof; (k) take any action, other than actions required by this Agreement, which would result in a failure to maintain the registration of the Pease Common Stock under the Exchange Act; (l) except as contemplated by this Agreement, adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other material reorganization of Pease or any of its subsidiaries; (m) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction of any such claims, liabilities or obligations, (x) reflected on, or reserved against in, or contemplated by, the financial statements (or the notes thereto) of Pease and its subsidiaries, (y) incurred in the ordinary course of business consistent with past practice or (z) which are legally required to be paid, discharged or satisfied; (n) knowingly take, or agree to commit to take, any action that would make any representation or warranty of Pease contained herein inaccurate in any respect at, or as of any time prior to, the Effective Time; (o) other than between or among wholly-owned subsidiaries of Pease which remain wholly-owned or between Pease and its wholly-owned subsidiaries which remain wholly- owned, neither Pease nor any of its subsidiaries will engage in any transaction with, or enter into any agreement, arrangement, or understanding with, directly or indirectly, any of Pease's affiliates, including, without limitation, any transactions, agreements, arrangements or understanding with any affiliate or other person covered under Item 404 of Regulation S-K promulgated under the Securities Act, other than pursuant to such agreement, arrangements or understandings existing on the date of this Agreement (which are set forth on Schedule 5.02(o) of the Pease Disclosure Schedule) or as disclosed in writing to Carpatsky on the date hereof or which are contemplated under this Agreement; provided, that Pease provides Carpatsky with all information concerning any such agreement, arrangement or understanding that Carpatsky may reasonably request; (p) agree to or approve any commitment, including any authorization for expenditure or agreement to acquire property, obligating Pease for an amount in excess of $100,000, other than for authorizations for expenditure involving Pease oil field operations which are made pursuant to existing agreements or are otherwise effected in the ordinary course or in order that Pease conduct its operations in a prudent manner consistent with industry standards; (q) engage in any futures or options trading or be a party to any price or currency swaps, hedges, futures or derivative instruments; or (r) agree in writing or otherwise to do any of the foregoing. 24 SECTION 5.03 Affirmative Covenants of Carpatsky. Carpatsky hereby covenants and agrees that, prior to the Effective Time, unless otherwise expressly contemplated by this Agreement or consented to in writing by Pease, Carpatsky will: (a) furnish to Pease the most recent reserve report regarding Carpatsky's interests in oil and gas properties in the Republic of the Ukraine prepared by Ryder Scott Company Petroleum Engineers; (b) operate its business in all material respects in the usual and ordinary course; (c) use all reasonable efforts to preserve substantially intact its business organization, maintain its material rights and franchises and maintain its relationships with its material customers, suppliers, partners and joint enterprise shareholders; (d) use all commercially reasonable efforts to maintain and keep its material properties and assets in as good repair and condition as at present, ordinary wear and tear excepted, and maintain supplies and inventories in quantities consistent with its customary business practice; (e) use all reasonable efforts to keep in full force and effect insurance and bonds comparable in amount and scope of coverage to that currently maintained; and (f) take all such steps as are commercially reasonable in order to consummate the Continuance and the Merger and all other transactions contemplated hereby, including, without limitation, securing all requisite consents thereto. SECTION 5.04 Negative Covenants of Carpatsky. Except as expressly contemplated by this Agreement or otherwise consented to in writing by Pease, from the date of this Agreement until the Effective Time, Carpatsky will not do or permit any of its subsidiaries to do any of the following: (a) declare or pay any dividend on, or make any other distribution in respect of, outstanding shares of capital stock; (b) (A) redeem, purchase or otherwise acquire any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock, or any options, warrants or conversion or other rights to acquire any shares of its or any such securities or obligations (except in connection with the exercise of outstanding stock options in accordance with their terms); (B) effect any reorganization or recapitalization; or (C) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for, shares of its capital stock; (c) except as contemplated by this Agreement, (i) issue, deliver, award, grant or sell, or authorize or propose the issuance, delivery, award, grant or sale (including the grant of any security interests, liens, claims, pledges, limitations in voting rights, charges or other encumbrances) of, any shares of any class of its capital stock (including shares held in treasury), any securities convertible into or exercisable or exchangeable for any such shares, or any rights, warrants or options to acquire any such shares (except as permitted pursuant to Sections 2.01(a), 2.01(b) and 2.01(e) of this Agreement or for the issuance of shares upon the exercise of outstanding stock options or the vesting of restricted stock in accordance with the terms of outstanding Carpatsky Stock Awards); (ii) amend or otherwise modify the terms of any such rights, warrants or options the effect of which shall be to make such terms more favorable to the holders thereof; or (iii) take any action to accelerate the exercisability of stock options; 25 (d) acquire or agree to acquire, by merging or consolidating with, by purchasing any equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets of any other person (other than pursuant to this Agreement or for the purchase of assets from suppliers or vendors in the ordinary course of business and consistent with past practice); (e) sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, any of its material assets; (f) initiate, solicit or encourage (including by way of furnishing information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal relating to, or that may reasonably be expected to lead to, any Competing Transaction, or enter into discussions or negotiate with any person or entity in furtherance of such inquiries or to obtain a Competing Transaction, or agree to or endorse any Competing Transaction, or authorize or permit any of the officers, directors or employees of Carpatsky or any investment banker, financial advisor, attorney, accountant or other representative retained by Carpatsky to take any such action, and Carpatsky shall promptly notify Pease of all relevant terms of any such inquiries and proposals received by Carpatsky or any of its subsidiaries or by any such officer, director, investment banker, financial advisor, attorney, accountant or other representative relating to any of such matters and if such inquiry or proposal is in writing, Carpatsky shall promptly deliver or cause to be delivered to Pease a copy of such inquiry or proposal; (g) adopt or propose to adopt any amendments to its certificate of incorporation or bylaws, which would alter the terms of its capital stock or would have an adverse impact on the consummation of the transactions contemplated by this Agreement; (h) (A) except for changing its fiscal year end in connection with the Merger to December 31 in each year and, as a result of the Continuance becoming subject to U.S. generally accepted accounting principles, change any of its methods of accounting in effect at December 31, 1999 or (B) make or rescind any express or deemed election relating to Taxes, settle or compromise any claim, action, suit, litigation, audit or controversy relating to Taxes (except where the amount of such settlements or controversies, individually or in the aggregate, does not exceed $10,000), or change any of its methods of reporting income or deductions for federal income tax purposes from those employed in the preparation of the its income tax returns for the taxable year ended June 30, 1999, except in each case, as may be required by Law or U.S. or Canadian generally accepted accounting principles; (i) incur any obligations for borrowed money or purchase money indebtedness or guarantee, whether or not evidenced by a note, bond, debenture or similar instrument, except in the ordinary course of business consistent with past practice and in no event in excess of $10,000 in the aggregate; (j) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other material reorganization of Carpatsky; (k) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction of any such claims, liabilities or obligations, (x) reflected on, or reserved against in, or contemplated by, the financial statements (or the notes thereto) of Carpatsky, (y) incurred in the ordinary course of business consistent with past practice or (z) which are legally required to be paid, discharged or satisfied; 26 (l) knowingly take, or agree to commit to take, any action that would make any representation or warranty of Carpatsky contained herein inaccurate in any respect at, or as of any time prior to, the Effective Time; (m) Except to the extent described in Schedule 5.04(m), Carpatsky will not engage in any transaction with, or enter into any agreement, arrangement, or understanding with, directly or indirectly, any of Carpatsky's affiliates, including, without limitation, any transactions, agreements, arrangements or understanding with any affiliate or other person covered under Item 404 of Regulation S-K promulgated under the Securities Act, other than pursuant to such agreement, arrangements or understandings existing on the date of this Agreement (which are set forth on Section 5.04(m) of the Carpatsky Disclosure Schedule) or as disclosed in writing to Pease on the date hereof or which are contemplated under this Agreement; provided, that Carpatsky provides Pease with all information concerning any such agreement, arrangement or understanding that Pease may reasonably request; (n) engage in any futures or options trading or be a party to any price or currency swaps, hedges, futures or derivative instruments; or (o) agree in writing or otherwise to do any of the foregoing. SECTION 5.05 Access and Information. (a) Pease shall, and shall cause its subsidiaries to, (i) afford Carpatsky and its officers, directors, employees, accountants, consultants, legal counsel, agents and other representatives (collectively, the "Carpatsky Representatives") reasonable access at reasonable times, upon reasonable prior notice, to the officers, employees, agents, properties, offices and other facilities of Pease and its subsidiaries and to the books and records thereof and (ii) furnish promptly to Carpatsky and the Carpatsky Representatives such information concerning the business, properties, contracts, records and personnel of Pease and its subsidiaries (including, without limitation, financial, operating and other data and information) as may be reasonably requested, from time to time, by Carpatsky or such Representatives. (b) Carpatsky shall, and shall cause its subsidiaries to, (i) afford to Pease and its officers, directors, employees, accountants, consultants, legal counsel, agents and other representatives (collectively, the "Pease Representatives") reasonable access at reasonable times, upon reasonable prior notice, to the officers, employees, accountants, agents, properties, offices and other facilities of Carpatsky and its subsidiaries and to the books and records thereof and (ii) furnish promptly to Pease and Pease Representatives such information concerning the business, properties, contracts, records and personnel of Carpatsky and its subsidiaries (including, without limitation, financial, operating and other data and information) as may be reasonably requested, from time to time, by Pease or such Representatives. (c) Notwithstanding the foregoing provisions of this Section 5.05, neither party shall be required to grant access or furnish information to the other party to the extent that such access to or the furnishing of such information is prohibited by Law. No investigation by the parties hereto made heretofore or hereafter shall affect the representations and warranties of the parties which are herein contained and each such representation and warranty shall survive such investigation. (d) The information received pursuant to Section 5.05(a) and (b) by either party hereto (the "Recipient") shall be deemed to be "confidential information" and may not be publically disclosed except pursuant to express written permission by the other party hereto (the "Informant") or valid court or investigative order unless such information is already in the public domain or in the possession of the Recipient and such disclosure and was not obtained in breach of any duty owed by the Informant. 27 SECTION 5.06 The Exchange. Pease will use its commercially reasonable efforts to cause the holders of its Preferred Stock to exchange such Preferred Stock for an aggregate of 8,865,665 shares of Common Stock pursuant to the Exchange Agreement attached as Exhibit A (the "Exchange") on or prior to the Closing Date. SECTION 5.07 Further Assurances. At and after the Effective Time, the officers and directors of the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of the Constituent Entities, any deeds, bills of sale, assignments or assurances, and to take and do, in the name and on behalf of the Constituent Entities, any other actions and things to vest, perfect, or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets of the Constituent Entities to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger. ARTICLE VI ADDITIONAL AGREEMENTS SECTION 6.01 Meetings of Stockholders. (a) Pease shall, promptly after the effectiveness of the Form S-4, take all actions necessary in accordance with Nevada Law and its articles of incorporation and bylaws to convene a special meeting of Pease's stockholders to approve the Amended and Restated Articles of Pease (the "Amendment") and to elect the directors listed in Schedule 1.06 (the "Pease Stockholders Meeting"), and Pease shall consult with Carpatsky in connection therewith. Pease shall use its reasonable efforts to solicit from stockholders of Pease proxies in favor of the approval and adoption of the Amendment and the election of directors and to secure the vote of stockholders required by Nevada Law, its articles of incorporation and bylaws to approve and adopt the Amendment, the election of directors and to otherwise satisfy the closing conditions set forth in Sections 7.01 and 7.02. (b) Carpatsky shall, promptly after the effectiveness of the Form S-4, take all action necessary in accordance with Delaware and Canadian Law and its charter and bylaws to convene a special meeting of Carpatsky's shareholders to (i) approve the Continuance and (ii) act on this Agreement (the "Carpatsky Stockholders Meeting"). Carpatsky shall recommend approval of the Continuance of Carpatsky in Delaware and the approval and adoption of this Agreement and the Merger and shall use its reasonable efforts to solicit from shareholders of Carpatsky proxies in favor of the approval and adoption of the Continuance, the Merger and this Agreement and to secure the vote of shareholders required by Canadian and Delaware Law and its charter and bylaws to approve and adopt the Continuance, the Merger, this Agreement and the transactions contemplated hereby. SECTION 6.02 Registration Statement. (a) As promptly as practicable after the execution of this Agreement, Carpatsky and Pease shall amend the Form S-4 previously filed by Pease, including a proxy statement and management information circular for stockholders of Pease and Carpatsky in connection with the transactions contemplated by this Agreement and a prospectus for the issuance by Pease of the Pease Common Stock (the "Proxy Statement/Prospectus"). In connection with the preparation and filing of the Proxy Statement/Prospectus, Carpatsky shall reconcile its financial statements in accordance with U.S. generally accepted accounting principles and the provisions of Reg. S-X and shall change its fiscal year end to December 31 for all fiscal years ending after June 30, 1999. Each of Carpatsky and Pease shall use its commercially reasonable efforts to cause the Form S-4 to be declared effective by the SEC as promptly as practicable, and 28 shall take any action required to be taken under any applicable federal or state securities laws in connection with the issuance of shares of Pease Common Stock and Pease Preferred Stock in the Conversion and the Merger. Each of Carpatsky and Pease shall furnish to the other all information concerning it and the holders of its capital stock as the other may reasonably request in connection with such actions. As promptly as practicable after the Form S-4 shall have been declared effective by the SEC, Pease shall mail the Proxy Statement/Prospectus to its stockholders entitled to notice of and to vote at the Pease Stockholders Meeting and to the stockholders of Carpatsky entitled to notice of and to vote at the Carpatsky Stockholders Meeting. The Proxy Statement/Prospectus shall include the recommendation of Pease's Board of Directors in favor of the Amendment and approval and adoption of this Agreement and the Merger. The Proxy Statement/Prospectus shall also be filed as a management information circular in the principal review jurisdiction of Carpatsky in Canada. The Proxy Statement/Prospectus shall include the recommendation of Carpatsky's Board of Directors that shareholders vote in favor of approval of the Continuance, and that shareholders vote to approve and adopt the Merger and this Agreement. (b) The information supplied by Pease for inclusion in the Form S-4 shall not, at the time the Proxy Statement/Prospectus is mailed to the stockholders of Pease and Carpatsky, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. If at any time prior to the Effective Time any event or circumstance relating to Pease or any of its affiliates, or its or their respective officers or directors, is discovered by Pease that should be set forth in a supplement to the Proxy Statement/Prospectus, Pease shall promptly inform Carpatsky thereof in writing. All documents that Pease is responsible for filing with the SEC in connection with the transactions contemplated herein shall comply as to form in all material respects with the applicable requirements of the Securities Act, the rules and regulations thereunder, the Exchange Act and the rules and regulations thereunder, and applicable Canadian securities laws and regulations. (c) The information supplied by Carpatsky for inclusion in the Form S-4 shall not, at the time the Proxy Statement/Prospectus is mailed to the stockholders of Pease and Carpatsky, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. If at any time prior to the Effective Time any event or circumstance relating to Carpatsky or any of its affiliates, or to their respective officers or directors, is discovered by Carpatsky that should be set forth in a supplement to the Proxy Statement/Prospectus, Carpatsky shall promptly inform Pease thereof in writing. SECTION 6.03 Appropriate Action; Consents; Filings. (a) Pease and Carpatsky shall each use, and shall cause each of their subsidiaries to use, all reasonable efforts to (i) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper or advisable under applicable Law or otherwise to consummate and make effective the transactions contemplated by this Agreement, (ii) obtain from any Governmental Authorities any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by Carpatsky or Pease or any of its subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, the Continuance, the Exchange and the Merger, (iii) make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement, the Continuance, the Exchange and the Merger required under (A) the Securities Act and the Exchange Act and the rules and regulations thereunder, and any other applicable federal or state securities laws, and (B) any other applicable Law; provided that Carpatsky and Pease shall cooperate with each other in connection with the making of all such filings, including providing copies of all such documents to the nonfiling party and its advisors prior to such filings and, if requested, shall accept all reasonable additions, deletions or changes suggested in connection therewith. Pease and Carpatsky shall furnish all information required for any application or other filing to be made pursuant to the rules 29 and regulations of any applicable Law (including all information required to be included in the Form S-4) in connection with the transactions contemplated by this Agreement. (b) Carpatsky and Pease agree to cooperate with respect to, and shall cause each of their respective subsidiaries to cooperate with respect to, and agree to use all reasonable efforts vigorously to contest and resist, any action, including legislative, administrative or judicial action, and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order (whether temporary, preliminary or permanent) (an "Order") of any Governmental Authority that is in effect and that restricts, prevents or prohibits the consummation of the Continuance, the Merger or any other transactions contemplated by this Agreement, including, without limitation, by vigorously pursuing all available avenues of administrative and judicial appeal and all available legislative action. Each of Carpatsky and Pease also agree to take any and all commercially reasonable actions, including, without limitation, the disposition of assets or the withdrawal from doing business in particular jurisdictions, required by regulatory authorities as a condition to the granting of any approvals required in order to permit the consummation of the Merger or as may be required to avoid, lift, vacate or reverse any legislative or judicial action which would otherwise cause any condition to Closing not to be satisfied; provided, however, that in no event shall Carpatsky be required to take any action that would or could reasonably be expected to have a Carpatsky Material Adverse Effect, and Pease shall not be required to take any action which would or could reasonably be expected to have a Pease Material Adverse Effect. (c) (i) Each of Pease and Carpatsky shall give (or Pease or Carpatsky shall cause its subsidiaries to give) any notices to third parties, and use, and cause their respective subsidiaries to use, all reasonable efforts to obtain any third party consents (A) necessary, proper or advisable to consummate the transactions contemplated by this Agreement, (B) otherwise required under any contracts, licenses, leases or other agreements in connection with the consummation of the transactions contemplated hereby or (C) required to prevent a Pease Material Adverse Effect from occurring prior to the Effective Time or a Carpatsky Material Adverse Effect from occurring after the Effective Time. (ii) In the event that any party shall fail to obtain any third party consent described in subsection (c)(i) above, such party shall use all reasonable efforts, and shall take any such actions reasonably requested by the other party, to limit the adverse effect upon Carpatsky and its subsidiaries and Pease and its subsidiaries, and their respective businesses resulting or which could reasonably be expected to result after the Effective Time, from the failure to obtain such consent. (d) Each of Carpatsky and Pease shall promptly notify the other of (w) any material change in its current or future business, assets, liabilities, financial condition or results of operations, (x) any complaints, investigations or hearings (or communications indicating that the same may be contemplated) of any Governmental Authorities with respect to its business or the transactions contemplated hereby, (y) the institution or the threat of material litigation involving it or any of its subsidiaries or (z) any event or condition that might reasonably be expected to cause any of its representations, warranties, covenants or agreements set forth herein not to be true and correct at the Effective Time. As used in the preceding sentence, "material litigation" means any case, arbitration or adversary proceeding or other matter which would have been required to be disclosed on the Pease Disclosure Schedule pursuant to Section 3.07 or the Carpatsky Disclosure Schedule pursuant to Section 4.09, as the case may be, if in existence on the date hereof, or in respect of which the legal fees and other costs to Pease (or its subsidiaries) might reasonably be expected to exceed $100,000 over the life of the matter or to Carpatsky (or its subsidiaries) might reasonably be expected to exceed $100,000 over the life of the matter. 30 SECTION 6.04 Tax Treatment. Each party hereto shall use all reasonable efforts to cause the Continuance, the Exchange and the Merger to qualify, and shall not take, and shall use all reasonable efforts to prevent any affiliate of such party from taking, any actions that could prevent the Continuance, the Exchange and the Merger from qualifying, as tax-free reorganizations under relevant provisions of the Code. SECTION 6.05 Public Announcements. Neither party shall issue any press release or otherwise make any public statements with respect to the Merger without the approval of the other. The press release announcing the execution and delivery of this Agreement shall be a joint press release of Carpatsky and Pease. SECTION 6.06 Amendment. For a period of six years after the Effective Time, Pease shall not amend or otherwise modify the Amended and Restated Articles of Pease or the Pease bylaws which could adversely affect the rights thereunder of any individuals, who at any time prior to and at the Effective Time were or are directors or officers of Pease, in respect of their terms of office or acts or omissions occurring at or prior to or after the Effective Time (including, without limitation, the transactions contemplated by this Agreement), unless such amendment or modification is required by Law. This Section 6.06 is intended to be for the benefit of, and shall be enforceable by, the persons referred to in the foregoing sentence, their heirs and personal representatives, and shall be binding on Pease and its successors and assigns. SECTION 6.07 Stock Resale Agreement. Pease and Carpatsky each agrees, and each will obtain the agreement of each of their respective offices, directors and affiliates, not purchase or sell or acquire or dispose of rights to purchase either party's Common Stock in the open market or from any stockholders during the period from the date hereof until consummation of the transactions contemplated hereby. Carpatsky agrees to deliver to Pease, on or prior to the Effective Time, such customary agreements as are reasonably requested by Pease of each stockholder who is a director or executive officer or who may be deemed to be an affiliate of Carpatsky not to effect any sales of the Pease Common Stock in excess of the volume limitations specified in Rule 145(d) promulgated under the Securities Act. SECTION 6.08 SEC Reports and Registration Statements. Pease shall use all reasonable efforts, including the timely filing of all Pease SEC Reports that may be due subsequent to the date hereof and obtaining any consents required from Pease's auditors necessary to include such Pease SEC Reports and the Form S-4. ARTICLE VII CLOSING CONDITIONS SECTION 7.01 Conditions to Obligations of Each Party Under This Agreement. The respective obligations of each party to effect the Continuance, the Exchange, the Merger and the other transactions contemplated hereby shall be subject to the satisfaction at or prior to the Closing Date of the following conditions, any or all of which may be waived in writing by the parties hereto, in whole or in part, to the extent permitted by applicable Law: (a) Securities Laws. The Form S-4 shall have been declared effective by the SEC [, describe required Canadian regulatory consent, ] and Pease shall have received all Blue Sky permits and other authorizations necessary to consummate the transactions contemplated by this Agreement. (b) Stockholder Approval. The Amendment shall have been approved and adopted by the requisite vote of the stockholders of Pease. The Continuance, this Agreement and the Merger shall have been approved and adopted by the requisite vote of the stockholders of Carpatsky. 31 (c) No Order. No Governmental Authority or federal, provincial or state court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is in effect and which has the effect of making the Continuance, the Amendment, the Merger or the Exchange illegal or otherwise prohibiting consummation of such transactions. (d) Dissenters Rights. The number of shares of Carpatsky Common Stock for which valid notices of intention to demand payment pursuant to the applicable provisions of the ABCA and Delaware Law have been provided and remain outstanding immediately prior to the effectiveness of the Merger does not exceed five-eighths of one percent (0.625%) of the issued and outstanding Carpatsky Common Stock immediately prior to the Effective Time. SECTION 7.02 Additional Conditions to Obligations of Carpatsky. The obligations of Carpatsky to effect the Continuance, the Merger and the other transactions contemplated hereby are also subject to the satisfaction at or prior to the Closing Date of the following conditions, any or all of which may be waived in writing by Carpatsky, in whole or in part, to the extent permitted by applicable Law: (a) Representations and Warranties. Each of the representations and warranties of Pease contained in this Agreement shall be true and correct as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date). Carpatsky shall have received a certificate of the President and the Chief Financial Officer of Pease, dated the Closing Date, to such effect. (b) Agreements and Covenants. Pease shall have performed or complied with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date. Carpatsky shall have received a certificate of the President and the Chief Financial Officer of Pease, dated the Closing Date, to such effect. (c) Material Adverse Change. Since the date of this Agreement, there shall have been no change, occurrence or circumstance in the current or future business, assets, liabilities, financial condition or results of operations of Pease or any of its subsidiaries having or reasonably likely to have, individually or in the aggregate, a Pease Material Adverse Effect. Carpatsky shall have received a certificate of the President and the Chief Financial Officer of Pease, dated the Closing Date, to such effect. (d) Absence of Regulatory Conditions. There shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Continuance or the Merger, by any Governmental Authority in connection with the grant of a regulatory approval necessary, in the reasonable business judgment of Carpatsky, to the continuing operation of the current or future business of Pease, which imposes any condition or restriction upon Carpatsky or the business or operations of Pease which, in the reasonable business judgment of Carpatsky, would be materially burdensome in the context of the transactions contemplated by this Agreement. 32 (e) Tax Opinion. Carpatsky shall have received the written opinion of Messrs. Feleski Flynn, Calgary, Alberta dated the Closing Date, to the effect that the disclosure regarding Canadian income tax laws set forth in the Form S-4 is correct in all material respects. (f) Alan W. Peryam, LLC Opinion. Carpatsky shall have received from Alan W. Peryam, LLC, counsel to Pease, a written opinion dated the Closing Date covering such customary matters regarding Pease as are reasonably requested by Carpatsky. (g) Withholding. Pease must not have determined to withhold any amount from the Merger Consideration pursuant to the tax withholding provisions of Section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code, or of any other provision of law, except with respect to cash paid for fractional shares and to dissenting stockholders. (h) Exchange of Pease Preferred Stock. All of the issued and outstanding shares of Pease Preferred Stock shall have been exchanged in accordance with the Exchange. SECTION 7.03 Additional Conditions to Obligations of Pease. The obligations of Pease to effect the Exchange and the Merger and the other transactions contemplated hereby are also subject to the satisfaction at or prior to the Closing Date of the following conditions, any or all of which may be waived in writing by Pease, in whole or in part, to the extent permitted by applicable law: (a) Representations and Warranties. Each of the representations and warranties of Carpatsky contained in this Agreement shall be true and correct as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date). Pease shall have received a certificate of the President and the Chief Financial Officer of Carpatsky, dated the Closing Date, to such effect. (b) Agreements and Covenants. Carpatsky shall have performed or complied with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date. Pease shall have received a certificate of the President and the Chief Financial Officer of Carpatsky, dated the Closing Date, to such effect. (c) Material Adverse Change. Since the date of this Agreement, there shall have been no change, occurrence or circumstance in (i) the current or future business, assets, liabilities, financial condition or results of operations of Carpatsky or any of its subsidiaries having or reasonably likely to have, individually or in the aggregate, a Carpatsky Material Adverse Effect or (ii) the assumptions used in preparing the reserve report for the RC field which materially adversely effects the reserve values set forth therein. Pease shall have received a certificate of the President and the Chief Financial Officer of Carpatsky, dated the Closing Date, to such effect. (d) Absence of Regulatory Conditions. There shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, by any Governmental Authority in connection with the grant of a regulatory approval necessary, in the reasonable business judgment of Pease, to the continuing operation of the current or future business of Carpatsky, which imposes any condition or restriction upon Pease or the business or operations of Carpatsky which, in the reasonable business judgment of Pease, would be materially burdensome in the context of the transactions contemplated by this Agreement. 33 (e) Haynes and Boone, LLP Opinion. Pease shall have received from Haynes and Boone, LLP, counsel to Carpatsky, an opinion dated the Closing Date, covering such customary matters regarding Carpatsky as are reasonably requested by Pease. (f) Continuance. The Continuance of Carpatsky in Delaware shall have been consummated. ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER SECTION 8.01 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of this Agreement, the Continuance, the Exchange and the Merger by the stockholders of Pease and Carpatsky: (a) by mutual consent of Carpatsky and Pease; (b) by Carpatsky, upon a material breach of any representation, warranty, covenant, condition or agreement on the part of Pease set forth in this Agreement or the failure to consummate the Exchange, or if any representation or warranty of Pease shall have become untrue, in either case such that the conditions set forth in Section 7.02(a) or Section 7.02(b) of this Agreement, as the case may be, would be incapable of being satisfied by October 31, 2000 (or as otherwise extended as described in Section 8.01(e)); provided, that in any case, a wilful breach shall be deemed to cause such condition as to be incapable of being satisfied for purposes of this Section 8.01(b); (c) by Pease, upon a material breach of any representation, warranty, covenant, condition, or agreement on the part of Carpatsky set forth in this Agreement, or if any representation or warranty of Carpatsky shall have become untrue, in either case such that the conditions set forth in Section 7.03(a) or Section 7.03(b) of this Agreement, as the case may be, would be incapable of being satisfied by October 31, 2000 (or as otherwise extended as described in Section 8.01(e)); provided, that in any case, a wilful breach shall be deemed to cause such condition as to be incapable of being satisfied for purposes of this Section 8.01(c); (d) by either Carpatsky or Pease, if there shall be any Order which is final and nonappealable preventing the consummation of the Continuance, the Conversion or the Merger, except if the party relying on such Order to terminate this Agreement has not complied with its obligations under Section 6.03(b) of this Agreement; (e) by either Carpatsky or Pease, if the Merger shall not have been consummated before October 31, 2000; provided, however, that this Agreement may be extended by written notice of either Carpatsky or Pease to a date not later than December 31, 2000, if the Merger shall not have been consummated by October 31, 2000, in order to receive all required regulatory approvals or consents with respect to the Merger; (f) by either Carpatsky or Pease, if the Amendment shall fail to receive the requisite vote for approval and adoption by the stockholders of Pease at the Pease Stockholders Meeting or if the Continuance or this Agreement and the Merger shall fail to receive the requisite vote for approval and adoption by the stockholders of Carpatsky at the Carpatsky Stockholders Meeting; (g) by Carpatsky, if (i) the Board of Directors of Pease withdraws, modifies or changes its recommendation of this Agreement, the Amendment or the Merger in a manner adverse to Carpatsky or shall resolved to do any of the foregoing; (ii) the Board of Directors of Pease shall have 34 recommended to the stockholders of Pease any Competing Transaction or shall have resolved to do so; (iii) a tender offer or exchange offer for 20% or more of the outstanding shares of capital stock of Pease is commenced, and the Board of Directors of Pease does not recommend that stockholders not tender their shares into such tender or exchange offer; (iv) any person (other than Carpatsky or an affiliate thereof, or any stockholder of Pease as of the date of this Agreement) shall have acquired beneficial ownership or the right to acquire beneficial ownership of, or any "group" (as such term if defined under Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder), shall have been formed which beneficially owns, or has the right to acquire beneficial ownership of, 20% or more of the then outstanding shares of capital stock of Pease; or (v) Pease fails to satisfy the condition to Carpatsky's obligation set forth in Section 7.02(h); (h) by Pease if (i) the Board of Directors of Carpatsky withdraws, modifies or changes its recommendation of this Agreement, the Continuance or the Merger in a manner adverse to Pease or shall resolved to do any of the foregoing; (ii) the Board of Directors of Carpatsky shall have recommended to the stockholders of Carpatsky any Competing Transaction or shall have resolved to do so; (iii) a tender offer or exchange offer for 20% or more of the outstanding shares of capital stock of Carpatsky is commenced, and the Board of Directors of Carpatsky does not recommend that stockholders not tender their shares into such tender or exchange offer; (iv) any person (other than Pease or an affiliate thereof, or any stockholder of Carpatsky as of the date of this Agreement) shall have acquired beneficial ownership or the right to acquire beneficial ownership of, or any "group" (as such term if defined under Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder), shall have been formed which beneficially owns, or has the right to acquire beneficial ownership of, 20% or more of the then outstanding shares of capital stock of Carpatsky; or (v) Pease's investment banking consultant, Houlihan Smith & Company (or other investment banking firm or consultant) fails to deliver an opinion that the transaction is fair, from a financial point of view, to the Pease stockholders. The right of any party hereto to terminate this Agreement pursuant to this Section 8.01 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any party hereto, any person controlling any such party or any of their respective officers, directors, representatives or agents, whether prior to or after the execution of this Agreement. SECTION 8.02 Effect of Termination. Except as provided in Section 8.05 or Section 9.01 of this Agreement, in the event of the termination of this Agreement, this Agreement shall forthwith become void, there shall be no liability on the part of Carpatsky or Pease or any of their affiliates to the other or to the other's affiliates and all rights and obligations of any party hereto shall cease. SECTION 8.03 Amendment. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after approval of the Merger by the stockholders of Pease and Carpatsky, no amendment, which under applicable Law may not be made without the approval of the stockholders of Pease or Carpatsky, may be made without such approval, and no amendment, which under the applicable rules of any securities exchange, on which the Pease Common Stock shall then be listed or shall be approved for listing), may not be made without the approval of the stockholders of Pease, may be made without such approval. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 8.04 Waiver. At any time prior to the Effective Time, any party hereto may extend the time for the performance of any of the obligations or other acts of the other party hereto, waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto and waive compliance by the other party with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby. 35 SECTION 8.05 Fees, Expenses and Other Payments. (a) Except as provided in Section 8.05(c) or Section 8.05(d) of this Agreement, in the event the Merger is not consummated all Expenses (as defined in paragraph (b) of this Section 8.05) incurred by the parties hereto shall be borne solely and entirely by the party that has incurred such Expenses; it being agreed that all Expenses incurred in connection with the Form S-4 shall be borne equally by Pease and Carpatsky (other than for the fees and expenses of such parties' respective counsel and accountants which will be borne by such parties); provided, however, in the event the Merger is consummated, all Expenses incurred in connection with the Merger and the transactions contemplated hereby will be paid by Pease. (b) "Expenses" as used in this Agreement shall include all out-of-pocket expenses (including, without limitation, all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a party hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this Agreement, the preparation, printing, filing and mailing of the Form S-4 and the Proxy Statement/Prospectus, the solicitation of stockholder approvals and all other matters related to the consummation of the transactions contemplated hereby. (c) Pease agrees that if this Agreement is terminated pursuant to: (i) Section 8.01(b) and (x) such termination is the result of an intentional breach of any representation, warranty, covenant or agreement of Pease contained herein, (y) Pease shall have had contacts or entered into negotiations relating to a Competing Transaction prior to or on the date of termination of this Agreement, and (z) within twelve months after the date of termination of this Agreement, and with respect to any person or group with whom the contacts or negotiations referred to in clause (y) have occurred, a Business Combination (as defined in Section 8.05(f)) shall have occurred or Pease shall have entered into a definitive agreement providing for a Business Combination; or (ii) Section 8.01(f) because this Agreement and the Merger or the amendment and restatement of Pease articles of incorporation shall fail to receive the requisite vote for approval and adoption by the stockholders of Pease at the Pease Stockholders Meeting and at the time of such meeting there shall exist a Competing Transaction; or (iii) Section 8.01(g)(i) and at the time of the withdrawal, modification or change (or resolution to do so) of its recommendation by the Board of Directors of Pease, there shall exist a Competing Transaction; or (iv) Sections 8.01(g)(ii), (iii) or (v); or (v) Section 8.01(h)(v) and within twelve months after the date of termination of this Agreement, Pease shall have entered into a Competing Transaction; then Pease shall pay to Carpatsky an amount equal to $250,000, which amount is inclusive of all of Carpatsky's Expenses. (d) Carpatsky agrees that if this Agreement is terminated pursuant to: 36 (i) Section 8.01(c) and (x) such termination is the result of an intentional breach of any representation, warranty, covenant or agreement of Carpatsky contained herein, (y) Carpatsky shall have had contacts or entered into negotiations relating to a Competing Transaction prior to or on the date of termination of this Agreement, and (z) within twelve months after the date of termination of this Agreement, and with respect to any person or group with whom the contacts or negotiations referred to in clause (y) have occurred, a Business Combination (as defined in Section 8.05(f)) shall have occurred or Carpatsky shall have entered into a definitive agreement providing for a Business Combination; or (ii) Section 8.01(f) because this Agreement and the Merger shall fail to receive the requisite vote for approval and adoption by the stockholders of Carpatsky at the Carpatsky Stockholders Meeting and at the time of such meeting there shall exist a Competing Transaction; or (iii) Section 8.01(h)(i) and at the time of the withdrawal, modification or change (or resolution to do so) of its recommendation by the Board of Directors of Carpatsky, there shall exist a Competing Transaction; or (iv) Sections 8.01(h)(ii) or (iii). then Carpatsky shall pay to Pease an amount equal to (i) $250,000, which amount is inclusive of all of Pease's Expenses, plus (ii) all amounts owed to Pease pursuant to the agreement, dated October 1, 1999, pursuant to which Pease agreed to assist in preparing Carpatsky's financial statements. (e) Any payment required to be made pursuant to Section 8.05(c) or Section 8.05(d) of this Agreement shall be made as promptly as practicable but not later than three business days after termination of this Agreement, and shall be made by wire transfer of immediately available funds to an account designated by Pease or Carpatsky, as the case may be, except that any payment to be made as the result of an event described in Section 8.05(c)(i) or Section 8.05(d)(i) shall be made as promptly as practicable but not later than three business days after the occurrence of the Business Combination or the execution of the definitive agreement providing for a Business Combination. (f) For purposes of this Section 8.05, the term "Business Combination" means a merger (other than pursuant to this Agreement), consolidation, share exchange, business combination or similar transaction involving Pease or Carpatsky, a sale, lease, exchange, transfer or other disposition of 20% or more of the assets of Pease and its subsidiaries, or Carpatsky and its subsidiaries, taken as a whole, in a single transaction or a series of transactions, or the acquisition, by a person (other than Carpatsky or any affiliate thereof) or group (as such term is defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of 20% or more of the Pease or Carpatsky Common or Pease Preferred Stock, as the case may be, whether by tender or exchange offer or otherwise. ARTICLE IX GENERAL PROVISIONS SECTION 9.01 Effectiveness of Representations, Warranties and Agreements. 37 (a) Except as set forth in Section 9.01(b) of this Agreement, the representations, warranties and agreements of each party hereto shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any other party hereto, any person controlling any such party or any of their officers, directors, representatives or agents, whether prior to or after the execution of this Agreement. (b) The representations, warranties and agreements in this Agreement shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Article VIII, except that the agreements set forth in Articles I and II and Sections 5.07, 6.05, 6.06, 6.07 and 6.08 shall survive the Effective Time and those set forth in Sections 5.05(d), 8.02 and 8.05 and Article IX hereof shall survive termination. SECTION 9.02 Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given upon receipt, if delivered personally or by air courier, or mailed by registered or certified mail (postage prepaid, return receipt requested), to the parties at the following addresses (or at such other address for a party as shall be specified by like changes of address) or sent by electronic transmission to the telecopier number specified below (to be followed promptly by personal or air courier delivery or mailing as hereinafter provided): (a) If to Carpatsky, to: Carpatsky Petroleum, Inc. 1331 Lamar, Suite 1450 Houston, TX 77010 Attention: Robert Bensh Facsimile Number: (713) 756-7029 with copy to: Haynes and Boone, LLP 1000 Louisiana, Suite 4300 Houston, Texas 77002 Attention: George G. Young III, Esq. Facsimile Number: (713) 236-5699 (b) If to Pease, to: Pease Oil and Gas Company 751 Horizon Court, Suite 203 Grand Junction, CO 81506 Attention: Patrick J. Duncan Facsimile Number: (970) 243-8840 with copy to: Alan W. Peryam, LLC 1120 Lincoln Street, Suite 1000 Denver, CO 80202 Attention: Alan W. Peryam, Esq. Facsimile Number: (303) 866-0999 SECTION 9.03 Certain Definitions. For the purposes of this Agreement, the term: (a) "affiliate" means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person; 38 (b) a person shall be deemed a "beneficial owner" of or to have "beneficial ownership" of Carpatsky Common Stock or Pease Common and Preferred Stock, as the case may be, in accordance with the interpretation of the term "beneficial ownership" as defined in Rule 13d- 3 under the Exchange Act, as in effect on the date hereof; provided that a person shall be deemed to be the beneficial owner of, and to have beneficial ownership of, Carpatsky Common Stock or Pease Common or Preferred Stock, as the case may be, that such person or any affiliate of such person has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise. (c) "business day" means any day other than a day on which banks in the State of Delaware are authorized or obligated to be closed; (d) "control" (including the terms "controlled," "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of stock or as trustee or executor, by contract or credit arrangement or otherwise; (e) "dollar" or "$" shall refer to the freely transferable currency of the United States of America. (f) "knowledge" or "known" shall mean, with respect to any matter in question, if an executive officer of Pease or Carpatsky, as the case may be, has actual knowledge of such matter; (g) "person" means an individual, corporation, partnership, association, trust, unincorporated organization, other entity or group (as defined in Section 13(d) of the Exchange Act); (h) "Significant Subsidiary" means any subsidiary of Pease or Carpatsky that would constitute a Significant Subsidiary of such party within the meaning of Rule 1-02 of Reg. S-X of the SEC; and (i) "subsidiary" or "subsidiaries" of Pease, Carpatsky, or of any other person, means any corporation, partnership, joint venture or other legal entity of which Pease, Carpatsky, Pease or any such other person, as the case may be (either alone or through or together with any other subsidiary), owns, directly or indirectly, currently or in the past, 50% or more of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity; provided, however, for purposes of this Agreement Ukrcarpatoil, Ltd. shall be deemed to constitute a subsidiary of Carpatsky. SECTION 9.04 Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section references herein are, unless the context otherwise requires, references to sections of this Agreement. SECTION 9.05 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. 39 SECTION 9.06 Entire Agreement; Effect of Amendment. This Agreement (together with the Exhibits, the Pease Disclosure Schedule and the Carpatsky Disclosure Schedule) constitutes the entire agreement of the parties, and supersede all prior agreements and undertakings, both written and oral, among the parties or between any of them, with respect to the subject matter hereof. Without limitation, each party hereto forever releases and discharges the other party and its affiliates and associates from any liability, claim, expense, damage or other loss, however arising, whether in tort, contract or otherwise, arising out of or related to the Original Agreement, any amendment thereto (other than this Agreement) or any action or inaction taken or not taken in connection therewith. SECTION 9.07 Assignment. This Agreement shall not be assigned by operation of law or otherwise. SECTION 9.08 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied (other than as contemplated by Section 6.06 or Section 6.08), is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. SECTION 9.09 Specific Performance. The parties hereby acknowledge and agree that the failure of any party to perform its agreements and covenants hereunder, including its failure to take all actions as are necessary on its part to the consummation of the Merger, will cause irreparable injury to the other parties for which damages, even if available, will not be an adequate remedy. Accordingly, each party hereby consents to the issuance of injunctive relief by any court of competent jurisdiction to compel performance of such party's obligations and to the granting by any court of the remedy of specific performance of its obligations hereunder. SECTION 9.10 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 9.11 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of law. SECTION 9.12 Counterparts. This Agreement may be executed in multiple counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. PEASE OIL AND GAS COMPANY By: -------------------------------------- Name --------------------------- Title -------------------------- CPI ACQUISITION CORP. By: -------------------------------------- Name --------------------------- Title -------------------------- CARPATSKY PETROLEUM INC. By: -------------------------------------- Name --------------------------- Title -------------------------- 40 EX-3.10 4 0004.txt AMENDED AND RESTATED ARTICLES Amended Exhibit B-4 to Agreement and Plan of Merger dated August 31, 1999 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PEASE OIL AND GAS COMPANY We, the undersigned, Patrick J. Duncan, President, and Virginia Cherry, Secretary, of Pease Oil and Gas Company, a Nevada corporation, do hereby certify as follows: ONE: We are the duly elected and acting President and Secretary, respectively, of Pease Oil and Gas Company (the "Corporation"). TWO: The Corporation's Articles of Incorporation were filed with the Secretary of State of the state of Nevada on September 11, 1968 and were amended on April 10, 1969, February 9, 1971, July 7, 1972, June 22, 1990, June 23, 1993, June 29, 1993, August 12, 1993, August 16, 1993, July 5, 1994, November 1, 1994, December 19, 1994, June 4, 1997, December 31, 1997, and December 1, 1998. THREE: These Amended and Restated Articles of Incorporation constitute an amendment and restatement of the original Articles of Incorporation filed September 11, 1968, as amended in accordance with Nevada Revised Statute, Section 78.403 (the "Act"), and supersede the Corpora tion's original Articles of Incorporation and all Amendments and Supplements thereto or restatements thereof. FOUR: The Amended and Restated Articles of Incorporation were adopted unanimously by the Board of Directors on August __, 1999, and by the vote of stockholders at a Special Meeting held on ________ __, 1999. Stockholders holding shares in the Corporation entitling them to exercise at least a majority of the voting power for each class of the Corporation's securities required to vote to amend and restate the Articles of Incorporation of the Corporation voted in favor of the Amendment. FIVE: The directors of the Corporation have adopted, and the stockholders have duly approved the following resolution: RESOLVED, that the Articles of Incorporation of the Corporation shall be amended and restated to read in their entirety as follows: 1 ARTICLE I Name The name of the Corporation shall be: Radiant Energy, Inc. ARTICLE II Purposes and Powers 2.1. Purpose. The purpose for which the Corporation is organized is to engage in any lawful business or businesses. 2.2. Powers. The Corporation shall have and may exercise all powers and rights granted or otherwise provided under the General Corporation Law of Nevada as in effect from time to time and any successor law. ARTICLE III Capital 3.1. Authorized Capital. The aggregate number of shares which the Corporation shall have authority to issue shall be 150,000,000 shares of common stock, par value $0.001 per share ("Common Stock"), and 110,000,000 shares of preferred stock, without par value ("Preferred Stock"). The designations, preferences, limitations and relative rights of shares of each class of stock shall be as set forth below. 3.2. Common Stock. The holders of Common Stock shall be entitled to receive the net assets of the Corporation upon dissolution or liquidation, subject to the payment of any preferences applicable to the outstanding Preferred Stock. All Common Stock, when duly issued, shall be fully paid and nonassessable. Each holder of Common Stock shall have one vote for each share of stock standing in his name on the books of the Corporation and entitled to vote, except that in the election of directors each holder of Common Stock shall have as many votes for each share held by him as there are directors to be elected by the Common Stockholders and for whose election the stockholder has a right to vote. Cumulative voting shall not be permitted in the election of directors or otherwise. The holders of Common Stock shall be entitled to receive dividends as they may be declared from time to time by the Board of Directors. 3.3. Preferred Stock. The Corporation may issue the Preferred Stock from time to time in one or more series with such distinctive designations, rights, preferences and limitations as the Board of Directors shall determine. The Board of Directors hereby is expressly vested with the authority to fix and determine the relative rights and preferences of each such series of Preferred 2 Stock to the full extent permitted by these Articles of Incorporation and the General Corporation Law of Nevada in respect to the following: (a) The rate of dividend, if any, the time of payment of dividends, when the dividends are cumulative, and the date from which any dividends shall accrue; (b) Whether shares may be redeemed and if so, the redemption price and the terms and conditions of redemption; (c) The amount payable upon shares in event of either voluntary or involuntary liquidation; (d) Sinking fund or other provisions, if any, for the redemption or purchase of shares; (e) The terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion, provided, that the price at which preferred shares may or shall be converted must be fixed at the time of issuance of Preferred Stock; (f) Voting powers, if any; and (g) Any other rights or privileges authorized or permitted under the General Corporation Law of Nevada. Notwithstanding the fixing of the number of shares constituting the particular series upon the issuance thereof, the Board of Directors may at any time thereafter authorize the issuance of additional shares of the same series or may reduce the number of shares constituting such series. The Board of Directors expressly is authorized to vary the provisions relating to the foregoing matters between the various series of Preferred Stock, but in all other respects the shares of each series shall be of equal rank with each other, regardless of series. All Preferred Stock in any one series shall be identical in all respects. 3.4. No Preemptive Rights. No stockholder of the Corporation shall be entitled as of right to acquire unissued shares of the Corporation or securities convertible into such shares or carrying a right to subscribe for or to acquire such shares, unless expressly provided to holders of Preferred Stock at the time of issuance. 3 ARTICLE IV Quorum and Voting Requirements for Stockholders' Meetings 4.1. Quorum. The holders of a majority of the issued and outstanding shares of any class entitled to be voted on a matter shall constitute a quorum of that class of stock for action on that matter at any meeting of stockholders. 4.2. Voting. Except as is otherwise required by the General Corporation Law of Nevada, action by stockholders on a matter other than the election of directors is approved if a quorum of stockholders is present and if the votes cast by holders of the class of stock favoring the action exceed the number of votes cast within the class of voting stock opposing the action; provided, however, that with respect to any of the following actions to be taken by stockholders of the Corporation, the approval by holders of a majority of the outstanding shares of stock entitled to vote on such matters shall be required: (i) To sell, lease, exchange or otherwise dispose of all or substantially all of the property and assets of the Corporation, with or without its goodwill, other than in the usual and regular course of its business. (ii) To approve a plan of merger or share exchange if stockholders' approval is required. (iii) To dissolve the Corporation. 4.3. Change in Quorum or Voting Requirements. Any amendment to these Articles of Incorporation adding, changing or deleting a greater quorum or voting requirement for stockholders shall meet the same quorum requirement and be adopted by the same vote and voting group required to take action under the quorum and voting requirements then in effect or proposed to be adopted, whichever is greater. ARTICLE V Board of Directors 5.1. Board of Directors. The corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, a Board of Directors. The terms of the directors shall be staggered in accordance with the following provisions. 5.2. Number. The number of directors of the Corporation shall be no fewer than five nor more than eleven, as specified or fixed in accordance with the Bylaws. The directors, other than those who may be elected by the holders of 4 any series of Preferred Stock of the Corporation, shall be classified, with respect to the term for which they severally hold office, into three classes, as nearly equal in number as possible. The Class I directors shall serve for a term expiring at the annual meeting of stockholders to be held in the first year following adoption of these Amended and Restated Articles of Incorporation, the Class II directors shall serve for a term expiring at the annual meeting of stockholders to be held in the second year following adoption of these Amended and Restated Articles of Incorporation, and the Class III directors shall serve for a term expiring at the annual meeting of stockholders to be held in 2002. the third year following adoption of these Amended and Restated Articles of Incorporation. At each annual meeting of stockholders, the successor or successors of the class of directors whose term expired at that meeting shall be elected and shall hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. In every case, a director shall continue to serve until the end of the director's term or until the director's successor is duly elected and qualified or until the director's earlier resignation or removal. 5.3. Removal. Subject to the rights, if any, of any series of Preferred Stock to elect directors and to remove any director whom the holders of any such stock have the right to elect, any director (including persons elected by directors to fill vacancies in the Board of Directors) may be removed from office only for cause and only by the stockholders at a meeting called for that purpose. At least 30 days prior to any meeting of stockholders at which it is proposed that any director be removed from office, written notice of such proposed removal shall be sent to the director whose removal shall be considered at the meeting. The term "cause" with respect to the removal of any director shall mean (i) conviction of a felony or plea of nolo contendere after a charge of felony, (ii) declaration of unsound mind by an order of a court of competent jurisdiction, (iii) gross dereliction of duty, including action taken which is in material conflict with the best interests of the Corporation, as determined by a majority of the disinterested directors, (iv) commission of any action involving moral turpitude, or (v) commission of an action which constitutes intentional misconduct or a knowing violation of law, if such action in either event results in a material injury to the Corporation. ARTICLE VI Limitation on Liability There shall be no personal liability, either direct or indirect, of any director of the Corporation to the Corporation or to its stockholders for monetary damages for any breach or breaches of fiduciary duty as a director; except that this provision shall not eliminate the liability of a director to the Corporation or to its stockholders for monetary damages for any breach, act, omission or transaction as to which the General Corporation Law of Nevada prohibits expressly the elimination of liability, such as intentional misconduct, fraud, or a knowing violation of law, or for the payment of any dividend in violation of Section 78.300 of the General Corporation Law of Nevada. 5 ARTICLE VII Indemnification The Corporation shall, to the fullest extent permitted by Nevada law in effect from time to time, indemnify any person against all liability and expense (including attorneys' fees) incurred by reason of the fact that he is or was a director or officer of the Corporation or, while serving as a director or officer of the Corporation, he is or was serving at the request of the Corporation as a director, officer, partner or trustee of, or any similar managerial or fiduciary position of, or as an employee or agent of, another Corporation, partnership, joint venture, trust, association, or other entity. Expenses (including attorneys' fees) incurred in defending an action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding to the fullest extent and under the circumstances permitted by Nevada law. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, fiduciary or agent of the Corporation against any liability asserted against and incurred by such person in any such capacity or arising out of such person's position, whether or not the Corporation would have the power to indemnify against such liability under the provisions of this Article VII. The indemnification provided by this Article VII shall not be deemed exclusive of any other rights to which those indemnified may be entitled under these Articles of Incorporation, any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise, and shall inure to the benefit of their heirs, executors and administrators. The provisions of this Article VII shall not be deemed to preclude the Corporation from indemnifying other persons from similar or other expenses and liabilities as the Board of Directors or the stockholders may determine in a specific instance or by resolution of general application. ARTICLE VIII Conflicts of Interest No contract or other transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any Corporation, firm, entity or association in which one or more of its directors or officers are directors or officers or are financially interested, shall be either void or voidable solely due to such financial interest or association or solely because any such director or officer is present at the meeting of the Board of Directors or a committee thereof which authorizes or approves the contract or transaction, or because the vote or votes of common or interested directors are counted for such purpose, so long as either (i) the fact of the common directorship or financial interest is disclosed or known to the Corporation's Board of Directors or committee and noted in the Minutes and the Board or committee authorizes, approves, or ratifies the contract or transaction in good faith by a vote sufficient for the purpose without counting the vote or votes of such director or directors; (ii) the fact of the common directorship or financial interest is disclosed or known to the stockholders, and they approve or ratify the contract or transaction in good faith by a majority vote or written consent of the stockholders holding a majority of the shares entitled to vote and the votes of the common or interested directors or officers shall be 6 counted in any such vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation at the time it is authorized or approved. The common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee thereof which authorizes, approves, or ratifies a contract or transaction, and if the vote of the common or interested directors is not counted at such meeting, then a majority of the disinterested directors may authorize, approve or ratify a contract or transaction. ARTICLE IX Combinations With Interested Stockholders Neither the Corporation nor its stockholders shall be subject to, nor entitled to assert the rights or privileges of Sections 78.411 through 78.444 of the General Corporation Law of Nevada, as the same may be amended from time to time. ARTICLE X Bylaws The directors of the Corporation are authorized to adopt, confirm, ratify, alter, amend, rescind and repeal Bylaws for the Corporation or any portion or provision thereof from time to time. SIX: The foregoing resolutions adopting the Amended and Restated Articles of Incorporation are true, correct and exact copies of the resolutions adopted effective ________ __, 2000, and they are currently in full force and effect and have not been altered, amended, modified, rescinded or revoked. SEVEN: Upon filing of these Amended and Restated Articles of Incorporation with the Nevada Secretary of State, all 105,828 outstanding shares of the Corporation's Series B 5% PIK Convertible Preferred Stock, the only outstanding preferred stock of the Corporation, shall automatically be converted into 8,865,665 shares of Common Stock pursuant to written consent of all holders. There are no outstanding shares of Preferred Stock and no series of Preferred Stock has been designated for issuance. 7 IN WITNESS WHEREOF, the undersigned President and Secretary of Pease Oil and Gas Company have executed this Amended and Restated Articles of Incorporation this ____ day of _____________, 2000. PEASE OIL AND GAS COMPANY (S E A L) By ________________________________________ Patrick J. Duncan, President By ________________________________________ Virginia Cherry, Secretary STATE OF COLORADO ) ) ss. COUNTY OF GRAND ) On this ____ day of __________. 1999, personally appeared before me, a Notary Public, in and for said county and state, Patrick J. Duncan and Virginia Cherry, known to me to be the President and Secretary, respectively, of the Corporation and stated that they executed the foregoing Amended and Restated Articles of Incorporation and upon oath each did depose and say that they are the officers of the Corporation as above designated; that they are acquainted with the seal of the Corporation and that the seal affixed to the instrument is the corporate seal of the Corporation; that the signatures to the instrument were made by officers of the Corporation as indicated after signatures; and that the Corporation executed the instrument freely and for the uses and purposes therein mentioned. WITNESS my hand and official seal. (S E A L) ------------------------------------------- Notary Public in and for said County and State H-183139.2 8 EX-10.14 5 0005.txt SECURITIES PURCHASE AGREEMENT Final Execution Copy =============================================================================== SECURITIES PURCHASE AGREEMENT by and between CARPATSKY PETROLEUM INC. an Alberta corporation (the "Company") and BELLWETHER EXPLORATION COMPANY a Delaware corporation ("Purchaser") Concerning the purchase of convertible preferred shares and warrants to purchase common shares December 30, 1999 =============================================================================== TABLE OF CONTENTS Page ARTICLE I. DEFINITIONS.................................................1 Section 1.1 Definitions........................................1 ARTICLE II. PURCHASE AND SALE OF SECURITIES..................................4 Section 2.1 Sale and Issuance Purchase Shares..................4 Section 2.2 Sale and Issuance of Warrants......................5 Section 2.3 Legend.............................................5 Section 2.4 Purchase; Purchase Price...........................5 ARTICLE III. CLOSING DATE; DELIVERY..........................................5 Section 3.1 Closing Date.......................................5 Section 3.2 Payment; Delivery..................................5 ARTICLE IV. REPRESENTATIONS AND WARRANTIES...................................6 Section 4.1 Representations and Warranties of the Company......6 (a) Organization and Standing; Articles and By-Laws....6 (b) Corporate Power; Authority.........................6 (c) Purchase Shares and Warrants.......................6 (d) Capitalization.....................................7 (e) Subsidiaries.......................................7 (f) No Conflicts or Consents...........................7 (g) Corporate Documents. .............................8 (h) ASC Documents; Financial Statements; Liabilities...8 (i) Oil and Gas Properties.............................9 (j) Investment Company................................10 (k) Public Utility Company............................10 (l) Environmental Matters.............................11 (m) Tax Matters.......................................13 (n) Litigation........................................15 (o) Broker's and Finder's Fee.........................15 (p) Absence of Sensitive Payments.....................15 (q) Compliance with Law...............................15 (r) Contracts.........................................16 (s) Employment Plans/Employment Agreements............17 (t) Absence of Certain Changes or Events..............17 (u) The Company's Assets..............................18 (v) Registration Rights...............................18 Section 4.2 Representations and Warranties of Purchaser.......18 (a) Investment Intent.................................18 (i) (b) Accredited Investor...............................21 (c) Corporate Power; Authority........................21 Section 4.3 Acknowledgments of the Purchaser..................21 ARTICLE V. CONDITIONS TO CLOSING............................................22 Section 5.1 Purchaser's Conditions............................22 (a) Representations and Warranties Correct............22 (b) Covenants.........................................22 (c) Compliance Certificate............................22 (d) No Material Adverse Change........................23 (e) Consents..........................................23 (f) Registration Rights Agreement.....................23 (g) Opinion of Company's Counsel......................23 (h) Pease Merger Agreement............................23 (i) Due Diligence.....................................23 Section 5.2 Company's Conditions..............................23 (a) Representations...................................23 (b) Consents..........................................23 (c) Pease Merger Agreement............................23 ARTICLE VI. AFFIRMATIVE COVENANTS OF THE COMPANY............................24 Section 6.1 Financial Information.............................24 (a) ASC Reports.......................................24 (b) Other Reports.....................................24 Section 6.2 Access............................................24 Section 6.3 Rule 144 Reporting................................24 Section 6.4 Shareholder Approval..............................25 Section 6.5 Conduct of Business by the Company Pending the Closing ..........................................25 Section 6.6 Stock Exchange Listing............................26 Section 6.7 Additional Agreements.............................26 Section 6.8 No Shop...........................................27 Section 6.9 Advice of Changes.................................27 Section 6.10 Pease Merger......................................27 Section 6.11 Board Nominees....................................28 Section 6.12 Use of Proceeds...................................28 ARTICLE VII. MISCELLANEOUS..................................................29 Section 7.1 Governing Law.....................................29 Section 7.2 Survival..........................................29 Section 7.3 Successors and Assigns............................29 Section 7.4 Entire Agreement, Amendment.......................29 Section 7.5 Notices, etc......................................29 Section 7.6 Delays or Omissions...............................29 (ii) Section 7.7 Counterparts.....................................30 Section 7.8 Severability.....................................30 Section 7.9 Titles and Subtitles.............................30 Section 7.10 Specific Performance.............................30 Articles of Amendment Exhibit A Warrant Exhibit B First Amendment to Registration Rights Agreement Exhibit C Form of Legal Opinion Exhibit D Amendment to the Pease Merger Agreement Exhibit E Company's Articles of Incorporation and By-Laws Schedule 4.1(a) Company's Capitalization Schedule 4.1(d) Company's Subsidiaries Schedule 4.1(e) Required Consents Schedule 4.1(f) Material Adverse Changes Schedule 4.1(h) Changes to Reserves Schedule 4.1(i)(ii) Environmental and Safety Matters Schedule 4.1(l) Taxes Schedule 4.1(m) Litigation Schedule 4.1(n) Contracts Schedule 4.1(r) Registration Rights Schedule 4.1(v) (iii) SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement (the "Agreement") is made and entered into as of December 30, 1999 by and between Carpatsky Petroleum Inc., an Alberta corporation (the "Company"), and Bellwether Exploration Company, a Delaware corporation ("Purchaser"). W I T N E S S E T H: WHEREAS, Purchaser desires to purchase 95,450,000 million Preferred Shares, and Warrants to purchase 12,500,000 Common Shares, and the Company desires to issue and sell to Purchaser the Preferred Shares and the Warrants, for an aggregate consideration of U.S.$4,000,000, all on the terms and conditions described herein. NOW, THEREFORE, for and in consideration of the mutual covenants and promises herein contained, as well as for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, contract and agree as follows: ARTICLE I. DEFINITIONS Section 1.1 Definitions. As used in this Agreement, the following terms when capitalized have the meanings indicated. "Affiliate" shall have the meaning ascribed by the Business Corporations Act (Alberta). "Agreement" shall mean this Agreement, including the Schedules and Exhibits hereto, all as amended or otherwise modified from time to time. "Alternative Proposal" has the meaning set forth in Section 6.8. "Amendment to the Pease Merger Agreement" means the amendment to the Pease Merger Agreement described in Exhibit F. "Ancillary Agreements" means, collectively, the First Amendment to Registration Rights Agreement and the Amendment to the Pease Merger Agreement. "Articles" has the meaning set forth in Section 2.1. "Articles of Amendment" means the articles of amendment with respect to the Preferred Shares in the form attached as Exhibit A. "ASC" means the Alberta Securities Commission. "ASC Documents" has the meaning set forth in Section 4.1(h)(i). 1 "Audited Financial Statements" shall mean the audited balance sheets, and the related statements of earnings, shareholders' equity and cash flows, and the related notes thereto of Company as of and for the years ended December 31, 1998. "CDNX" means the Canadian Venture Exchange. "Closing" shall have the meaning ascribed to it in Section 3.1. "Closing Date" has the meaning provided for in Section3.1. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Common Shares" has the meaning set forth in Section 2.1. "Company" has the meaning set forth in the introductory paragraph. "Environmental Laws" has the meaning set forth in Section 4.1(l)(xi). "Environmental Liability" has the meaning set forth in Section 4.1(l) (xiii). "ERISA" has the meaning provided for in Section 4.1(s). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Financial Statements" shall mean the Audited Financial Statements and the Interim Financial Statements. "First Amendment to Registration Rights Agreement" means the agreement set forth in Exhibit C. "Governmental Authority" means the government of any nation, state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing (including, without limitation, a government controlled oil company). "Hazardous Materials" has the meaning set forth in Section 4.1(l)(xii). "Holder" means the Purchaser and any subsequent direct or indirect transferee of the Purchase Shares, Warrants, Shares or Warrant Shares, other than a transferee, (i) who has acquired the Purchase Shares, Warrants, Shares or Warrant Shares that have been the subject of a distribution registered under the Securities Act or (ii) in the case of Shares or Warrant Shares, who has acquired such Common Shares after such shares have been the subject of a distribution 2 to the public pursuant to Rule 144 under the Securities Act or otherwise distributed under circumstances not requiring a legend as described in Section 2.3. "Interim Financial Statements" shall mean the unaudited balance sheet, and the related unaudited statements of earnings and cash flows of the Company as of and for the nine months ended September 30, 1999. "Latest Balance Sheet" shall mean the balance sheet included in the Interim Financial Statements. "Liens" shall mean pledges, liens, defects, leases, licenses, equities, conditional sales contracts, charges, claims, encumbrances, security interests, easements, restrictions, chattel mortgages, mortgages or deeds of trust, of any kind or nature whatsoever. "Material Adverse Change" is a change which had or is reasonably likely to have a Material Adverse Effect. "Material Adverse Effect" shall mean with respect to any Person, a material adverse effect on the financial condition, results of operations, business or prospects of such Person and, in the case of the Company, its consolidated subsidiaries taken as a whole. "Other Securities" has the meaning provided for in the Articles of Amendment or the Warrant. "Payment" has the meaning set forth in Section 4.1(p). "Pease" means Pease Oil and Gas Company, a Nevada corporation. "Pease Merger Agreement" means the Agreement and Plan of Merger between the Company and Pease, dated September 1, 1999. "Person" shall mean an individual, firm, corporation, general or limited partnership, limited liability company, limited liability partnership, joint venture, trust, Governmental Authority or body, association, unincorporated organization or other entity. "Preferred Shares" has the meaning set forth in Section 2.1. "Purchase Price" has the meaning set forth in Section 2.4. "Purchase Shares" has the meaning set forth in Section 2.1. "Purchaser" has the meaning set forth in the introductory paragraph. 3 "Reserve Engineer" has the meaning set forth in Section 4.1(i)(ii). "Reserve Report" has the meaning set forth in Section 4.1(i)(ii). "Returns" shall mean all returns, reports, estimates, declarations and statements of any nature regarding Taxes for periods required to be filed by the taxpayer relating to its income, properties or operations. "SEC" means the U.S. Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Securities Act" means the U.S. Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, and shall include any replacement statute and rules and regulations thereunder. "Securities Act (Alberta)" means the Securities Act (Alberta), as amended, and the rules, regulations, policy statements, notices and other requirements promulgated thereunder. "Shareholder Consent" means the consent to the private placement contemplated by this Agreement. "Shares" has the meaning set forth in Section 2.1. "Securities Laws" has the meaning set forth in Section 4.1(c). "Taxes" shall mean any taxes imposed by any government or entity empowered with taxing authority by a government, including, without limitation, national, federal, provincial, state, regional, local or other taxes (including, without limitation, income, value-added, alternative minimum, franchise, property, sales, use, lease, excise, premium, payroll, wage, employment or withholding taxes), fees, duties, assessments, withholdings or governmental charges of any kind whatsoever (including interest, penalties and additions to tax). "Warrants" means the warrants in the form of Exhibit B. "Warrant Shares" has the meaning set forth in Section 2.2. ARTICLE II. PURCHASE AND SALE OF SECURITIES Section 2.1 Sale and Issuance Purchase Shares. The Company shall issue and sell to Purchaser at the Closing (as hereinafter defined) 94,450,000 shares (the "Purchase Shares") of its convertible preferred shares ("Preferred Shares"), initially convertible into 50,000,000 common shares ("Common Shares") of the Company, representing, as of the date hereof, 31.66% of the Common Shares on a fully diluted basis. The Purchase Shares have the characteristics set forth 4 in the Articles of Amendment. The Purchase Shares and the Shares (as hereinafter defined) issuable upon conversion of the Purchase Shares shall be entitled to all of the rights, privileges and preferences provided therein and in the Company's Articles of Incorporation, as amended by the Articles of Amendment, included in Schedule 4.1(a) ("Articles"). The Common Shares or Other Securities to be received upon conversion of the Purchase Shares are referred to herein as the "Shares." Section 2.2 Sale and Issuance of Warrants. The Company shall issue and sell to Purchaser at the Closing (as hereinafter defined) Warrants to purchase 12,500,000 Common Shares, representing, as of the date hereof, 7.91% of the Common Shares on a fully diluted basis. All Warrant Shares (as hereinafter defined) to be purchased pursuant to the Warrants shall have the rights, privileges and preferences as set forth in the Articles. The Common Shares or Other Securities for which the Warrants shall be exercisable upon payment of the exercise price set forth in the Warrant are referred to herein as the "Warrant Shares." Section 2.3 Legend. The Purchase Shares, Warrants, any Shares issued upon conversion of the Purchase Shares, and any Warrant Shares issued upon exercise of the Warrants will not be registered under the Securities Act, and will bear a restrictive legend as set forth in Section 4.2(a)(vii). Section 2.4 Purchase; Purchase Price. Subject to the terms and conditions set forth herein, for and in consideration of the sale and issuance of the Purchase Shares and Warrants, Purchaser hereby agrees to pay to the Company at the Closing U.S.$4,000,000 in cash ("Purchase Price"). ARTICLE III. CLOSING DATE; DELIVERY Section 3.1 Closing Date. The closing ("Closing") of the purchase and sale of the Purchase Shares and Warrants hereunder shall be held at 10:00 A.M. Houston, Texas time, on December 30, 1999 ("Closing Date"), at the offices of Haynes & Boone L.L.P., 1000 Louisiana, Suite 4300, Houston, Texas 77002. Section 3.2 Payment; Delivery. At the Closing, the Company will deliver to Purchaser duly executed certificates representing the Purchase Shares registered in the name of Purchaser, against payment of the Purchase Price therefor, by wire transfer of immediately available funds per the Company's instructions, together with delivery by the Company of such other documents, certificates and opinions of counsel as may be required to be delivered by the Company to Purchaser as a condition to Purchaser's consummation of this Agreement, including, without limitation, the Ancillary Agreements. 5 ARTICLE IV. REPRESENTATIONS AND WARRANTIES Section 4.1 Representations and Warranties of the Company. In order to induce Purchaser to enter into this Agreement, the Company hereby represents and warrants to Purchaser, as follows: (a) Organization and Standing; Articles and By-Laws. The Company is a corporation legally incorporated, duly organized, validly existing and in good standing under the laws of the province of Alberta, Canada, has full corporate power and authority and all necessary licenses and permits to own, lease, produce and operate the properties used in its business and to carry on its business as now being conducted. The Company is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the character of the properties owned, leased or produced by it or the nature of the businesses transacted by it requires it to be so qualified. Schedule 4.1(a) is a true, correct and complete copy of the Company's Articles and By-Laws, containing all amendments through the date hereof. (b) Corporate Power; Authority. The Company has full corporate power and authority to enter into this Agreement and each of the Ancillary Agreements and to perform its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement, and the Ancillary Agreements, the issuance of the Purchase Shares and Warrants, the issuance upon conversion of the Purchase Shares of the Shares, the issuance upon exercise of the Warrants of the Warrant Shares, and the consummation of the transactions contemplated hereby and thereby have been duly authorized and approved by the Board of Directors of the Company and, subject to the receipt of approval of the Company's shareholders as contemplated by Section 6.4, no other corporate proceeding on the part of the Company is necessary to authorize and approve this Agreement and the Ancillary Agreements and the transactions contemplated hereby and thereby. This Agreement has been, and at the Closing each Ancillary Agreement will be, duly executed and delivered by, and constitutes or will constitute a valid and binding obligation of, the Company, enforceable against the Company in accordance with its terms (except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by the principles governing the availability of equitable remedies). (c) Purchase Shares and Warrants. The Purchase Shares and Warrants, when issued in accordance with this Agreement, will be validly issued, fully paid and non-assessable and will have the rights, preferences and privileges set forth in the Articles of Amendment or Warrant (as the case may be). The Shares and Warrant Shares have been duly and validly reserved and, when issued in compliance with the provisions of this Agreement and the Articles of Amendment or Warrant (as the case may be), will be validly issued, fully paid and non-assessable and will have the rights, preferences and privileges set forth in the Articles. Upon issuance upon conversion of the Purchase Shares or upon exercise of the Warrants, the Shares or Warrant Shares 6 (as the case may be) will be free of any Liens created by the Company; provided, however, that the Shares and Warrant Shares will be subject to restrictions on transfer under the Securities Act or any applicable United States or Canadian state and provincial securities laws and rules of the ASC (collectively, "Securities Laws"). The Shares and Warrant Shares are not subject to any preemptive rights or rights of first refusal. (d) Capitalization. The authorized capital stock of the Company consists of unlimited number of Common Shares, of which 77,778,263 shares are issued and outstanding as of the date of the hereof. The outstanding shares have been duly authorized and validly issued, and are fully paid and nonassessable. All outstanding securities of the Company were issued in compliance with applicable Securities Laws. The Company has reserved 50,000,000 and 12,500,000 Common Shares for issuance upon conversion of the Preferred Shares and exercise of the Warrants, respectively. Other than the Common Shares and except as specifically described on Schedule 4.1(d), the Company does not have any outstanding capital stock or securities convertible into or exchangeable for any shares of its capital stock, or any outstanding rights (either preemptive or other) to subscribe for or to purchase, or any outstanding rights or options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any outstanding calls, commitments or claims of any character relating to, any capital stock or any stock or securities convertible into or exchangeable for any capital stock of the Company. The Company is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any convertible securities, rights or options of the type described in the preceding sentence. The Company is not a party to any agreement (except as contemplated by this Agreement) restricting the transfer of any shares of the Company's capital stock. (e) Subsidiaries. Except as listed on Schedule 4.1(e), the Company has no subsidiaries and does not otherwise own or control, directly or indirectly, any equity interest in any corporation, association, business entity or other Person. Each such subsidiary is a corporation legally incorporated, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority and all necessary licenses and permits to own, lease, produce and operate the properties used in its business and to carry on its business as now being conducted. Each subsidiary is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the character of the properties owned or leased by it or the nature of the businesses transacted by it requires it to be so qualified except where the failure to be so qualified would not have a Material Adverse Effect. (f) No Conflicts or Consents. (i) Neither the execution, delivery or performance of this Agreement nor the Ancillary Agreements by the Company nor the consummation of the transactions contemplated hereby 7 or thereby will (1) violate, conflict with, or result in a breach of any provision of, constitute a material default (or an event that, with notice or lapse of time or both, would constitute a material default) under, result in the termination of, or accelerate the performance required by, or result in the creation of any material adverse claim against any of the material properties or assets of the Company or its subsidiaries under, (A) the Articles, by-laws or any other organizational documents of the Company or its subsidiaries, or (B) any material note, bond, mortgage, indenture, deed of trust, lease, license, agreement, production sharing contract, concession or other instrument or obligation to which the Company or any of its subsidiaries is a party, or by which the Company or any of its subsidiaries or any of their respective assets are bound, or (2) violate any order, writ, injunction, decree, judgment, statute, rule or regulation of any Governmental Authority to which the Company or any subsidiary is subject or by which the Company or any of its subsidiaries or any of their respective assets are bound in any material respect. (ii) Except as set forth on Schedule 4.1(f), no consent, approval, order, permit or authorization of, or registration, declaration or filing with, any Person or of any Governmental Authority is required for the execution, delivery and performance by the Company of this Agreement and the Ancillary Agreements and the covenants and transactions contemplated hereby or thereby. (g) Corporate Documents. The minute books of the Company and its subsidiaries contain reasonably complete and accurate required records of all corporate actions of the equity owners of the various entities and of the boards of directors or other governing bodies, including committees of such boards or governing bodies. The share transfer records of the Company are maintained by its transfer agent and registrar and, to the knowledge of the Company, contain complete and accurate records of all issuances and redemptions of shares by the Company. (h) ASC Documents; Financial Statements; Liabilities. (i) Since January 1, 1997, the Company has filed all reports, forms, statements and other documents required under the Securities Act (Alberta) to be filed with the ASC (the "ASC Documents") other than annual audited financial statements for the year ended June 30, 1999 and unaudited interim financial statements for the three months ended September 30, 1999. The ASC Documents, and any such reports, forms and documents filed by the Company with the ASC after the date hereof, as amended, complied, or will comply, as to 8 form in all material respects with the requirements of the Securities Act (Alberta), as the case may be, applicable to such ASC Documents, and none of the ASC Documents contained, any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (ii) The Financial Statements included in the ASC Documents have been audited by Garrett Power, Chartered Accountants (in the case of the Audited Financial Statements) in accordance with Canadian generally accepted auditing standards, have been prepared in accordance with Canadian generally accepted accounting principles applied on a basis consistent with prior periods, and present fairly the consolidated financial position of the Company at such dates and the results of operations and cash flows for the periods then ended, except, in the case of the Interim Financial Statements, as permitted by the Securities Act (Alberta). The Interim Financial Statements reflect all adjustments (consisting only of normal, recurring adjustments) that are necessary for a fair statement of the results for the interim periods presented therein. Except as set forth on Schedule 4.1(h), or in the Latest Balance Sheet and the notes thereto, there has not been any Material Adverse Change in the consolidated financial condition of the Company since December 31, 1998. (iii) The Latest Balance Sheet includes appropriate reserves for all Taxes and other liabilities incurred as of such date but not yet payable. (iv) Since the date of the Latest Balance Sheet, there has been no change that has had or is likely to have a Material Adverse Effect on the Company. (i) Oil and Gas Properties. (i) Except for Liens arising in the ordinary course of business after the date of the Latest Balance Sheet and assets disposed of in the ordinary course of business after the date of the Latest Balance Sheet, each of the Company and its subsidiaries has good and marketable title, free and clear of all Liens which would have a Material Adverse Effect on the Company and its subsidiaries on a consolidated basis, to the all their material properties and assets, whether tangible or intangible, real, personal or mixed, reflected in the Latest Balance Sheet as being owned by the Company and its subsidiaries as of the date thereof or purported to be owned on the date thereof, including without limitation, the oil and gas interests reported upon in the Reserve Report. All buildings, and all fixtures, equipment and other property and assets which are material to its business on a consolidated 9 basis, held under leases by the Company and its subsidiaries are held under valid instruments enforceable by each of them in accordance with their respective terms. Substantially all of the Company's and its subsidiaries' equipment in regular use has been reasonably well maintained and is generally in good and serviceable condition, reasonable wear and tear excepted. (ii) The Company has delivered to the Purchaser a copy of the reserve report ("Reserve Report") dated as of December 31, 1998, prepared by Ryder Scott Company Petroleum Engineers, independent reserve engineers ("Reserve Engineers") relating to the oil and gas reserves of the Company. The factual information underlying the estimates of the reserves of the Company, which was supplied by the Company to the Reserve Engineers for the purpose of preparing the Reserve Report, including, without limitation, production, volumes, sales prices for production, contractual pricing provisions under oil or gas sales or marketing contracts under hedging arrangements, costs of operations and development, and working interest and net revenue information relating to the Company's ownership interests in properties, was true and correct in all material respects on the date of such Reserve Report; the estimates of future capital expenditures and other future exploration and development costs supplied to the Reserve Engineers were prepared in good faith and with a reasonable basis; the information provided to the Reserve Engineers for purposes of preparing the Reserve Reports were prepared in accordance with customary industry practices; each of the Reserve Engineers were, as of the date of any Reserve Report prepared by it, and are, as of the date hereof, independent petroleum engineers with respect to the Company; other than normal production of the reserves and intervening oil and gas price fluctuations set forth in Schedule 4.1(i)(ii), the Company is not, as of the date hereof, aware of any facts or circumstances that would result in a materially adverse change in the reserves in the aggregate, or the aggregate present value of future net cash flows therefrom, as described in the Reserve Reports; estimates of such reserves and the present value of the future net cash flows therefrom in the Reserve Report comply in all material respects to the applicable requirements of Regulation S-X under the Securities Act; (j) Investment Company. Neither the Company nor any of its subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (k) Public Utility Company. Neither the Company nor any of its subsidiaries is a "public utility," a "holding company" or a subsidiary or "affiliate" of a public utility within the meaning of the Public Utility Holding Company Act of 1935, as amended. 10 (l) Environmental Matters. Except as set forth on Schedule 4.1(l), and except for matters that would not result individually in liability to the Company or any of its subsidiaries in excess of (a) $10,000 in the case of matters known to the Company or, in the aggregate with all other such matters, in liability to the Company or any of its subsidiaries in excess of $25,000, or (b) $25,000 in the case of matters not known to the Company or, in the aggregate with all other such matters, in liability to the Company or any of its subsidiaries in excess of $50,000, to the best knowledge of the Company: (i) the properties, operations and activities of the Company or any of its subsidiaries are in compliance in all material respects with all applicable Environmental Laws and there are no circumstances which could reasonably be expected to prevent or interfere with their continued compliance with applicable Environmental Laws; (ii) each of the Company and its subsidiaries and the properties and operations of the Company and its subsidiaries (including, without limitation, properties located in the Ukraine) are not subject to any existing, pending, or, to the Company's knowledge, threatened civil, criminal or administrative action, suit, claim, notice of violation, investigation, notice of potential liability, request for information, inquiry, demand or proceeding under applicable Environmental Laws; (iii) neither the Company nor any of its subsidiaries has agreed, whether by contract or by consent agreement with Governmental Authorities or private persons, to undertake any environmental investigation, clean up, or remedial activities; (iv) all notices, permits, licenses, or similar authorizations required to be obtained or filed by the Company or its subsidiaries under any Environmental Law in connection with any aspect of the business of the Company or its subsidiaries, including without limitation those relating to the treatment, storage, disposal or discharge of Hazardous Materials, have been duly obtained or filed, and the Company and its subsidiaries are in compliance with the terms and conditions of all such notices, permits, licenses and similar authorizations. (v) the Company and each of its subsidiaries has satisfied and is currently in compliance with all financial responsibility requirements applicable to their operations and imposed by any Governmental Authority under Environmental Laws, and the Company has not received any notice of noncompliance with respect to any such financial responsibility requirements; (vi) there are no physical or environmental conditions existing on any property of the Company or any of its subsidiaries or resulting from the Company's or any of its subsidiaries' operations or activities, past or present, at 11 any location, including, without limitation, releases and disposal of Hazardous Materials, that would give rise to any on-site or off-site investigation, reporting, or remedial obligations or other Environmental Liability; (vii) to the extent required by applicable Environmental Laws, all Hazardous Materials generated by the Company and its subsidiaries have been transported only by persons authorized under applicable Environmental Laws to transport such materials, and disposed of only at treatment, storage and disposal facilities authorized under applicable Environmental Laws to treat, store or dispose of such Hazardous materials; (viii) there has been no exposure of any person or property to Hazardous Materials or any release of Hazardous Materials into the environment by the Company and its subsidiaries or in connection with their present or prior properties or operations that could reasonably by expected to give rise to any Environmental Liability; (ix) no release or clean up of Hazardous Materials has occurred at the Company's and its subsidiaries' properties which could reasonably be expected to result in the assertion or creation of any Lien on the properties by any Governmental Authority with respect thereto, nor has any such lien been asserted or made by any Governmental Authority with respect thereto; and (x) the operations of each third party operator of any of the Company's and its subsidiaries' properties are in compliance with the terms of this Section. The Company has made available to the Purchaser all material internal and external environmental audits, studies, documents and correspondence on environmental matters in the possession of the Company relating to any of the present or prior properties or operations of the Company and its subsidiaries. In this Section, (xi) "Environmental Laws" shall mean any and all laws, statutes, ordinances, rules, regulations or orders of any Governmental Authority pertaining to pollution, health, safety, or the environment, including, without limitation, the laws of the Ukraine on Environmental Protection (VVR (Visnyk Verkhovnoi Rady [Herald of the Supreme Rada]) 1991, #41. p. 5546), the Clean Air Act, the Comprehensive Environmental, Response, Compensation, and Liability Act, the Clean Water Act, the Occupational Safety and Health Act, the Resource Conservation and Recovery Act, the Solid Waste Disposal Act, the Emergency Planning and Community Right-To-Know Act, the Safe Drinking Water Act, the Toxic Substances Control Act, the 12 Hazardous Materials Transportation Act, the Oil Pollution Act, all as amended, any state laws implementing the foregoing federal laws, any state laws pertaining to, health, safety and waste management including, without limitation, the handling of asbestos, medical waste or disposable products, hydrocarbon products, PCBs or other Hazardous Materials or processing or disposing of wastes or the use, maintenance and closure of pits and impoundments, all other federal, provincial, state or local environmental conservation or protection and health and safety laws, domestic and foreign, and any common law creating liability for environmental conditions. Environmental Laws shall include, without limitation, all restrictions, conditions, standards, limitations, prohibitions, requirements, guidelines, obligations, schedules and timetables contained in Environmental Laws or contained in any regulation, plan, code, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder. (xii) "Hazardous Materials" shall mean any materials that are regulated by or form the basis or liability under Environmental Laws, and include, without limitation, asbestos, wastes, including, without limitation, medical wastes or disposable products, hazardous substances, pollutants or contaminants, hazardous or solid wastes, hazardous constituents, hazardous materials, toxic substances, petroleum, including crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas or synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas). (xiii) "Environmental Liability" shall mean liabilities, fines, penalties, obligations, consequential damages, responsibilities, response costs, natural resource damages, corrective action costs, reclamation costs, and costs and expenses, known or unknown, absolute or contingent, past, present or future, resulting from any requirement, claim or demand under Environmental Laws or contract. (m) Tax Matters. (i) Each of the following is true with respect to each of the Company and its subsidiaries to the extent applicable to such member: (1) all Returns that are or were required to be filed by or with respect to the Company and its subsidiaries have been or will be timely filed by each of the Company and its subsidiaries when due in accordance with all applicable laws; all Taxes shown on the Returns have been or will be timely paid when due; the Returns have been properly completed in compliance with all applicable laws and regulations and completely and accurately reflect the facts regarding the income, expenses, properties, business 13 and operations required to be shown thereon; the Returns are not subject to penalties under Section 6662 of the Code (or any corresponding provision of state, local or foreign tax law); (2) except as set forth on Schedule 4.1(m), each member of the Company and its subsidiaries has paid all Taxes required to be paid by it (whether or not shown on a Return) or for which it could be liable (provided that it shall not be considered a breach of this representation if it is ultimately determined that additional tax payments are due but such assessment is based on an adjustment to a Return or position, if such member has a reasonable basis for the position taken with respect to such Taxes), whether to taxing authorities or to other Persons under tax allocation agreements or otherwise, and the charges, accruals, and reserves for Taxes due, or accrued but not yet due, relating to its income, properties, transactions or operations for any period as reflected on its books (including, without limitation, the Latest Balance Sheet) are adequate to cover such Taxes; (3) there are no ongoing or scheduled audits, agreements or consents currently in effect for the extension or waiver of the time (A) to file any Return or (B) for assessment or collection of any Taxes relating to the income, properties or operations of any of the Company and its subsidiaries for any period, and neither the Company nor any subsidiary has been requested to enter into any such agreement or consent; (4) there are no Liens for Taxes (other than for current Taxes not yet due and payable and Taxes set forth on Schedule 4.1(m) ) upon the assets of any of the Company nor its subsidiaries; (5) the Company and its subsidiaries have not received notice of any Tax deficiency outstanding, proposed or assessed against or allocable to the Company or its subsidiaries or their assets (other than for Taxes set forth on Schedule 4.1(m); (6) to the knowledge of the Company, each of the Company and its subsidiaries has complied in all material respects with all applicable tax laws (other than for Taxes set forth on Schedule 4.1(m); and 14 (7) all Taxes that the Company and its subsidiaries are or were required by applicable law to withhold or collect have been duly withheld, collected and paid. (n) Litigation. Except as disclosed on Schedule 4.1(n), there are no actions, suits, proceedings, arbitrations or investigations pending or, to the knowledge of the Company, threatened before any court, any Governmental Authority, governmental instrumentality or any arbitration panel, against or affecting any of the Company or its subsidiaries. To the knowledge of the Company, no facts or circumstances exist that would be reasonably likely to result in the filing of any such action that would have a Material Adverse Effect on the Company. Except as disclosed on Schedule 4.1(n), neither the Company nor its subsidiaries is subject to any currently pending judgment, order or decree entered in any lawsuit or proceeding. (o) Broker's and Finder's Fee. No agent, broker, Person or firm acting on behalf of the Company is or will be entitled to any commission or broker's or finder's fee from the Company or its subsidiaries in connection with any of the transactions contemplated herein. (p) Absence of Sensitive Payments. Except as disclosed to Purchaser, neither the Company, any subsidiary nor any Affiliate thereof nor any officer or director of any of them acting alone or together, has performed any of the following acts: (i) the making of any contribution, payment, remuneration, gift or other form of economic benefit (a "Payment") to or for the private use of any governmental official, employee or agent where the Payment or the purpose of the Payment was illegal under the laws of the United States, Canada or the Ukraine or the jurisdiction in which such payment was made, (ii) the establishment or maintenance of any unrecorded fund, asset or liability for any purpose or the making of any false or artificial entries on its books, (iii) the making of any Payment or the receipt of any Payment with the intention or understanding that any part of the Payment was to be used for any purpose other than that described in the documents supporting the Payment, or (iv) the giving of any Payment to, or the receipt of any Payment from, any person who was or could have been in a position to help or hinder the business of the Company and its subsidiaries (or assist any of the Company or its subsidiaries in connection with any actual or proposed transaction) which (A) would reasonably have been expected to subject any of the Company or its subsidiaries to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (B) if not given in the past, would have had a Material Adverse Effect on the Company or (C) if not continued in the future, would have a Material Adverse Effect on the Company. (q) Compliance with Law. Neither the Company nor any subsidiary is in violation of any statute, law, ordinance, regulation, rule or order of any foreign, United States, Canadian or Ukranian federal, state, provincial or local Governmental Authority or any judgment, decree or order of any court, except where any such violation 15 would not, individually or in the aggregate, have a Material Adverse Effect on the Company. Each of the Company and its subsidiaries has all permits, approvals, licenses and franchises from Governmental Authorities required to conduct its business as now being conducted, except for such permits, approvals, licenses and franchises the absence of which would not, individually or in the aggregate, have a Material Adverse Effect on the Company. (r) Contracts. (i) Schedule 4.1(r) sets forth, as of the date hereof, a list of all of the following material contracts and other agreements to which the Company or its subsidiaries is a party or by which any of them or any material portion of their properties or assets are bound or subject (other than those set forth on any other Schedule): (1) contracts, severance agreements and other agreements with any current or former officer, director, employee, consultant, agent or other representative; (2) contracts and other agreements with any labor union or association representing any employee of the Company and its subsidiaries; (3) contracts, agreements or other agreements relating to the Company and its subsidiaries between the Company and its subsidiaries, on the one hand, and any shareholder or any of his, her or its Affiliates on the other hand; (4) joint venture agreements, concessions, licenses or production sharing contracts; (5) contracts and other agreements under which the Company or any of its subsidiaries agrees to indemnify any party; (6) contracts and other agreements relating to the borrowing of money; or (7) any other material contract or other agreement whether or not made in the ordinary course of business. There have been delivered or made available to the Purchaser true and complete copies of all such contracts and other agreements set forth on Schedule 4.1(r). (ii) All contracts, agreements and understandings set forth on Schedule 4.1(r) are valid and binding and are in full force and effect and enforceable in accordance with their respective terms other than contracts, agreements or understandings which are by their terms no longer in force or effect. Except as set forth on Schedule 4.1(r) (or on another Schedule), (1) no approval or consent of, or notice to, any Person is needed in order that such contract, agreement or understanding shall continue in full force and effect in accordance with its terms without penalty, acceleration or rights of early termination following the consummation of the transactions contemplated by this Agreement, and (2) neither the Company nor any of its subsidiaries is in violation or breach of or default under any such contract, agreement or understanding nor to the knowledge of the Company is any other party to any such contract, agreement or understanding. 16 (s) Employment Plans/Employment Agreements (i) Neither the Company nor its subsidiaries has sponsored, maintained or contributed to or for the benefit of the current or former employees, officers or directors of the Company or its subsidiaries or has been so sponsored, maintained or contributed to within six years prior to the Closing Date: (1) any "employee benefit plan," as such term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (including, but not limited to, employee benefit plans, such as foreign plans, which are not subject to the provisions of ERISA); and (2) any personnel policy, option plan, collective bargaining agreement, bonus plan or arrangement, incentive award plan or arrangement, vacation policy, severance pay plan, policy or agreement, deferred compensation agreement or arrangement, executive compensation or supplemental income arrangement, consulting agreement, employment agreement and each other employee benefit plan, agreement, arrangement, program, practice or understanding. (ii) Neither the Company nor its subsidiaries contributes to or has an obligation to contribute to, and has not at any time within six years prior to the Closing Date contributed to or had an obligation to contribute to or any liability with respect to (a) a multiemployer plan within the meaning of Section 3(37) of ERISA or (b) a plan subject to Title IV of ERISA, Section 302 of ERISA or Section 412 of the Code. No Plan is funded through a trust that is intended to be exempt from federal income taxation pursuant to Section 501(c)(9) of the Code. (iii) the Company does not have a 401(k) Plan or any health benefit plans. (t) Absence of Certain Changes or Events. Since the date of the Latest Balance Sheet, each of the Company and its subsidiaries has conducted its business only in the ordinary course, and has not: (i) amended its articles of incorporation, bylaws or similar organizational documents; (ii) merged or consolidated with another entity (other than a subsidiary) or acquired or agreed to acquire any business or any corporation, partnership or other business 17 organization, or sold, leased, transferred or otherwise disposed of any material portion of its assets except for fair value in the ordinary course of business; (iii) suffered any damage, destruction or loss (whether or not covered by insurance) which has had or could have a Material Adverse Effect on the Company; (iv) suffered the termination, suspension or revocation of any license or permit necessary for the operation of its business; (v) entered into any transaction other than on an arm's-length basis; (vi) declared or paid any dividend or made any distribution with respect to any of its equity interests, or redeemed, purchased or otherwise acquired any of its equity interests, or issued, sold or granted any option, warrant or other right to purchase or acquire any equity interest; or (vii) agreed, whether or not in writing, to do any of the foregoing (other than as contemplated by the Pease Merger Agreement). (u) The Company's Assets. The assets of the Company and of its subsidiaries consist solely of (i) reserves of oil, rights to reserves of oil and associated exploration and production assets with a fair market value not exceeding $500 million and (ii) other assets with a fair market value not exceeding $15 million. For purposes of this Section 4.1(u), the term "associated exploration and production assets" shall have the meaning ascribed thereto in Section 802.3 of the Rules promulgated pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act"). (v) Registration Rights. The Company is not under any obligation to register (as defined in the First Amendment to Registration Rights Agreement) any of its presently outstanding securities or any of its securities which may hereafter be issued, except as described on Schedule 4.1(v). Section 4.2 Representations and Warranties of Purchaser. Purchaser hereby represents and warrants to the Company as follows: (a) Investment Intent. Purchaser: (i) is acquiring the Purchase Shares, the Warrants, the Shares and the Warrant Shares for investment for its own account, not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof except pursuant to the First Amendment to Registration Rights Agreement; 18 (ii) understands and acknowledges that the Purchase Shares, the Warrants, the Shares and the Warrant Shares have not been and will not be registered under any applicable Securities Laws, and that the issuance contemplated hereby is being made in reliance on a private placement exemption to "accredited investors" as defined in Regulation D under the Securities Act and similar exemptions under state law and applicable exemptions under the Securities Act (Alberta); (iii) has had access to such information concerning the Company as it has considered necessary in connection with its investment decision to invest in the Purchase Shares, the Warrants, the Shares and the Warrant Shares, including an opportunity to meet with members of management of the Company and to ask and receive answers to questions regarding the Company, its business, financial condition, prospects and the terms of this offering; (iv) has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment in the Purchase Shares, Warrants, Shares and Warrant Shares and is able to bear the economic risks of such investment; (v) acknowledges that it has not purchased the Purchase Shares, the Warrants, the Shares and the Warrant Shares as a result of any general solicitation or general advertising, including advertisements, articles, notices or other communications published in any newspaper, magazine or similar media or broadcast over the internet, radio or television, or any seminar or meeting whose attendees have been invited by general solicitation or general advertising; (vi) agrees that if it decides to offer, sell or otherwise transfer any of the Purchase Shares, the Warrants, the Shares or the Warrant Shares, it will not offer, sell or otherwise transfer any of such Purchase Shares, Warrants, Shares or Warrant Shares, directly or indirectly, unless: A. the sale is to the Company or registered under applicable Securities Laws; or B. the sale is made outside the United States in a transaction meeting the requirements of Rule 904 of Regulation S (or such successor rule or regulation as then in effect); C. the sale is made pursuant to the exemption from the registration requirements under the Securities Act provided by Rule 144 thereunder, if available, and in accordance with any applicable state securities laws; or 19 D. the sale is made in a transaction that otherwise does not require registration under applicable Securities Laws governing the offer and sale of the Purchase Shares, Warrants, Shares and Warrant Shares; (vii) understands and acknowledges that upon issuance thereof and until such time as is no longer required under requirements of the applicable Securities Laws, all certificates representing the Purchase Shares, the Warrants, the Shares and the Warrant Shares (and all certificates issued in exchange therefor or in substitution thereof), shall bear, in addition to any legend(s) required by applicable Securities Laws and policies, the following legend: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE COMPANY THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (A) TO THE COMPANY, (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH REGULATION S UNDER THE 1933 ACT, IF APPLICABLE (OR SUCH SUCCESSOR RULE OR REGULATION AS THEN IN EFFECT), (C) INSIDE THE UNITED STATES (1) PURSUANT TO REGISTRATION UNDER THE 1933 ACT AND APPLICABLE STATE LAWS, OR (2) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, OR (3) IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE 1933 ACT OR ANY APPLICABLE STATE SECURITIES LAWS, AND THE HOLDER HAS PRIOR TO SUCH SALE FURNISHED TO THE COMPANY AN OPINION OF COUNSEL OF RECOGNIZED STANDING, REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. and understands that the certificate representing the Purchase Shares, Warrants, Shares and Warrant Shares will bear the following additional legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD UNLESS (A) A PERIOD OF AT LEAST 12 MONTHS HAS ELAPSED FROM THE DATE OF ORIGINAL ISSUE, (B) NO UNUSUAL EFFORT IS MADE TO PREPARE THE MARKET OR TO CREATE A DEMAND FOR THE SECURITIES MAKING UP THE DISTRIBUTION, (C) NO EXTRAORDINARY COMMISSION OR 20 CONSIDERATION IS PAID TO A PERSON OR COMPANY OTHER THAN THE VENDOR OF THE SECURITIES IN RESPECT OF THE TRADE, AND (D) THE FIRST TRADE IS NOT FROM THE HOLDINGS OF A CONTROL PERSON. ("UNUSUAL EFFORT," "EXTRAORDINARY COMMISSION" AND "CONTROL PERSON" HAVE THE MEANINGS SET OUT IN THE SECURITIES ACT (ALBERTA) AND THE RULES THEREUNDER.) (viii) consents to the Company making a notation on its records or giving instructions to any transfer agent of the Purchase Shares, the Warrants, the Shares and the Warrant Shares in order to implement the restrictions on transfer set forth and described herein; and (ix) will not sell all or any of the Purchase Shares, the Warrants, the Shares and the Warrant Shares except in compliance with applicable Securities Laws. (b) Accredited Investor. The Purchaser is an "accredited investor" as such term is defined in Regulation D under the Securities Act. (c) Corporate Power; Authority. The Purchaser has full corporate power and authority to enter into this Agreement and the Ancillary Agreements and to perform its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement, and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby have been duly authorized and approved by the Board of Directors of the Purchaser and no other corporate proceeding on the part of the Purchaser is necessary to authorize and approve this Agreement and the Ancillary Agreements and the transactions contemplated hereby and thereby. This Agreement has been, and at the Closing, each Ancillary Agreement will be, duly executed and delivered by, and constitutes or will constitute a valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms (except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by the principles governing the availability of equitable remedies). Section 4.3 Acknowledgments of the Purchaser. In connection with the issuance of the Purchase Shares and the Warrants, Purchaser certifies that it is not a resident of Alberta and hereby acknowledges to the Company as follows: (a) Purchaser understands that no securities commission or similar regulatory authority has reviewed or passed on the merits of the Purchase Shares or the Warrants, (b) there is no government or other insurance covering the Purchase Shares or the Warrants, 21 (c) there are risks associated with the purchase of the Purchase Shares and the Warrants, (d) there are restrictions on the Purchaser's ability to resell the Purchase Shares and the Warrants (and the Shares and Warrant Shares) and it is the responsibility of the Purchaser to find out what those restrictions are and to comply with them before selling the Purchase Shares Warrants (and the Shares and Warrant Shares), and (e) the Company has advised the Purchaser that the Company is relying on an exemption from the requirements to provide the Purchaser with a prospectus and to sell the Purchase Shares and Warrants through a person or company registered to sell securities under the Securities Act (Alberta) and, as a consequence of acquiring the Purchase Shares and the Warrants pursuant to this exemption, certain protections, rights and remedies provided by the Securities Act (Alberta), including statutory rights of rescission or damages, will not be available to the Purchaser. ARTICLE V. CONDITIONS TO CLOSING Section 5.1 Purchaser's Conditions. Purchaser's obligations to purchase the Purchase Shares and the Warrants at the Closing are subject to the fulfillment of the following conditions, the waiver of which shall not be effective against Purchaser unless specifically consented to in writing: (a) Representations and Warranties Correct. The representations and warranties made by the Company in Section 4.1 hereof shall be true and correct when made, and shall be true and correct on the Closing Date except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date. (b) Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all respects. (c) Compliance Certificate. The Company shall have delivered to Purchaser a certificate of the Company, executed by the President and Secretary of the Company, dated the Closing Date, and certifying, that all representations and warranties of the Company contained in the Agreement are true and correct on the Closing Date as if made on such date, that all conditions to the obligations of Purchaser to close the transactions contemplated by this Agreement have been satisfied or waived in writing by Purchaser and that the Company has complied with all covenants or obligations set forth in this Agreement. 22 (d) No Material Adverse Change. There shall have been no Material Adverse Change with respect to the Company since the date of the Interim Financial Statements. (e) Consents. The shareholders of the Company shall have approved the issuance of the Purchase Shares and Warrants as contemplated by Section 6.4. Any consent, approval, authorization or order of any court, Governmental Authority or administrative body required for the consummation of the transactions contemplated by this Agreement, shall have been obtained and shall be in effect on the Closing Date. (f) Registration Rights Agreement. The Company shall have executed the First Amendment to Registration Rights Agreement. (g) Opinion of Company's Counsel. Purchaser shall have received from McManus Thompson a favorable opinion dated the Closing Date, in form and substance satisfactory to Purchaser, in the form of Exhibit D. (h) Pease Merger Agreement. The Pease Merger Agreement shall have been amended as contemplated by Section 6.10 and the form and substance of such amendment shall be satisfactory to the Purchaser, acting reasonably. (i) Due Diligence. The Purchaser shall have completed its due diligence investigation of the Company, its subsidiaries and their respective assets, operations and prospects, and the Company shall be satisfied in its sole and absolute discretion with the results of that investigation. Such due diligence shall include, without limitation, receipt of such opinions and certificates regarding the operations, properties and prospects of the Company from Ukranian counsel to Purchaser as purchaser shall request. Section 5.2 Company's Conditions. The Company's obligation to sell and issue the Purchase Shares and Warrants at the Closing is, at the option of the Company, subject to the fulfillment as of the Closing Date of the following conditions: (a) Representations. The representations made by Purchaser in Sections 4.2 and 4.3 hereof shall be true and correct when made, and shall be true and correct on the Closing Date. (b) Consents. The shareholders of the Company shall have approved the issuance of the Purchase Shares and Warrants as contemplated by Section 6.4. Any other consent, approval, authorization or order of any court, Governmental Authority or administrative body required for the consummation of the transactions contemplated by this Agreement, shall have been obtained and shall be in effect on the Closing Date. (c) Pease Merger Agreement. The Pease Merger Agreement shall have been amended as contemplated by Section 6.10. 23 ARTICLE VI. AFFIRMATIVE COVENANTS OF THE COMPANY Section 6.1 Financial Information. The Company will mail to each Holder of any of the Purchase Shares, Warrants, Shares or Warrant Shares the following: (a) ASC Reports. The Company shall promptly mail copies of all quarterly and annual reports and of the information, documents and other reports which the Company is required to file with the ASC or the SEC, exclusive of any exhibits to such reports and exclusive of registration statements on Form S-8. (b) Other Reports. If the Company is not required to file reports with the ASC or the SEC, the Company shall mail within five days after it would have been required to file with the SEC, financial statements, including notes thereto (and with respect to annual financial statements, an auditor's report by a firm of established national reputation), and a "Management's Discussion and Analysis of Financial Condition and Results of Operations" both comparable to that which the Company would have been required to include in such annual or quarterly reports, information, documents or other reports if the Company were subject to the requirements of Section 13 or 15(d) of the Exchange Act. Section 6.2 Access. The Company will allow, and will cause its subsidiaries to allow, any Holder of Purchase Shares, Warrants, Shares or Warrant Shares or proposed assignee of Purchase Shares, Warrants, Shares or Warrant Shares designated by such Holder, and their respective representatives, upon two Business Days prior telephonic notice, to visit and inspect any of its property, to examine its books of record and account, and to discuss its affairs, finances and accounts with its officers, provided, (i) the Holder of Purchase Shares, Warrants, Shares or Warrant Shares, proposed assignee or representative signs a customary confidentiality agreement if requested by the Company and (ii) the examination will not unreasonably disrupt, in any material manner, the operations of the Company. Section 6.3 Rule 144 Reporting. The Company agrees that from and after the date it registers any class of its securities under Section 12(b) or 12(g) of the Exchange Act, it shall: (a) Make and keep "adequate public information" available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after the date hereof; (b) File with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) So long as Purchaser owns any Purchase Shares or Common Shares, furnish to Purchaser promptly upon request a written statement 24 by the Company as to its compliance with the reporting requirements (i) necessary to cause "adequate public information" to be available under Rule 144, and (ii) of the Securities Act and Exchange Act. Section 6.4 Shareholder Approval. The Company will take all action necessary to obtain the approval of the shareholders of the Company in accordance with the requirements of the CDNX by obtaining Shareholder Consents from holders of a majority of its Common Shares, excluding the Purchaser and Torch Energy Advisors Incorporated, with respect to the transactions contemplated hereby. The Board of Directors of the Company shall recommend such approval and shall each take all lawful action to solicit such approval; provided, however, that such recommendation is subject to any action required by the fiduciary duties of the Board of Directors of the Company under applicable law. Section 6.5 Conduct of Business by the Company Pending the Closing. Prior to the Closing, unless Purchaser shall otherwise agree in writing or except as otherwise required by this Agreement: (i) the Company shall, and shall cause its subsidiaries to, carry on their respective businesses in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, and shall, and shall cause its subsidiaries to, use their reasonable efforts to preserve intact their present business organizations and preserve their relationships with customers, suppliers and others having business dealings with them to the end that their goodwill and on-going businesses shall be unimpaired at the Closing. The Company shall, and shall cause its subsidiaries to, (a) maintain insurance coverages and its books, accounts and records in the usual manner consistent with past practice; (b) comply in all material respects with all laws, ordinances and regulations of Governmental Authorities applicable to the Company and its subsidiaries; (c) maintain and keep its material properties and equipment in good repair, working order and condition, ordinary wear and tear excepted; (d) maintain its material concessions in full force and effect and not take any action or fail to take any action which would constitute a material breach or default thereunder; and (e) perform in all material respects its obligations under all material contracts and commitments to which it is a party or by which it is bound; (ii) the Company shall not, and shall not propose or agree to, nor shall it permit any of its subsidiaries to, or propose or agree to, (a) sell or pledge or agree to sell or pledge any capital stock owned by it in any of their respective subsidiaries, (b) amend their respective articles or by-laws, (c) split, combine or reclassify their outstanding stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for such shares of stock, or declare, set aside, authorize or pay any dividend or other distribution payable in cash, stock or property, or (d) directly or indirectly redeem, purchase or otherwise acquire or agree to redeem, purchase or otherwise acquire any shares of stock; 25 (iii) the Company shall not, nor shall it permit any of its subsidiaries to, (A) issue, deliver or sell or agree to issue, deliver or sell any additional shares of, or rights of any kind to acquire any shares of, its respective stock of any class, any indebtedness having the right to vote on any matter on which the Company's shareholders may vote or any option, rights or warrants to acquire, or securities convertible into, exercisable for or exchangeable for, shares of stock other than issuances, deliveries or sales of securities pursuant to obligations outstanding as of the date of this Agreement; (B) acquire, lease or dispose or agree to acquire, lease or dispose of any capital assets or any other assets other than in the ordinary course of business; (C) incur additional indebtedness or encumber or grant a security interest in any asset or enter into any other material transaction other than in each case in the ordinary course of business; (D) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof; or (E) enter into any contract, agreement, commitment or arrangement with respect to any of the foregoing; (iv) the Company shall not, nor shall it permit any of its subsidiaries to, except as required to comply with applicable law, enter into any new (or amend any existing) employment, severance or consulting agreement, grant any general increase in the compensation of current or former directors, officers or employees (including any such increase pursuant to any bonus, pension, profit-sharing or other plan or commitment) or grant any increase in the compensation payable or to become payable to any director, officer or employee, except in any of the foregoing cases in accordance with pre-existing contractual provisions or in the ordinary course of business consistent with past practice; and (v) the Company shall not, nor shall it permit any of its subsidiaries to, amend, modify, terminate, waive or permit to lapse any material right of first refusal, preferential right, right of first offer, or any other material right of the Company or any of its subsidiaries. Section 6.6 Stock Exchange Listing. The Company shall use its best efforts to list on the CDNX, the Shares and Warrant Shares, to be issued pursuant to the Purchase Shares and Warrants. Section 6.7 Additional Agreements. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use all commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using all commercially reasonable efforts to obtain all necessary waivers, consents and approvals, to effect all necessary registrations and filings and to lift any injunction to the transactions contemplated hereby (and, in such case, to proceed with such transactions as expeditiously as possible). 26 Section 6.8 No Shop. The Company agrees (a) that neither it nor any of its subsidiaries shall, and it shall direct and use its best efforts to cause its officers, directors, employees, agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by it or any of its subsidiaries) not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its shareholders) with respect to a merger, stock or asset acquisition, consolidation or similar transaction, involving, or any purchase of all or any significant portion of the assets or any equity securities of, the Company or its subsidiaries, taken as a whole (any such proposal or offer being hereinafter referred to as an "Alternative Proposal"), or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any Person relating to an Alternative Proposal, or release any third party from any obligations under any existing standstill agreement or arrangement, or enter into any agreement with respect to an Alternative Proposal, or otherwise facilitate any effort or attempt to make or implement an Alternative Proposal; (b) that it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing, and it will take the necessary steps to inform the individuals or entities referred to above of the obligations undertaken in this Section 6.8; and (c) that it will notify the Purchaser immediately if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with, it. Notwithstanding the foregoing, the Company may, directly or indirectly, furnish information and access to, and may participate in discussions and negotiate with, any Person, if such Person has submitted a written proposal to its Board of Directors relating to an Alternative Proposal which the Board of Directors believes is superior from a financial point of view to the transactions contemplated hereby and is reasonably likely to be consummated and the Company's Board of Directors, having received a written opinion of legal counsel relating thereto, determines in its good faith judgment that failing to take such action would constitute a breach of the Board of Directors' fiduciary duty to its shareholders imposed by law. The Board of Directors shall provide a copy of any such written proposal to the Purchaser immediately after receipt thereof and thereafter keep the other party promptly advised of any development with respect thereto and any revision of the terms of such Alternative Proposal. Section 6.9 Advice of Changes. The Company shall confer on a regular basis with Purchaser on operational matters. The Company shall promptly advise the Purchaser orally and in writing of any change or event that has had, or could reasonably be expected to have, a Material Adverse Effect. The Company shall promptly provide the Purchaser (or their respective counsel) copies of all filings made by such party with the CDNX or any other Governmental Authority in connection with this Agreement and the transactions contemplated hereby. Section 6.10 Pease Merger. The Company is currently party to the Pease Merger Agreement. Contemporaneously with the execution of this Agreement, Pease and the Company have amended the Pease Merger Agreement as contemplated by Exhibit E. Purchaser agrees to vote all Common Shares which it owns or controls and all of the Preferred Shares in favor of the Pease Merger Agreement (as amended as contemplated by Exhibit E), including the approval and adoption of 27 the Redomestication (as defined in the Pease Merger Agreement) and the Merger (as defined in the Pease Merger Agreement); provided however, Purchaser shall not be required to vote or cause the voting of Common Shares or Preferred Shares unless: (i) The conditions to consummation of the Redomesticatioin and the Merger set forth in Section 7.01(a) and (c) of the Pease Merger Agreement shall have been satisfied as of the date of the vote of shareholders or waived by Purchaser. (ii) The conditions to the consummation of the Redomestication and Merger set forth in Section 7.02(a) through 7.02(j) of the Pease Merger Agreement shall have been satisfied as of the date of the vote of shareholders or waived by Purchaser, except that (A) the certificates of the President and Chief Financial Officer of Pease described in Section 7.02(a), 7.02(b) and 7.02(c) of the Pease Merger Agreement shall be delivered and addressed to Purchaser and shall be dated the date of the shareholder vote; (B) the "reasonable business judgement of Carpatsky" set forth in Section 7.02(d) of the Pease Merger Agreement shall be the "reasonable business judgement of Bellwether Exploration Company"; (C) Purchaser shall have been advised orally that the requirements of the second sentence of clause (iii) below are anticipated to be satisfied at the closing. (iii) Purchaser shall have received drafts of the opinions set forth in Section 7.02(e) and (f) of the Pease Merger Agreement, and such opinion shall be in form and substance acceptable to Purchaser, acting reasonably. Each of the opinions described in Section 7.02(e) and (f) of the Pease Merger Agreement shall be addressed and delivered to Purchaser at the Closing. (iv) The Company will not waive the conditions in Section 7.02(i) or (j) of the Pease Merger Agreement without the prior written consent of Purchaser. Section 6.11 Board Nominees. At or prior to the Closing, the Company shall cause J.P. Bryan to be appointed as Chief Executive Officer of the Company, and shall cause the board to be increased by two members, Mr. Burges, Mr. Braun and Mr. Richards to resign as directors, and Mr. Bryan, Dr. Jack Birks, Mr. Timothy Robson, Mr. Don Boykiw and Mr. John Kousinioris to be appointed as directors of the Company. Section 6.12 Use of Proceeds. The Company shall pay $1.0 million of the net proceeds of the issuance of the Preferred Shares and Warrants to the joint activity account created pursuant to the Joint Activity Agreement, dated September 14, 1995, between Poltavanaftogaz and the Company, as amended. 28 ARTICLE VII. MISCELLANEOUS Section 7.1 Governing Law. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS BY THE INTERNAL LAWS OF THE STATE OF TEXAS. Section 7.2 Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by Purchaser and the closing of the transactions contemplated hereby. Section 7.3 Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. Section 7.4 Entire Agreement, Amendment. This Agreement and the other documents delivered pursuant hereto at the Closing constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. Section 7.5 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to Purchaser, at: Bellwether Exploration Company, 1331 Lamar, Suite 1450, Houston, Texas 77010, Attn: Roland E. Sledge, Esq. with a copy to Haynes and Boone, LLP, 1000 Louisiana, Suite 4300, Houston, Texas 77002, Attention: Guy Young, or at such other address as Purchaser shall have furnished to the Company in writing, or (b) if to any other Holder of any Purchase Shares, Warrants, Shares or Warrant Shares, at such address as such Holder shall have furnished the Company in writing, or, until any such Holder so furnishes an address to the Company, then to and at the address of the last Holder of such Purchase Shares, Warrants, Shares or Warrant Shares who has so furnished an address to the Company, or (c) if to the Company, to its address set forth on the signature page of this Agreement and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to Purchaser, with a copy to McManus Thomson, 1210, 606-4th Street S.W., Calgary, Alberta T2P 1T1, Attention: James D. Thomson. Section 7.6 Delays or Omissions. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any Holder of any Purchase Shares, Warrants, Warrant Shares or Shares , upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default 29 theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Holder of any breach or default under this Agreement, or any waiver on the part of any Holder of any provisions or conditions of this agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any Holder, shall be cumulative and not alternative. Section 7.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which together shall constitute one agreement. Section 7.8 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. Section 7.9 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. Section 7.10 Specific Performance. The Company acknowledges that any breaches of the agreements and covenants contained in of this Agreement would cause irreparable injury to Purchaser for which Purchaser would have no adequate remedy at law. In addition to any other remedy that Purchaser may be entitled to, the parties agree that Purchaser shall be entitled to the remedy of specific performance. [Signatures on the following page] 30 The foregoing Agreement is hereby executed as of the date first above written. "COMPANY" Address: 6671 Southwest Freeway, Suite 303 CARPATSKY PETROLEUM INC. Houston, Texas 77074 Fax: (713) 981-8670 By --------------------------------- David A. Melman, Chief Corporate Officer "PURCHASER" BELLWETHER EXPLORATION COMPANY By --------------------------------- J.P. Bryan, Chief Executive Officer 31 Exhibit A Final Execution Copy to Securities Purchase Agreement dated December 30, 1999 FORM 4 BUSINESS CORPORATIONS ACT (SECTIONS 27 OR 171) Alberta ARTICLES OF AMENDMENT - ------------------------------------- ----------------------------------------- 1. NAME OF CORPORATION 2. CORPORATE ACCESS NUMBER Carpatsky Petroleum Inc. J06545923 - ------------------------------------ ----------------------------------------- - ------------------------------------ ----------------------------------------- 3. ITEM NO. __ OF THE ARTICLES OF THE ABOVE NAMED CORPORATION ARE AMENDED IN ACCORDANCE WITH SECTION ______ OF THE BUSINESS CORPORATIONS ACT. Pursuant to Section 27(5) of the Business Corporations Act (Alberta), the share capital of the Corporation is hereby amended to create a series of Preferred Shares to be designated "Convertible Preferred Shares, Series A" (the "Convertible Preferred Shares"), consisting of 500,000,000 Convertible Preferred Shares. Each such Convertible Preferred Share shall have attached thereto the rights, privileges, restrictions and conditions described in the electronic attachment. 4. DATE SIGNATURE TITLE December 30, 1999 - ----------------------------- ----------------------- ------------------- CARPATSKY PETROLEUM INC. ELECTRONIC ATTACHMENT TO ARTICLES OF AMENDMENT SETTING FORTH THE POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF THE CORPORATION'S CONVERTIBLE PREFERRED SHARES, SERIES A Section 1. Designation and Number. (a) The series of Preferred Shares shall be designated as "Convertible Preferred Shares, Series A" ("Preferred Shares"). The number of shares initially constituting the Preferred Shares shall be 500,000,000. Such number may not be decreased below the number of then outstanding shares of such series of Preferred Shares. (b) The Preferred Shares shall, with respect to rights on liquidation, dissolution or winding up, rank prior to all other classes and series of Junior Shares of the Corporation now or hereafter authorized including, without limitation, the Common Shares. (c) Capitalized terms used herein and not otherwise defined shall have the meanings set forth in Section 10 below. Section 2. Dividends and Distributions. In the event that the Corporation shall declare a cash dividend to holders of Common Shares, then the Board of Directors shall declare, and the holder of each Preferred Share shall be entitled to receive, a dividend in an amount equal to the amount of such dividend received by a holder of the number of Common Shares for which such Preferred Shares are convertible on the record date for such dividend. Any such amount shall be paid to the holders of Preferred Shares at the same time such dividend is made to holders of Common Shares. The holders Preferred Shares shall not be entitled to receive any dividends or other distributions except as provided herein. Section 3. Voting Rights. In addition to any voting rights provided by law and except where only a specified class or series of shares is entitled to vote, the holders Preferred Shares shall have the following voting rights: 1 (a) Except as otherwise required by applicable law and so long as the Preferred Shares are outstanding, each Preferred Share shall entitle the holder thereof to vote, in person or by proxy or written consent, at a special or annual meeting of shareholders or in connection with any shareholder action taken in lieu of a meeting of shareholders, on all matters voted on by holders of Common Shares, including the election of directors, voting together as a single class with all other shares entitled to vote thereon. With respect to any such vote, each Preferred Share shall entitle the holder thereof to cast one vote for each Preferred Share standing in his or her name on the transfer books of the Corporation as of the record date for determining the shareholders of the Corporation eligible to vote on any such matters. (b) Unless the consent or approval of a greater number of shares shall then be required by law, the affirmative vote of the holders of at least 66-2/3% of the outstanding Preferred Shares, voting separately as a single class, in person or by proxy, at a special or annual meeting of shareholders called for the purpose, shall be necessary to (i) authorize, adopt or approve an amendment to the Articles that would alter or change the powers, preferences or special rights of the Preferred Shares, (ii) amend, alter or repeal the Shares so as to affect the Preferred Shares adversely, including, without limitation, by granting any voting right to any holder of notes, bonds, debentures or other debt obligations of the Corporation, or (iii) authorize, increase the authorized number of shares of, or issue (including on conversion or exchange of any convertible or exchangeable securities or by reclassification) any additional Preferred Shares except under Section 9. (c) For so long as the Preferred Shares are outstanding, the Corporation shall not issue any capital stock entitling the holder thereof to vote generally under ordinary circumstances in the election of directors, other than (i) Common Shares and (ii) Preferred Shares issued pursuant to Section 9. Section 4. Redemption. The Corporation shall not have any right to redeem any Preferred Shares. Section 5. Reacquired Shares. Any Preferred Shares converted, exchanged, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such Preferred Shares shall upon their cancellation become authorized but unissued preferred shares. Section 6. Liquidation, Dissolution or Winding Up. (a) In the event of the liquidation, dissolution or winding-up of the Corporation or other distribution of the assets of the Corporation among its shareholders for the purpose of winding-up its affairs, the holders of the Preferred Shares shall be entitled to receive the Liquidation Amount prior to any payment being made or any property of the Corporation being distributed to 2 the holders of the Common Shares or the holders of any Junior Shares. After payment to the holders of the Preferred Shares of the Liquidation Amount, the holders of the Preferred Shares shall be entitled to receive (rateably with the holders of the Common Shares) for each Preferred Share held, the amount which would have been received by the Holder of such Preferred Shares if on the record date for such distribution, the holder of such Preferred Shares had converted such Preferred Shares into the number of Common Shares into which such Preferred Shares were convertible on the record date for such distribution. (b) Neither the consolidation or merger of the Corporation with or into any other Person nor the sale or other distribution to another Person of all or substantially all the assets, property or business of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 6. Section 7. Conversion. (a) Subject to the terms and conditions set forth herein, each Preferred Share shall be convertible into a number of fully paid and non-assessable Common Shares as is equal, subject to Section 7(g), to a fraction, the numerator of which shall be the Common Share Conversion Number and the denominator of which shall be the number of Preferred Shares issued and outstanding on the date of conversion. The Common Share Conversion Number shall initially be 50,000,000, and shall be subject to adjustment as set forth in this Section. Such conversion right may only be exercised by the holders of a majority of the outstanding Preferred Shares surrendering certificates ("Surrendered Certificates") representing a majority of the outstanding Preferred Shares to the Corporation at any time during usual business hours at its principal place of business to be maintained by it, accompanied by written notice that the holders of a majority of the outstanding Preferred Shares elect to convert such shares and specifying the name or names (with address) in which a certificate or certificates for Common Shares are to be issued and (if so required by the Corporation) by a written instrument or instruments of transfer in form reasonably satisfactory to the Corporation duly executed by the holder or its duly authorized legal representative and transfer tax stamps or funds therefor, if required pursuant to Section 7(j). Upon such surrender, all Preferred Shares shall automatically be converted into Common Shares as provided in this Section. Notwithstanding the foregoing provisions or anything set forth herein or in the Articles of the Corporation, any Preferred Shares remaining outstanding on December 28, 2004 shall be and be deemed to have been converted into Common Shares at the Conversion Number then in effect. (b) As promptly as practicable after the surrender, as herein provided, of Preferred Shares for conversion pursuant to Section 7(a), the Corporation shall deliver to all holders of Preferred Shares a written notice informing such holders (i) that the holders of a majority of the outstanding Preferred Shares have delivered their certificates for such shares to the Corporation in satisfactory form for conversion into Common Shares pursuant to the requirements of this Section 7, (ii) that, as result of such delivery, all outstanding Preferred Shares have been converted into the right to receive 3 Common Shares and (iii) of the Common Share Conversion Number and instructing such holders to surrender the certificates representing their Preferred Shares to the Corporation in the manner specified in Section 7(a) above in order to receive certificates representing the Common Shares deliverable upon the conversion of their Preferred Shares. As promptly as practicable after the surrender of any certificates representing Preferred Shares in accordance with the requirements of this Section 7, the Corporation shall deliver to or upon the written order of the holder of such shares so surrendered a certificate or certificates representing the number of fully paid and non-assessable Common Shares into which such Preferred Shares may be or have been converted in accordance with the provisions of this Section 7. Subject to the following provisions of this paragraph and of Section 7(d), such conversion shall be deemed to have been made immediately prior to the close of business on the date that such Preferred Shares shall have been surrendered in satisfactory form for conversion, and the Person or Persons entitled to receive the Common Shares deliverable upon conversion of such Preferred Shares shall be treated for all purposes as having become the record holder or holders of such Common Shares at such appropriate time, and such conversion shall be based on the Common Share Conversion Number in effect at such time; provided, however, that no surrender shall be effective to constitute the Person or Persons entitled to receive the Common Shares deliverable upon such conversion as the record holder or holders of such Common Shares while the share transfer books of the Corporation shall be closed (but not for any period in excess of five days), but such surrender shall be effective to constitute the Person or Persons entitled to receive such Common Shares as the record holder or holders thereof for all purposes immediately prior to the close of business on the next succeeding day on which such share transfer books are open, and such conversion shall be deemed to have been made at, and shall be based on the Common Share Conversion Number in effect at, such time on such next succeeding day. (c) To the extent permitted by law, when Preferred Shares are converted, all dividends declared and unpaid on the Preferred Shares so converted to the date of conversion shall be immediately due and payable and must accompany the Common Shares issued upon such conversion. (d) The Common Share Conversion Number shall be subject to adjustment as follows: (i) In case the Corporation shall at any time or from time to time (A) pay a dividend or make a distribution on the outstanding Common Shares in capital stock (which, for purposes of this Section 7(d) shall include, without limitation, any dividends or distributions in the form of options, warrants or other rights to acquire capital stock) of the Corporation, (B) subdivide the outstanding Common Shares into a larger number of shares, (C) combine the outstanding Common Shares into a smaller number of shares, or (D) issue any shares of its capital stock in a reclassification of the Common Shares then, and in each such case, the Common Share Conversion Number in effect immediately prior to such event shall be adjusted to equal the Common Share Conversion Number in effect immediately prior to such action 4 multiplied by a fraction, the numerator of which is the number of Common Shares outstanding after the action described in clauses (A) through (D) and the denominator of which is the number Common Shares outstanding immediately prior to such action. An adjustment made pursuant to this Section 7(d)(i) shall become effective retroactively (A) in the case of any such dividend or distribution, to a date immediately following the close of business on the record date for the determination of holders of Common Shares entitled to receive such dividend or distribution or (B) in the case of any such subdivision, combination or reclassification, to the close of business on the day upon which such corporate action becomes effective. (ii) In case the Corporation shall at any time or from time to time issue Common Shares (or securities convertible into or exchangeable for Common Shares, or any options, warrants or other rights to acquire Common Shares) for a consideration per share less than the Current Market Price per Common Share then in effect at the record date or issuance date, as the case may be (the "Date"), referred to in the following sentence (treating the consideration per share of any security convertible or exchangeable or exercisable into Common Shares as equal to (A) the sum of the price for such security convertible, exchangeable or exercisable into Common Shares plus any additional consideration payable (without regard to any anti-dilution adjustments) upon the conversion, exchange or exercise of such security into Common Shares divided by (B) the number of Common Shares initially underlying such convertible, exchangeable or exercisable security), then, and in each such case, the Common Share Conversion Number in effect shall be adjusted by multiplying the Common Share Conversion Number in effect on the day immediately prior to the Date by a fraction (x) the numerator of which shall be the sum of the number of Common Shares outstanding on the Date plus the number of additional Common Shares issued or to be issued (or the maximum number into which such convertible or exchangeable securities initially may convert or exchange or for which such options, warrants or other rights initially may be exercised) and (y) the denominator of which shall be the sum of the number of Common Shares outstanding on the Date plus the number of Common Shares which the aggregate consideration for the total number of such additional Common Shares (or securities convertible into or exchangeable for Common Shares, or any options, warrants or other rights to acquire Common Shares) plus the aggregate amount of any additional consideration initially payable (without regard to any anti-dilution adjustments) upon such conversion, exchange or exercise of such security into Common Shares would purchase at the Current Market Price per Common Share on the Date. Such adjustment shall be made whenever such shares, securities, options, warrants or other rights are issued, and shall become effective retroactively to a date immediately following the close of business (i) in the case of issuance to shareholders of the Corporation, as such, on the record date for the determination of shareholders entitled to receive such shares, securities, options, warrants or other rights and (ii) in all other 5 cases, on the date ("issuance date") of such issuance; provided that: (A) the determination as to whether an adjustment is required to be made pursuant to this Section 7(d)(ii) shall be made upon the issuance of such shares or such convertible or exchangeable securities, options, warrants or other rights; (B) if any convertible or exchangeable securities, options, warrants or other rights (or any portions thereof) which shall have given rise to an adjustment pursuant to this Section 7(d)(ii) shall have expired or terminated without the exercise thereof and/or if by reason of the terms of such convertible or exchangeable securities, options, warrants or other rights there shall have been an increase or increases or decrease or decreases, with the passage of time or otherwise, in the price payable upon the exercise or conversion thereof, then the Common Share Conversion Number hereunder shall be readjusted (but to no greater extent than originally adjusted) on the basis of (x) eliminating from the computation any additional Common Shares corresponding to such convertible or exchangeable securities, options, warrants or other rights as shall have expired or terminated, (y) treating the additional Common Shares, if any, actually issued or issuable pursuant to the previous exercise of such convertible or exchangeable securities, options, warrants or other rights as having been issued for the consideration actually received and receivable therefor and (z) treating any of such convertible or exchangeable securities, options, warrants or other rights which remain outstanding as being subject to exercise or conversion on the basis of such exercise or conversion price as shall be in effect at the time of adjustment; and (C) no adjustment in the Common Share Conversion Number shall be made pursuant to this Section 7(d)(ii) as a result of any issuance of securities by the Corporation in respect of which an adjustment to the Common Share Conversion Number is made pursuant to Section 7(d)(i). (iii) In the case the Corporation, at any time or from time to time, shall take any action affecting its Common Shares similar to or having an effect similar to any of the actions described in any of Section 7(d)(i) and Section 7(d)(ii), or Section 7(h) (but not including any action described in any such Section) and the Board of Directors of the Corporation in good faith determines that it would be equitable in the circumstances to adjust the Common Share Conversion Number as a result of such action, then, and in each such case, the Common Share Conversion Number shall be adjusted in such manner and at such time as the Board of Directors of the Corporation in good faith determines would be equitable in the circumstances (such determination to be evidenced in a resolution, a certified copy of which shall be mailed to the holders of the Preferred Shares). (iv) Notwithstanding anything herein to the contrary, no adjustment under this Section 7(d) shall be made upon the grant of options to employees or directors of the Corporation pursuant to benefit plans approved by the Board of Directors of the Corporation or 6 upon the issuance of Common Shares upon exercise of such options if the exercise price thereof was not less than the Market Price of the Common Shares on the date such options were granted. (e) If the Corporation shall take a record of the holders of its Common Shares for the purpose of entitling them to receive a dividend or other distribution, and shall thereafter and before the distribution to shareholders thereof legally abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment in the Common Share Conversion Number then in effect shall be required by reason of the taking of such record. (f) Upon any increase or decrease in the Common Share Conversion Number, then, and in each such case, the Corporation promptly shall deliver to each registered holder of Preferred Shares at least 10 Business Days prior to effecting any of the foregoing transactions a certificate, signed by the President or a Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated and specifying the increased or decreased Common Share Conversion Number then in effect following such adjustment. (g) No fractional shares or scrip representing fractional shares shall be issued upon the conversion of any Preferred Shares. If more than one Preferred Share shall be surrendered for conversion at one time by the same holder, the number of full Common Shares issuable upon conversion thereof shall be computed on the basis of the aggregate number of Preferred Shares so surrendered. If the conversion of any Preferred Share of Preferred Shares results in a fraction, an amount equal to such fraction multiplied by the Current Market Price of the Common Shares on the Business Day preceding the day of conversion shall be paid to such holder in cash by the Corporation. (h) In case of any capital reorganization or reclassification or other change of outstanding Common Shares, or in case of any consolidation or merger of the Corporation with or into another Person (other than (i) a consolidation or merger in which the resulting entity is obligated and bound by this Article of Amendment, the Articles of the resulting entity contain identical terms in such Articles regarding the Common Shares of the resulting entity and which does not result in any reclassification or change of outstanding Common Shares or (ii) a transaction described in Section 7(d)(i)), or in case of any sale or other disposition to another Person of all or substantially all of the assets of the Corporation (any of the foregoing, a "Transaction"), the Corporation, or such successor or purchasing Person, as the case may be, shall execute and deliver to each holder of Preferred Shares at least 10 Business Days prior to effecting any of the foregoing Transactions a certificate that the holder of each Preferred Share then outstanding shall have the right thereafter to convert such Preferred Share into the kind and amount of shares or other securities (of the Corporation or another issuer, the "Other Securities")) or property or cash receivable upon such Transaction by a holder of the number of Common Shares into which such Preferred Shares could have been converted immediately prior to such Transaction. Such certificate shall provide for adjustments which shall be as 7 nearly equivalent as may be practicable to the adjustments provided for in this Section 7. If, in the case of any such Transaction, the Other Securities, cash or property receivable thereupon by a holder of Common Shares includes shares or other securities of a Person other than the resulting entity or purchasing Person and other than the Corporation, which controls or is controlled by the resulting entity or purchasing Person or which, in connection with such Transaction, issues Other Securities, other property or cash to holders of Common Shares, then such certificate also shall be executed by such Person, and such Person shall, in such certificate, specifically acknowledge the obligations of such successor or purchasing Person and acknowledge its obligations to issue such Other Securities, other property or cash to the holders of Preferred Shares upon conversion of the Preferred Shares as provided above. The provisions of this Section 7(h) and any equivalent thereof in any such certificate similarly shall apply to successive Transactions. (i) The Corporation shall at all times reserve and keep available for issuance upon the conversion of the Preferred Shares, such number of its authorized but unissued Common Shares as will from time to time be sufficient to permit the conversion of all outstanding Preferred Shares, and shall take all action required to increase the authorized number of Common Shares if at any time there shall be insufficient authorized but unissued Common Shares to permit such reservation or to permit the conversion of all outstanding Preferred Shares. (j) The issuance or delivery of certificates for Common Shares upon the conversion of Preferred Shares shall be made without charge to the converting holder of Preferred Shares for such certificates or for any tax in respect of the issuance or delivery of such certificates or the securities represented thereby, and such certificates shall be issued or delivered in the respective names of, or (subject to compliance with the applicable provisions of federal and state securities laws) in such names as may be directed by, the holders of the Preferred Shares converted; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the holder of the Preferred Shares converted, and the Corporation shall not be required to issue or deliver such certificate unless or until the Person or Persons requesting the issuance or delivery thereof shall have paid to the Corporation the amount of such tax or shall have established to the reasonable satisfaction of the Corporation that such tax has been paid. (k) If an offer is made to purchase Common Shares and the offer must, by reason of applicable securities legislation or the requirements of a stock exchange on which the Common Shares are listed, be made to all or substantially all holders of Common Shares located in a province of Canada in which the requirement applies, the holders of Preferred Shares shall be given the opportunity to participate in the offer through conversion of the Preferred Shares into Common Shares; unless; (i) an identical offer (in terms of price per security and percentage of outstanding securities to be taken upon, exclusive of securities owned immediately prior to the bid by the offeror, or associates or affiliates of the offeror, and in all other material respects) is made concurrently to purchase Preferred Shares, which 8 offer has no condition attached other than the right not to take up and pay for securities tendered if no securities are purchased pursuant to the offer for Common Shares; or (ii) less than 50% of the Common Shares outstanding immediately prior to the offer, other than Common Shares owned by the offeror, or associates or affiliates of the offeror, are deposited pursuant to the offer. Section 8. Certain Remedies. Any registered holder of Preferred Shares shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Article of Amendment and to enforce specifically the terms and provisions of this Article of Amendment in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which such holder may be entitled at law or in equity. Section 9. Additional Preferred Shares. While any Preferred Shares are outstanding, the Corporation shall not issue any additional Common Shares or convertible securities, rights, warrants, options or other commitments to issue Common Shares unless, prior to such issuance, the Corporation declares and pays a dividend on the Preferred Shares of a number of Preferred Shares equal to the number of Common Shares being issued or the maximum number of Common Shares which may be issued pursuant to such convertible securities, rights, warrants, options or commitments; provided, however, the Corporation shall not be required to issue additional Preferred Shares in connection with the issuance of Common Shares pursuant to agreements described in a Schedule to the Purchase Agreement. Section 10. Definitions. For the purposes of this Article of Amendment, the following terms shall have the meanings indicated: "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law or executive order to close. "Common Shares" shall mean and include the Common Shares of the Corporation and each other class of capital stock of the Corporation that does not have a preference over any other class of capital stock of the Corporation as to dividends or upon liquidation, dissolution or winding up of the Corporation and, in each case, shall include any other class of capital stock of the Corporation into which such shares are reclassified or reconstituted. 9 "Current Market Price" per share shall mean, on any date specified herein for the determination thereof, (a) the average daily Market Price of the Common Shares for those days during the period of 20 days, ending on such date, which are Trading Days, and (b) if the Common Shares are not then listed or admitted to trading on any national securities exchange or quoted in the over-the-counter market, the Market Price on such date. "Junior Shares" shall mean any capital stock of the Corporation ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Shares including, without limitation, the Common Shares. "Liquidation Amount" with respect to a Preferred Share shall mean the sum of (a) all declared and unpaid dividends on such Preferred Share, and (b) the sum of $10.00 divided by the number of Preferred Shares outstanding on the applicable date. "Market Price" shall mean, per Common Share on any date specified herein: (a) the closing price per Common Share on the Canadian Venture Exchange or other principal Canadian stock exchange on which the Common Shares are traded, stated in U.S. dollars at the then current noon buying rate for Canadian dollars as certified by the New York Federal Reserve Bank or (b) if there shall have been no trading on such date or if the Common Shares are not so designated, the average of the reported closing bid and asked prices of the Common Shares on such date as shown by any reputable dealer in Common Shares as selected by the Board of Directors of the Corporation. If none of (a) or (b) is applicable, Market Price shall mean a market price per share determined at the Corporation's expense by an appraiser chosen by the holders of a majority of the Preferred Shares or, if no such appraiser is so chosen more than twenty business days after notice of the necessity of such calculation shall have been delivered by the Corporation to the holders of Preferred Shares, then by an appraiser chosen by the Corporation. "Person" shall mean any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, limited liability company, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger) of such entity. "Purchase Agreement" shall mean the Securities Purchase Agreement, dated December 29, 1999, between the Corporation and Bellwether Exploration Company. "Trading Day" shall mean a day on which the national securities exchanges are open for trading. 10 Exhibit B Final Execution Copy to Securities Purchase Agreement dated December 30, 1999 WARRANT CARPATSKY PETROLEUM INC. an Alberta Corporation (the "Company") To Purchase up to 12,500,000 of the Company's Common Shares issued to Bellwether Exploration Company a Delaware corporation ("Warrantholder") December 30, 1999 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE COMPANY THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (A) TO THE COMPANY (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH REGULATION S UNDER THE 1933 ACT, IF APPLICABLE (OR SUCH SUCCESSOR RULE OR REGULATION AS THEN IN EFFECT), (C) INSIDE THE UNITED STATES (1) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, OR (2) IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE 1933 ACT OR ANY APPLICABLE STATE SECURITIES LAWS, AND IN THE CASE OF A TRANSFER UNDER CLAUSE C, THE HOLDER HAS PRIOR TO SUCH SALE FURNISHED TO THE COMPANY AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. UPON RECEIPT OF A CERTIFICATE OF THE HOLDER IN FORM SATISFACTORY TO THE COMPANY, INDICATING THE HOLDER WILL COMPLY WITH THE REQUIREMENTS OF REGULATION S IN CONNECTION WITH THE SALE OF THE SECURITIES THE COMPANY WILL DIRECT THE TRANSFER AGENT TO REMOVE THIS LEGEND TO PERMIT GOOD DELIVERY OF THE SECURITIES. IN ADDITION, THE SECURITIES REPRESENTED HEREBY MAY NOT BE TRANSFERRED UNTIL DECEMBER 29, 2000, EXCEPT PURSUANT TO AN EXEMPTION FROM THE PROSPECTUS REQUIREMENTS OF THE SECURITIES ACT (ALBERTA). =============================================================================== TABLE OF CONTENTS Page ARTICLE I. EXERCISE OF WARRANT...............................................1 Section 1.1. Manner of Exercise.................................1 Section 1.2. When Exercise Effective............................1 Section 1.3. Delivery of Share Certificates, etc................2 (a) Certificates.......................................2 (b) Partial Exercise...................................2 ARTICLE II. ADJUSTMENT OF COMMON SHARES ISSUABLE UPON EXERCISE................2 Section 2.1. General; Warrant Price.............................2 Section 2.2. Share Dividends....................................2 Section 2.3. Rights, Options and Warrants.......................3 Section 2.4. Subdivisions.......................................3 Section 2.5. Certain Non-Cash Distributions.....................4 Section 2.6. Certain Cash Distributions.........................4 Section 2.7. Certain Tender Offers..............................5 Section 2.8. Reclassification...................................6 Section 2.9. Certain Calculations...............................6 Section 2.10. Size of Adjustments................................6 Section 2.11. Permitted Increases................................7 Section 2.12. Notice of Adjustments of Warrant Price.............7 Section 2.13. Notice of Certain Corporate Action.................7 Section 2.14. Company to Reserve Common Shares...................8 Section 2.15. Taxes on Conversions...............................8 Section 2.16. Covenant as to Common Shares.......................8 ARTICLE III. CONSOLIDATION, MERGER, ETC......................................8 Section 3.1. Consolidation, Merger, Sale of Assets, Reorganization, etc................................9 Section 3.2. Assumption of Obligations..........................9 ARTICLE IV. OTHER PROVISIONS CONCERNING DILUTION.............................9 Section 4.1. No Dilution or Impairment..........................9 Section 4.2. Registration of Common Shares.....................10 Section 4.3. Availability of Information.......................10 Section 4.4. Reservation of Shares, etc........................10 ARTICLE V. RESTRICTIONS ON TRANSFER.........................................11 Section 5.1. Restrictive Legends...............................11 Section 5.2. Notice of Proposed Transfer; Opinions of Counsel..12 Section 5.3. Termination of Restrictions.......................12 (i) ARTICLE VI. OWNERSHIP, TRANSFER AND SUBSTITUTION OF WARRANTS.................13 Section 6.1. Ownership of Warrants.............................13 Section 6.2. Office, Transfer and Exchange of Warrants.........13 (a) Office............................................13 (b) New Warrant.......................................13 Section 6.3. Replacement of Warrants...........................13 ARTICLE VII. DEFINITIONS....................................................14 ARTICLE VIII. MISCELLANEOUS..................................................15 Section 8.1. Remedies..........................................15 Section 8.2. No Rights or Liabilities as Shareholder...........15 Section 8.3. Notices...........................................16 Section 8.5. Miscellaneous.....................................16 (ii) CARPATSKY PETROLEUM INC. Warrant No. W-2 December 30, 1999 Carpatsky Petroleum Inc., an Alberta corporation (the "Company"), for value received, hereby certifies that, subject to Section 8.6, Bellwether Exploration Company, a Delaware corporation ("Bellwether"), or registered assigns, is entitled to purchase from the Company up to 12,500,000 duly authorized, validly issued, fully paid and non-assessable common shares (the "Common Shares") at any time or from time to time prior to 5:00 p.m., Houston, Texas time, on the Expiration Date, all subject to terms, conditions and adjustments set forth in this Warrant. Certain capitalized terms used in this Warrant are defined in Article VII; unless otherwise specified, references to an "Exhibit" mean one of the exhibits attached to this Warrant, references to an "Article" mean one of the articles in this Warrant and references to a "Section" mean one of the sections of this Warrant. ARTICLE I. EXERCISE OF WARRANT Section 1.1. Manner of Exercise. This Warrant may be exercised by the holder hereof, in whole or in part, from time to time, during normal business hours on any Business Day, by surrender of this Warrant to the Company at its office maintained pursuant to subsection (a) of Section 6.2, accompanied by a subscription in substantially the form attached to this Warrant (or a reasonable facsimile thereof) duly executed by such holder and accompanied by payment, in cash or by certified or official bank check payable to the order of the Company in the amount obtained by multiplying (a) the number of Common Shares (without giving effect to any adjustment thereof) designated in such subscription by (b) U.S. $0.20, and such holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully paid and non-assessable Common Shares (or Other Securities) determined as provided in Articles II through IV. Section 1.2. When Exercise Effective. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the Business Day on which this Warrant shall have been surrendered to the Company as provided in Section 1.1, and at such time the Person or Persons in whose name or names any certificate or certificates for Common Shares (or Other Securities) shall be issuable upon such exercise as provided in Section 1.3 shall be deemed to have become the holder or holders of record thereof. Section 1.3. Delivery of Share Certificates, etc. As soon as practicable after each exercise of this Warrant, in whole or in part, and in any event within five Business Days thereafter, the Company, at its expense (including the payment by it of any applicable issue taxes), will cause to be issued in the name of and delivered to the holder hereof, subject to Article V, as such holder (upon payment by such holder of any applicable transfer taxes) may direct, the following: 1 (a) Certificates. A certificate or certificates for the number of duly authorized, validly issued, fully paid and non-assessable Common Shares (or Other Securities) to which such holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash in an amount equal to the same fraction of the market price per share on the Business Day next preceding the date of such exercise. (b) Partial Exercise. In case such exercise is in part only, a new Warrant or Warrants of like tenor dated the date hereof, calling in the aggregate on the face or faces thereof for the number of Common Shares equal (without giving effect to any adjustment thereof) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the holder upon such exercise as provided in Section 1.1. ARTICLE II. ADJUSTMENT OF COMMON SHARES ISSUABLE UPON EXERCISE Section 2.1. General; Warrant Price. The number of Common Shares which the holder of this Warrant shall be entitled to receive upon each exercise hereof shall be determined by multiplying the number of Common Shares which would be issuable upon such exercise, as designated by the holder hereof pursuant to Section 1.1, by a fraction (a) the numerator of which is U.S. $0.20 and (b) the denominator of which is the Warrant Price in effect at the effective time of such exercise (as provided in Section 1.2). The "Warrant Price" shall initially be U.S. $0.20, shall be adjusted and readjusted from time to time as provided in this Article II and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by this Article II. Section 2.2. Share Dividends. In case the Company shall pay or make a dividend or other distribution on any class of capital stock of the Company payable in Common Shares, the Warrant Price in effect at the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Warrant Price by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such increase to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this Section 2.2, the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of Common Shares. The Company will not pay any dividend or make any distribution on Common Shares held in the treasury of the Company. Section 2.3. Rights, Options and Warrants. In case the Company shall issue rights, options or warrants to all holders of its Common Shares entitling them to subscribe for or purchase Common Shares at a price per share less than the current market price per Common Share (determined as provided in Section 2.9) on the date fixed for the determination of shareholders entitled to receive such rights, options or warrants, the Warrant Price in effect at the opening of 2 business on the day following the date fixed for such determination shall be reduced by multiplying such Warrant Price by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination plus the number of Common Shares which the aggregate of the offering price of the total number of Common Shares so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination plus the number of Common Shares so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this Section 2.3, the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of Common Shares. The Company will not issue any rights, options or warrants in respect of Common Shares held in the treasury of the Company. To the extent that any rights, options or warrants are not so issued or any such rights, options or warrants are not exercised prior to the expiration thereof, the Warrant Price shall then be readjusted to the Warrant Price which would then be in effect based upon the number of Common Shares actually issued upon the exercise of such rights, option or warrants. Section 2.4. Subdivisions. In case outstanding Common Shares shall be subdivided into a greater number of Common Shares, the Warrant Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding Common Shares shall each be combined into a smaller number of Common Shares, the Warrant Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. Section 2.5. Certain Non-Cash Distributions. In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Shares evidences of its indebtedness, shares of any class of capital stock, or other property (including cash and securities, but excluding (i) any rights, options or warrants referred to in Section 2.3, and (ii) any dividend or distribution referred to in Section 2.2), the Warrant Price shall be reduced so that the same shall equal the rate determined by multiplying the Warrant Price in effect immediately prior to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution by a fraction of which the numerator shall be the current market price per Common Share (determined as provided in Section 2.9) on the date fixed for such determination (the "Reference Date") less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in an certificate delivered to the holders) on the Reference Date of the portion of the assets, shares or evidences of indebtedness so distributed applicable to one Common Share and the denominator shall be the current market price per Common Share on the Reference Date, such adjustment to become effective immediately prior to the opening of business on the day following the Reference Date. 3 Section 2.6. Certain Cash Distributions. In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Shares cash (excluding any cash that is distributed as part of a distribution referred to in Section 2.5) in an aggregate amount that, combined together with (i) the aggregate amount of any other cash distributions to all holders of its Common Shares made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to this Section 2.6 has been made and (ii) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board) of consideration payable in respect of any tender offer by the Company or any of its subsidiaries for all or any portion of the Common Shares concluded within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to Section 2.7 has been made (the "combined cash and tender amount"), exceeds 15% of the product of the current market price per share (determined as provided in Section 2.9) of the Common Shares on the date for the determination of holders of Common Shares entitled to receive such distribution times the number of Common Shares outstanding on such date (the "aggregate current market price"), then, and in each such case, immediately after the close of business on such date for determination, the Warrant Price shall be reduced so that the same shall equal the rate determined by multiplying the Warrant Price in effect immediately prior to the close of business on the date fixed for determination of the shareholders entitled to receive such distribution by a fraction (i) the numerator of which shall be equal to the current market price per Common Share (determined as provided in Section 2.9) on the date fixed for such determination less an amount equal to the quotient of (x) the excess of such combined cash and tender amount over 15% of such aggregate current market price divided by (y) the number of Common Shares outstanding on such date for determination and (ii) the denominator of which shall be equal to the current market price per Common Share (determined as provided in Section 2.9) on such date for determination. Section 2.7. Certain Tender Offers. In case a tender offer made by the Company or any Subsidiary for all or any portion of the Common Shares shall expire and such tender offer or exchange (as amended upon the expiration thereof) shall require the payment to shareholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) that combined together with (i) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution), as of the expiration of such tender or exchange offer, of consideration payable in respect of any other tender or exchange offer by the Company or any Subsidiary for all or any portion of the Common Shares expiring within the 12 months preceding the expiration of such tender or exchange offer and in respect of which no adjustment pursuant to this Section 2.7 has been made and (ii) the aggregate amount of any cash distributions to all holders of the Company's Common Shares within 12 months preceding the expiration of such tender or exchange offer and in respect of which no adjustment pursuant to Section 2.6 has been made (the "combined tender and cash amount") exceeds 15% of the product of the current market price per Common Share (determined as provided in Section 2.9) as of the last time (the "Expiration Time") tenders or exchanges could have been made 4 pursuant to such tender or exchange offer (as it may be amended) times the number of Common Shares outstanding (including any tendered or exchanged shares) as of the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after the date of the Expiration Time, the Warrant Price shall be reduced so that the same shall equal the rate determined by multiplying the Warrant Price immediately prior to close of business on the date of the Expiration Time by a fraction (i) the numerator of which shall be equal to (A) the product of (i) the current market price per Common Share (determined as provided in this Section 2.9 on the date of the Expiration Time multiplied by (ii) the number of Common Shares outstanding (including any tendered or exchanged shares) on the date of the Expiration Time less (B) the combined tender and cash amount, and (ii) the denominator of which shall be equal to the product of (A) the current market price per Common Share (determined as provided in Section 2.9) as of the Expiration Time multiplied by (B) the number of Common Shares outstanding (including any tendered or exchanged shares) as of the Expiration Time less the number of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted up to any such maximum, being referred to as the "Purchased Shares"). Section 2.8. Reclassification. The reclassification of Common Shares into securities other than Common Shares shall be deemed to involve (a) a distribution of such securities other than Common Shares to all holders of Common Shares (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of shareholders entitled to receive such distribution" and "the date fixed for such determination" within the meaning of Section 2.5), and (b) a subdivision or combination, as the case may be, of the number Common Shares outstanding immediately prior to such reclassification into the number Common Shares outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective", as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of Section 2.4). Section 2.9. Certain Calculations. For the purpose of any computation under Sections 2.3, 2.5, 2.6 or 2.7, the current market price per Common Share on any date shall be calculated by the Company and be deemed to be the average of the daily closing prices per share for the five consecutive Trading Days selected by the Company commencing not more than 10 Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex" date with respect to the issuance or distribution requiring such computation. For purposes of this paragraph, the term "'ex' date", when used with respect to any issuance or distribution, means the first date on which the Common Shares trade regular way in the applicable securities market or on the applicable securities exchange without the right to receive such issuance or distribution. Section 2.10. Size of Adjustments. No adjustment in the Warrant Price shall be required unless such adjustment (plus any adjustments not previously made by reason of this Section 2.10) would require an increase or decrease of at least one percent in such rate; provided, however, that any adjustments which by reason of this Section 2.10 are not required to be made shall be carried 5 forward and taken into account in any subsequent adjustment. All calculations under this Section shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Section 2.11. Permitted Increases. The Company may make such increases in the Warrant Price, for the remaining term of the Securities or any shorter term, in addition to those required herein, as it considers to be advisable in order to avoid or diminish any income tax to any holders of Common Shares resulting from any dividend or distribution of shares or issuance of rights or warrants to purchase or subscribe for shares or from any event treated as such for income tax purposes. Section 2.12. Notice of Adjustments of Warrant Price. Whenever the Warrant Price is adjusted as herein provided the Company shall compute the adjusted Warrant Price in accordance with this Article and shall prepare a certificate signed by the principal accounting or financial officer of the Company setting forth the adjusted Warrant Price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall promptly be sent to the Lender. Section 2.13. Notice of Certain Corporate Action. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Shares payable (i) otherwise than exclusively in cash or (ii) exclusively in cash in an amount that would require any adjustment pursuant to Section 2.3 through 2.8; or (b) the Company shall authorize the granting to the holders of its Common Shares generally of rights, options or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (c) of any reclassification of the Common Shares of the Company, or of any consolidation, merger or share exchange to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance, sale, transfer or lease of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) the Company or any Subsidiary shall commence a tender offer for all or a portion of the Company's outstanding Common Shares (or shall amend any such tender offer); then the Company shall deliver to the holder of this Warrant at least 20 days (or 10 days in any case specified in clause (a) or (b) above) prior to the applicable record, expiration or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights, options or warrants, or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution, rights, options or warrants are to be determined, (y) the date on which the right to make tenders under such tender 6 offer expires or (z) the date on which such reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation or winding up. Neither the failure to give such notice or the notice referred to in the following paragraph nor any defect therein shall affect the legality or validity of the proceedings described in clauses (a) through (e) of this Section 2.13. Section 2.14. Company to Reserve Common Shares. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Shares, for the purpose of effecting the conversion of Securities, the full number of Common Shares then issuable upon the exercise of this Warrant. Section 2.15. Taxes on Conversions. Except as provided in the next sentence, the Company will pay any and all taxes and duties that may be payable in respect of the issue or delivery of Common Shares on exercise of this Warrant. The Company shall not, however, be required to pay any tax or duty which may be payable in respect of (i) income of the holder or (ii) any transfer involved in the issue and delivery of Common Shares in a name other than that of the holder, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax or duty, or has established to the satisfaction of the Company that such tax or duty has been paid. Section 2.16. Covenant as to Common Shares. The Company agrees that all Common Shares which may be delivered upon exercise of this Warrant will be newly issued shares and, upon such delivery, will have been duly authorized and validly issued and will be fully paid and nonassessable and, except as provided in Section 2.15, the Company will pay all taxes, liens and charges with respect to the issue thereof. ARTICLE III. CONSOLIDATION, MERGER, ETC. Section 3.1. Consolidation, Merger, Sale of Assets, Reorganization, etc. From and after the date hereof, the Company shall not (a) consolidate with or merge into any other Person if the resulting entity is not bound by and obligated to comply with the terms of this Warrant, or (b) permit any other Person to consolidate with or merge into the Company if, in connection with such consolidation or merger, the Common Shares or Other Securities shall be changed into or exchanged for shares or other securities of any other Person (unless the Common Shares or Other Securities are converted into the shares of the resulting entity and the terms of the articles of incorporation pertaining to the Common Shares or Other Securities of the resulting entity are identical to the articles of incorporation of the Company) or cash or any other property, or (c) transfer all or substantially all of its properties or assets to any other Person, or (d) effect a capital reorganization or reclassification of the Common Shares or Other Securities (other than a capital reorganization or reclassification resulting in adjustment in the Warrant Price is provided in Article II) unless 7 the Company provides the holder of this Warrant written notice of the proposed transaction 10 days prior to any record date for notice to shareholders entitled to vote on such transaction or, if no such vote is taken, 20 days prior to the effective date or closing of the transaction. Section 3.2. Assumption of Obligations. If any of the transactions described in Section 3.1 are consummated, the holder of this Warrant shall be entitled to receive, following such transaction, the Common Shares or Other Securities that such holder would have been entitled to receive had such holder exercised such Warrant immediately prior to the effective time of such transaction. If the transaction described in Section 3.1 provides that a holder of Common Shares may elect to receive different forms of consideration, the holder shall, by notice to the Company, be entitled to elect the type of consideration to be received and, if the holder fails to make such election, the Company may make such election acting in good faith. Notwithstanding anything contained in this Warrant to the contrary, the Company will not effect any of the transactions described in clauses (a) through (d) of Section 3.1 unless, prior to the consummation thereof, each Person (other than the Company) which may be required to deliver any shares, securities, cash or property upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to, and reasonably satisfactory to, the holder of this Warrant, (a) the obligations of the Company under this Warrant (and if the Company shall survive the consummation of such transaction, such assumption shall be in addition to, and shall not release the Company from, any continuing obligations of the Company under this Warrant) and (b) the obligation to deliver to such holder such shares, securities, cash or property as, in accordance with the foregoing provisions of this Article III, such holder may be entitled to receive. ARTICLE IV. OTHER PROVISIONS CONCERNING DILUTION Section 4.1. No Dilution or Impairment. The Company will not, by amendment of its articles of incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against dilution or other impairment. Without limiting the generality of the foregoing, the Company will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Common Shares on the exercise of the Warrant from time to time outstanding, and will not take any action which results in any adjustment of the Warrant Price if the total number of Common Shares (or Other Securities) issuable after the action upon the exercise of the Warrant would exceed the total number of Common Shares (or Other Securities) then authorized by the Company's articles of incorporation and available for the purpose of issuance upon such exercise. Section 4.2. Registration of Common Shares. If any Common Shares required to be reserved for purposes of exercise of this Warrant require registration with or approval of any governmental authority under any U.S. or Canadian 8 federal, state or provincial law (other than the Securities Act) before such shares may be issued upon exercise, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered or approved, as the case may be. At any such time as Common Shares are listed on any securities exchange, the Company will, at its expense, list the Common Shares issuable upon exercise of the Warrant and maintain the listing of such shares after their issuance; and the Company will also list on such securities exchange, [will register under the Exchange Act] and will maintain such listing of, any Other Securities that at any time are issuable upon exercise of the Warrants, if and at the time that any securities of the same class shall be listed on such securities exchange by the Company. Section 4.3. Availability of Information. The Company will cooperate with each holder of any Warrant, in supplying such information as may be reasonably requested by such holder to complete and file any information reporting forms presently or hereafter required by the Commission or the ASC to report such holders beneficial ownership of Common Shares or Other Securities or as a condition to the availability of an exemption from the provisions of the Securities Act (Alberta) or the Securities Act for the sale of any Restricted Securities. Section 4.4. Reservation of Shares, etc. The Company will at all times reserve and keep available, solely for issuance and delivery upon exercise of the Warrants, the number of Common Shares (or Other Securities) from time to time issuable upon exercise of the Warrant. All Common Shares (or Other Securities) issuable upon exercise of the Warrant shall be duly authorized and, when issued upon such exercise, shall be validly issued and, in the case of shares, fully paid and non-assessable with no liability on the part of the holders thereof. ARTICLE V. RESTRICTIONS ON TRANSFER Section 5.1. Restrictive Legends. Except as otherwise permitted by this Article V, this Warrant and any shares acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933, as amended, and may not be transferred, sold or otherwise disposed of in the absence of such registration or an exemption therefrom under such Act. In addition, this Warrant and any shares acquired upon the exercise of this Warrant may not be transferred until one year from the date of issuance of Warrant except pursuant to an exemption from the prospectus requirements of the Securities Act (Alberta). This Warrant and such Shares may be transferred only in compliance with the conditions specified in this Warrant. Each Warrant issued upon the transfer of any Warrant shall be stamped or otherwise imprinted with a legend containing the foregoing restrictions. Except as otherwise permitted by this Article V, each certificate for Common Shares (or Other Securities) issued upon the exercise of any Warrant, and each certificate issued upon the transfer of any such Common Shares (or Other Securities), shall be stamped or otherwise imprinted with a legend in substantially the following form: 9 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE COMPANY THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (A) TO THE COMPANY (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH REGULATION S UNDER THE 1933 ACT, IF APPLICABLE (OR SUCH SUCCESSOR RULE OR REGULATION AS THEN IN EFFECT), (C) INSIDE THE UNITED STATES (1) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, OR (2) IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE 1933 ACT OR ANY APPLICABLE STATE SECURITIES LAWS, AND IN THE CASE OF A TRANSFER UNDER CLAUSE C, THE HOLDER HAS PRIOR TO SUCH SALE FURNISHED TO THE COMPANY AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. UPON RECEIPT OF A CERTIFICATE OF THE HOLDER IN FORM SATISFACTORY TO THE COMPANY, INDICATING THE HOLDER WILL COMPLY WITH THE REQUIREMENTS OF REGULATION S IN CONNECTION WITH THE SALE OF THE SECURITIES THE COMPANY WILL DIRECT THE TRANSFER AGENT TO REMOVE THIS LEGEND TO PERMIT GOOD DELIVERY OF THE SECURITIES. IN ADDITION, THE SECURITIES REPRESENTED HEREBY MAY NOT BE TRANSFERRED UNTIL DECEMBER 29, 2000, EXCEPT PURSUANT TO AN EXEMPTION FROM THE PROSPECTUS REQUIREMENTS OF THE SECURITIES ACT (ALBERTA). Section 5.2. Notice of Proposed Transfer; Opinions of Counsel. Prior to any transfer of any Restricted Securities which are not registered under an effective registration statement under the Securities Act, the holder thereof, will give written notice to the Company of such holder's intention to effect such transfer and to comply in all other respects with this Section 5.2. Each such notice (a) shall describe the manner and circumstances of the proposed transfer and (b) if requested by the Company, shall include an opinion of legal counsel addressed to the Company, in form and substance reasonably satisfactory to the Company, to the effect that such transfer does not violate the Act and applicable state or provincial securities laws. Section 5.3. Termination of Restrictions. The restrictions imposed by this Article V upon the transferability of Restricted Securities shall cease and terminate as to any particular Restricted Securities when such securities shall have been sold pursuant to an effective registration statement under the Act and a prospectus under the Securities Act (Alberta) or otherwise become freely 10 transferable by the holder thereof. Whenever such restrictions shall cease and terminate as to any Restricted Securities, the holder thereof shall be entitled to receive from the Company, without expense (other than applicable transfer taxes, if any), new certificates representing the securities not bearing the applicable legends required by Section 5.1. ARTICLE VI. OWNERSHIP, TRANSFER AND SUBSTITUTION OF WARRANTS Section 6.1. Ownership of Warrants. The Company may treat the person in whose name any Warrant is registered on the register kept at the office of the Company maintained pursuant to subdivision (a) of Section 6.2 as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, except that, if and when any Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer thereof as the owner of such Warrant for all purposes, notwithstanding any notice to the contrary. Subject to Article V, a Warrant, if properly assigned, may be exercised by a new holder without a new Warrant first having been issued. Section 6.2. Office, Transfer and Exchange of Warrants. (a) Office. The Company will maintain an office where notices, presentations and demands in respect of this Warrant may be made upon it. Such office shall be maintained at 6671 Southwest Freeway, Suite 303, Houston, Texas 77074 until such time as the Company shall notify each holder of the Warrant of any change of location of such office. (b) New Warrant. Upon the surrender of any Warrant, properly endorsed, for registration of transfer or for exchange at the office of the Company maintained pursuant to subdivision (a) of this Section 6.2, the Company at its expense will (subject to compliance with Article V, if applicable) execute and deliver to or upon the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of Common Shares called for on the face or faces of the Warrant or Warrants so surrendered. Section 6.3. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon delivery of indemnity reasonably satisfactory to the Company in form and amount or, in the case of any such mutilation, upon surrender of such Warrant for cancellation at the office of the Company maintained pursuant to subdivision (a) of Section 6.2, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 11 ARTICLE VII. DEFINITIONS As used herein, unless the context otherwise requires, the following terms have the following respective meanings: ASC: The Alberta Securities Commission. Business Day: Any day other than a Saturday or a Sunday or a day on which commercial banking institutions in the States of Texas or the province of Alberta are authorized by law to be closed. Any reference to "days" (unless Business Days are specified) shall mean calendar days. Commission: The Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. Common Shares: As defined in the introduction to this Warrant, such term to include (i) any shares into which such Common Shares shall have been changed or any shares resulting from any reclassification of such Common Shares, (ii) all other shares of any class or classes (however designated) of the Company the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference. Company: As defined in the introduction to this Warrant, such term to include any corporation which shall succeed to or assume the obligations of the Company hereunder in compliance with Article III. Exchange Act: The Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Expiration Date: December 31, 2000. NASD: The National Association of Securities Dealers, Inc. Other Securities: Any shares (other than Common Shares) and other securities of the Company or any other Person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received upon the exercise of the Warrant, in lieu of or in addition to Common Shares, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Shares or Other Securities pursuant to Article III or otherwise. 12 Person: Any corporation, association, partnership, joint venture, trust, estate, organization, business, individual, government or political subdivision thereof or governmental agency. Restricted Securities: All of the following: (a) any Warrants bearing the applicable legend or legends referred to in Section 5.1, (b) any Common Shares (or Other Securities) which have been issued upon the exercise of Warrants and which are evidenced by a certificate or certificates bearing the applicable legend or legends referred to in such section and (c) unless the context otherwise requires, any Common Shares (or Other Securities) which are at the time issuable upon the exercise of Warrants and which, when so issued, will be evidenced by a certificate or certificates bearing the applicable legend or legends referred to in such section. Securities Act: The Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Securities Act (Alberta): The Securities Act (Alberta), as amended, and the rules, regulations, policy statements, notices and other requirements promulgated thereunder. Warrant Price: As defined in Section 2.1 of this Warrant. ARTICLE VIII. MISCELLANEOUS Section 8.1. Remedies. The Company stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. Section 8.2. No Rights or Liabilities as Shareholder. The holder of this Warrant and all subsequent holders thereof hereby agree that, except to the extent set forth in Section 8.4 and elsewhere herein, no provision of this Warrant shall be construed as conferring upon the holder hereof any rights as a shareholder of the Company or as imposing any obligation on such holder to purchase any securities or as imposing any liabilities on such holder as a shareholder of the Company, whether such obligation or liabilities are asserted by the Company or by creditors of the Company. Section 8.3. Notices. All notices and other communications under this Warrant shall be in writing and shall be mailed by registered or certified mail, return receipt requested, addressed (a) if to any holder of any Warrant, to the registered address of such holder as set forth in the register kept at the principal office of the Company, or (b) if the Company, to the attention of its 13 President at its office maintained pursuant to subdivision (a) of Section 6.2, provided that the exercise of any Warrant shall be effective in the manner provided in Article I. Section 8.5. Miscellaneous. (a) This Warrant may be amended, waived, discharged or terminated and the Company may take any action herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holder or holders of Warrants entitling such holders to purchase 51% or more by number of shares of the total number of Common Shares issuable under all Warrants at the time outstanding. (b) THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF TEXAS. (c) The section headings in this Warrant are for purposes of convenience only and shall not constitute a part hereof. (d) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this agreement which are for the benefit of the parties hereto other than the Company shall also be for the benefit of and enforceable by any subsequent holder of any Registrable Securities. CARPATSKY PETROLEUM INC. By: Name: David A. Melman Title: Chief Corporate Officer 14 [THIS IS A SIGNATURE PAGE TO THE CARPATSKY PETROLEUM INC. WARRANT] FORM OF SUBSCRIPTION To Carpatsky Petroleum Inc.: The undersigned registered holder of the within Warrant hereby irrevocably exercises such Warrant for, and purchases _________* Common Shares of Carpatsky Petroleum Inc., and herewith makes payment of $___________ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to ____________________, whose address is - -----------------------------------. Dated: (Signature must conform in all respects to name of holder as specified on the face or Warrant) (Street Address) (City) (State) (Zip Code) - --------------------------- *Insert the number of shares called for on the face of this Warrant (or, in the case of a partial exercise, the portion thereof as to which this Warrant is being exercised), in either case without making any adjustment for additional Common Shares or any other shares or other securities or property or cash which, pursuant to the adjustment provisions of this Warrant, may be delivered upon exercise. In the case of a partial exercise, a new Warrant or Warrants will be issued and delivered, representing the unexercised portion of the Warrant, to the holder surrendering the Warrant. 1 FORM OF ASSIGNMENT [To be executed only upon transfer of Warrant] For value received, the undersigned registered holder of the within Warrant hereby sells, assigns and transfers unto _________________ the right represented by such Warrant to purchase Common Shares of to which such Warrant relates, and appoints ______________ his Attorney in fact to make such transfer on the books of maintained for such purpose, with full power of substitution in the premises. Dated: (Signature must conform in all respects to name of holder as specified on the face or Warrant) (Street Address) (City) (State) (Zip Code) Signed in the presence of: - -------------------------- Instructions: 1. If the Transfer Form is signed by a trustee, executor, administrator, curator, guardian, attorney, officer of a corporation or any person acting in a judiciary or representative capacity, the certificate must be accompanied by evidence of authority to sign satisfactory to the Trustee and the Company. 2. The signature on the Transfer Form must be guaranteed by a Schedule "A" major chartered bank/trust company, or a member of an acceptable Medallion Guarantee program. The Guarantor must affix a stamp bearing the actual words: "Signature guaranteed". Signature guarantees are not accepted from treasury branches or credit unions unless they are 1 members of the Stamp Medallion Program. Furthermore, in the United States, signature guarantees must be done by members of the "Medallion Signature Guarantee program" only. 3. Warrants shall only be transferable in accordance with applicable laws. Holders of Special Warrants are directed to consult with their legal advisors in this regard. 4. Transferees must duly complete the Acknowledgment and Declaration of Transferee Form Attached. 2 ACKNOWLEDGMENT AND DECLARATION OF TRANSFEREE TO: Carpatsky Petroleum Inc. The undersigned transferee of ________________ Warrants of Carpatsky Petroleum Inc. hereby: (i) acknowledges that any transfer of the Warrants or the securities issued on exercise of the Warrants may be subject to resale restrictions; and (ii) represents and warrants that [check only one]: [ ] A. (i) the transferee is not a U.S. Person as defined in Rule 902 of Regulation S under the United States Securities Act of 1933, as amended (the "1933 Act"), and is not acquiring the Warrants for the account or benefit of or resale to a U.S. Person; (ii) no offers to sell the Warrants were made by any person to the transferee or any beneficial transferee for whom it is acting while such persons were in the United States; and (iii) the transferee and each beneficial transferee for whom the transferee is acting were not in the United States at the time of the execution and delivery of the document or instrument or other buy order by which the transferee and each beneficial transferee for whom it is acting agreed to acquire the Warrants; or [ ] B. the transfer of Warrants is exempt from registration under the 1933 Act and applicable state securities laws, and the transferee has provided evidence of the exemption (which the transferee acknowledges must be satisfactory to Carpatsky Petroleum Inc.) and may at the option of Carpatsky Petroleum Inc. be required to include an opinion of counsel; and (i) expressly waives and releases Carpatsky Petroleum Inc. to the fullest extent permitted by law, from all rights of withdrawal to which it might otherwise be entitled pursuant to the provisions of applicable securities legislation. [SIGNATURES BEGIN ON THE FOLLOWING PAGE] 1 DATED the _____ day of __________________, _____. Name of Transferee By ------------------------------------- Name: Title: Address: [THIS IS A SIGNATURE PAGE TO THE ACKNOWLEDGMENT AND DECLARATION OF TRANSFEREE] 2 Exhibit C Final Execution Copy to Securities Purchase Agreement dated December 30, 1999 AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT This Amendment is made and entered into as of December 30, 1999 by and between Carpatsky Petroleum Inc., an Alberta corporation ("Company"), and Bellwether Exploration Company, a Delaware corporation ("Bellwether"), for the purpose of amending the Registration Rights Agreement, dated October 7, 1999 between the Company and Bellwether ("Agreement"). Section 1. Amendments to the Agreement. 1.1 The Agreement is hereby amended by amending the definition of "Company Securities" in Section 1.1 to read as follows: "Company Securities" means any securities of the Company and includes the Common Stock, the Additional Warrants, the Warrants (as defined in the Securities Purchase Agreement, the Shares (as defined in the Securities Purchase Agreement) and the Warrant Shares (as defined in the Securities Purchase Agreement). 1.2 The agreement is further amended by adding the following definition to Section 1.1: "Securities Purchase Agreement" means the Securities Purchase Agreement, dated December 30, 1999, entered into by and between the Company and Bellwether. Section 2. No Other Changes. Except as explicitly amended by this Amendment, the terms, conditions, rights and obligations under the Agreement shall remain in full force and effect. Section 3. Consents. The Company represents and warrants that no consent, approval, order, or authorization of, or declaration, filing, or registration with, any party is required to be obtained or made in connection with the execution, delivery, or performance by the Company of the Agreement, as amended by this Amendment, or the consummation by it of the transactions contemplated hereby or thereby, other than those consents that have been received by the Company as of the date hereof and requisite filings and registrations with, and orders of, the Alberta Securities Commission or the United States Securities and Exchange Commission. Section 4. Counterparts. This Amendment may be executed by the parties hereto in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. - 1 - The parties have executed this agreement on the date first written above. CARPATSKY PETROLEUM INC. By: ---------------------------------------- Name: David A. Melman Title: Chief Corporate Officer BELLWETHER EXPLORATION COMPANY By: ---------------------------------------- Name: J. P. Bryan Title: Chief Executive Officer - 2 - Schedule 1.05 Directors of Pease (Radiant Energy) J.P. Bryan Dr. Jack Burks David Melman Leslie Texas Steve Antry 2 other nominees to be identified by Bellwether in writing prior to the Closing Directors of Surviving Corporation J.P. Bryan David Melman 1 other nominee to be identified by Bellwether in writing prior to the Closing Officers of Pease (Radiant Energy) and the Surviving Corporation J.P. Bryan Chief Executive Officer Leslie Texas President Robert Bensh Vice President Additional Officers David Melman Patrick Duncan Schedule 4.01 C. Carpatsky, through the Joint Activity Agreement No. 410/95 dated September 15, 1995, revised on October 15, 1996 and amended on December 25, 1997 and again on August 26, 1998, owns an interest for the purpose of investment, exploration and operation of the Rudovsko- Chervonozavodsky field, located in the Poltava district of eastern Ukraine (this contract, as amended, is referred to collectively herein as the "Joint Activity Agreement"). The Joint Activity Agreement is sometimes referred to as the Carpatsky-Poltavaneftagaz Joint Activity, which essentially acts as, and is referred to as, a Ukrainian Joint Venture. Pursuant to the terms of the Joint Activity Agreement, Carpatsky has the right, not the obligation, to own up to a 45% net revenue interest (representing a 50% working interest) in the Joint Activity. The net revenue interest is determined by: a.) dividing Carpatsky's total capital contributions, as defined in the Joint Activity Agreement, by the total capital contributions of the Joint Activity; and b.) multiplying this percentage by 90%. The Joint Activity Agreement is unclear whether or not the working interest decreases proportionately should Carpatsky's total contributions, as compared to the total contributions of the Joint Activity, fall below 50%. However, it is Carpatsky's representation to Pease that the working interest, and corresponding obligations to the Joint Account, would be proportionately reduced under such circumstances. As of September 30, 1999, Carpatsky's net revenue interest in the Joint Activity was 41.68% (representing a presumed working interest of 46.31%). On October 1, 1999, Carpatsky's net revenue interest was effectively reduced to 31.98% when its Ukrainian partner increased their equity position through an additional capital contribution to the Joint Account. The Ukrainian partner has advised Carpatsky that it has until December 31, 1999 to make an additional capital contribution of approximately $2.9 million. A failure to do so may dilute Carpatsky's interest in the RC field even further and will preclude Carpatsky from participating in at least the next two wells that will be drilled. Carpatsky's rights and obligations are subject to all terms and conditions of the Joint Activity Agreement, as amended. Schedule 4.03(b)(iii) As discussed in Schedule 4.01 C, Carpatsky's net revenue interest as of October 1, 1999 in the Carpatsky-Poltavaneftagaz Joint Activity is 31.98%. Pursuant to the terms of the Joint Activity Agreement, as amended, as of September 30, 1999, Carpatsky has the right to increase its net revenue interest percentage to 45% by contributing, or repaying, approximately $2.9 million to the Joint Account, or its partners. The terms of the Joint Activity Agreement contemplate that Carpatsky will be a 50/50 partner on all expenditures subject to the Joint Activity. The Joint Activity Agreement also contemplates that from time-to-time the respective partners may not contribute at the contemplated 50/50 levels and has certain provisions that deal with these imbalances. However, it is unclear as to whether or not Carpatsky's right to increase its net revenue interest percentage to 45% will or can be honored by its partners indefinitely. Schedule 4.03(c) B. Carpatsky Stock Awards 1. As previously disclosed in Schedule 4.03(b)(i)C, item 5, Torch Energy Advisors Incorporated will receive 1,200,000 Carpatsky shares in settlement of a payable due Torch for services performed for $150,000, 2. As previously disclosed in Schedule 4.03(b)(i)C, item 4, Proteus International has been offered 720,000 Carpatsky shares and warrants to purchase 435,000 Carpatsky common shares in settlement of a $90,000 claim for services. As previously disclosed, the warrants will be exercisable at US $0.20 per share and will expire on December 31, 2000. 3. As previously disclosed in Schedule 4.03(b)(i)C, item 6, David A. Melman will receive 953,333 common shares of Carpatsky and warrants to purchase 357,000 Carpatsky common shares in connection with financial services rendered in a US $1,000,000 private placement. As previously disclosed, the warrants will be exercisable at US $0.20 per share and will expire on December 31, 2000. 4. In connection with the contemplated merger with Pease, David A. Melman will receive 2.0 million shares of Carpatsky (to be issued prior to the Effective Time of the merger) as compensation for services rendered. Schedule 4.08 As of September 30, 1999, the Carpatsky-Poltavaneftagaz Joint Activity had incurred a Corporate Profits Liability in UAH of 2,899,558 (US equivalent is $648,714 using September 30, 1999 exchange rates). This liability is past due and incurring interest at a annual rate of 45% (the discount rate in UAH of the National Bank of Ukraine). Using Carpatsky's presumed working interest of 46.31% at September 30, 1999, our proportionate share is approximately US $300,419, excluding interest. However, as discussed in Schedule 4.01C, the wording of the Carpatsky-Poltavaneftagaz Joint Activity Agreement leaves the issue of the adjustable working interest unclear. Accordingly, if the working interest is 50%, Carpatsky's proportionate share could be as high as US$324,357, excluding interest. Schedule 4.11 B. As disclosed in Schedule 4.08, as of September 30, 1999 the Carpatsky- Poltavaneftagaz Joint Activity had incurred a Corporate Profits Liability in UAH of $2,899,558 (US equivalent is $648,714 using September 30, 1999 exchange rates). This liability is past due and incurring interest at an annual rate of 45% (the discount rate in UAH of the National Bank of Ukraine). Using Carpatsky's presumed working interest of 46.31% at September 30, 1999, our proportionate share is approximately US $300,419, excluding interest. However, because it is unclear whether the working interest could arguably be 50% Carpatsky proportionate share could be as high as US$324,357, excluding interest. Schedule 4.19 The following are Carpatsky's contractual commitments in excess of $10,000 over 12 months as of June 30, 1999: A As discussed in Schedule 4.01 C and disclosed in Schedule 4.03(b)(iii), Carpatsky's working interest as of October 1, 1999 in the Carpatsky-Poltavaneftagaz Joint Activity is 31.98%. Pursuant to the terms of the Joint Activity Agreement, as amended, as of September 30, 1999, Carpatsky has the right to increase its working interest percentage to 50% by contributing, or repaying, approximately $2.9 million to the Joint Account, or its partners by December 31, 1999. A failure to do so may dilute Carpatsky's interest in the RC field even further and will preclude Carpatsky from participating in at least the next two wells that will be drilled. The terms of the Joint Activity Agreement contemplate that Carpatsky will be a 50/50 partner on all expenditures subject to the Joint Activity. The Joint Activity Agreement also contemplates that from time-to-time the respective partners may not contribute at the contemplated 50/50 levels and has certain provisions that deal with these imbalances. However, it is unclear as to whether or not Carpatsky's right to increase its working interest percentage to 50% will or can be honored by its partners indefinitely. Schedule 4.1(d) to Securities Purchase Agreement dated December 30, 1999 Common Stock Outstanding 77,728,2631 Stock Options Outstanding 200,000 Stock Purchase Warrants 17,665,4042 Offers Outstanding to Convert: Calaway Debt - approximately $275,000 @ 12.5(cent) per share RLF Debt approximately $365,000 @ 12.5(cent) per share No other securities with equity component. - -------- 1 Inclusive of stock option repurchases. 2 All at $.20 US expiring December 31, 2000. Schedule 4.1(e) to Securities Purchase Agreement dated December 30, 1999 Carpatsky Petroleum Corp., a Delaware corporation Schedule 4.1(f) to Securities Purchase Agreement dated December 30, 1999 Consent of the CDNX. Schedule 4.1(h) to Securities Purchase Agreement dated December 30, 1999 None Schedule 4.1(i)(ii) to Securities Purchase Agreement dated December 30, 1999 Common to the oil and gas industry in foreign countries, Carpatsky does not own an interest in real property; its rights and obligations are governed by joint agreements with its Ukrainian partners. Carpatsky's oil and gas assets consist of interests in the following two fields in the Republic of Ukraine: (1) Rudovsko-Chervonozavodskoye natural gas and gas condensate field (the "RC" field) located in the Poltava District of Eastern Ukraine; and (2) the Bitkov-Babchensky oil field (the "Bitkov field") located in the Ivano-Frankovsk District of southwest Ukraine. The RC field is governed by the Joint Activity Agreement No. 410/95 dated September 15, 1995, revised on October 15, 1996 and amended on December 25, 1997 and again on August 26, 1998. This Joint Activity Agreement was established for the purpose of investment, exploration and operation of the RC field. All of Carpatsky's rights and obligations are subject to all terms and conditions of the Joint Activity Agreement as amended. The Bitkov field is governed by a Joint Venture Agreement dated April 18, 1995, which establishes Carpatsky's rights and obligations in UkrCarpatoil, Ltd., a Ukrainian joint venture. UkrCarpatoil was created for the purpose of production, exploitation and exploration of the Bitkov field. As outlined in the License Agreement dated July 25, 1995, Carpatsky's rights are limited to the incremental hydrocarbon production above the "baseline" production as defined in the License Agreement. The "organizational period" as defined in the license agreement dated April 18, 1995 has been extended through August 13, 2000 by amendments executed on August 13, 1999. Carpatsky's rights and obligations are subject to all of the terms and conditions of the Joint Venture Agreement and License Agreement as amended. Schedule 4.1(i)(ii) to Securities Purchase Agreement dated December 30, 1999 a) The Reserve Report dated June 30, 1999, prepared by Ryder Scott Company Petroleum Engineers and entitled, "Carpatsky Petroleum Estimated Future Reserves and Income Attributable to Certain Leasehold Interests in Ukraine, SEC Perimeters Full Contractual Interest Case", is subject to all the limitations, contingencies, uncertainties and estimates that are described in the Discussion Letter dated June 23, 1999 included in the aforementioned Reserve Report. This Discussion Letter is incorporated in this document by reference in its entirety. b) The Development Schedule (or Drilling Plan) that was contemplated in the aforementioned Reserve Report has not been adhered to principally because the capital necessary to fund the drilling activity has not been available. c) The aforementioned Reserve Report contemplated that all of the natural gas in the RC field would be sold to Unocal beginning October 1, 1999 on an exported basis. That event did not occur and the natural gas from the RC field is currently being sold domestically in Ukraine. Historically, Carpatsky has not received payment for the majority of its natural gas sales in Ukraine and there can be assurance payment will be received in the future. d) The sales price used in the Reserve Report for natural gas is $1.50 per Mcf and is held constant throughout the life of the reserves. The actual selling price for 1999 (through September 30th) has averaged $0.87 per Mcf. Schedule 4.1(l) to Securities Purchase Agreement dated December 30, 1999 None Schedule 4.1(m) to Securities Purchase Agreement dated December 30, 1999 As of September 30, 1999, the Carpatsky Poltavanaftagas, Joint Activity in the RC field has incurred a corporate profits liability in UAH of 2,899,558 (U.S. equivalent is $648,714 using September 30, 1999 exchange rate). This liability is past due and incurring interest and penalties at an annual rate of 45% (the discount rate in UAH of the National Bank of Ukraine). Carpatsky's properties are subject to a lien to the extent of unpaid taxes. Schedule 4.1(n) to Securities Purchase Agreement dated December 30, 1999 RLG International has threatened litigation. Schedule 4.1(r) to Securities Purchase Agreement dated December 30, 1999 The terms of the Stock Subscription Agreement for the 1999 Private Placement stated David A. Melman will be appointed as a member of Senior Management and a member of the Company's Board of Directors. The following debts are past due as of September 30, 1999: 1) Series 1 Debenture dated August 15, 1998 in favor of James C. Calaway, principal amount $220,000 plus accrued interest of $55,973. 2) Promissory Note in favor of RLG International, Inc.; principal amount of $328,914 plus accrued interest of $30,277. Schedule 4.1(v) to Securities Purchase Agreement dated December 30, 1999 The only registration rights agreements that the Company is a party to are with Bellwether Exploration Company and Torch Energy Advisors Incorporated. EX-10.15 6 0006.txt LESLIE C. TEXAS EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") entered into effective as of June 1, 2000, by and between Leslie C. Texas (the "Employee"), and Carpatsky Petroleum, Inc., a Delaware corporation having its principal place of business at 1331 Lamar, Suite 1455, Houston, Texas 77010-3039 (the "Company"); W I T N E S S E T H: WHEREAS, the Company wishes to employ the Employee to perform services for the Company, and the Employee wishes to be so employed by the Company, all upon the terms and conditions hereinafter set forth: NOW THEREFORE, in consideration of the premises and mutual covenants and obligations herein set forth and for other good and valuable consideration, the receipt, sufficiency and adequacy of which is hereby acknowledged, accepted and agreed to, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Employment and Term. The term of this Agreement (the "Term of this Agreement") shall be effective as of the 1st day of June, 2000 and shall terminate twelve (12) months from the date hereof (the "Termination Date"), unless earlier terminated by either party hereto in accordance with the provisions of Section 5 hereof. During the term of this Agreement, the terms of employment shall be as set forth herein unless modified by the Employee and the Company in accordance with the provisions of Section 11 hereof. The Employee hereby agrees to accept such employment and to perform the services specified herein, all upon the terms and conditions hereinafter set forth. 2. Position and Responsibilities. The Employee shall report to, and be subject to the general direction and control of the Chairman of the Board of the Company. The Employee's duties shall include, but not be limited to, the securing of oil and gas industry investment opportunities in the former Soviet Union ("Investment Opportunities") for Company and its affiliates. The Employee shall maintain an office at the Company's principal offices located in the greater Houston, Texas metropolitan area and at the offices currently occupied by the Employee located in Kiev, Ukraine. 3. Extent of Service. The Employee shall devote substantially all of his time and attention during normal business hours to the business of the Company. 4. Compensation. (a) In consideration of the services to be rendered by the Employee to the Company, the Company will pay the Employee a salary ("Salary") of $10,000 per month during the Term of this Agreement. Such Salary will be payable in conformity with the Company's prevailing practice for Employees' compensation as such practice shall be established or modified from time to time. Salary payments shall be subject to all applicable federal and state withholding, payroll and other taxes. (b) In the event Company elects, in writing within ten (10) business days after Employee has submitted an Investment Opportunity to the Company in writing, to pursue in good faith such Investment Opportunity ("CPI Submission"), Company shall pay Employee at closing of the Investment Opportunity, an incentive fee equal to a minimum of two percent (2%) and a maximum of five percent (5%) net profits interest in the Investment Opportunity based on the net purchase price and/or the fair market value of such Investment Opportunity at closing ("CPI Incentive Fee"). In the event the Investment Opportunity does not close for any reason, no fee shall be due by Company to Employee. Employee may elect, by giving Company written notice within ten (10) business days prior to the closing of an Investment Opportunity, to receive its CPI Incentive Fee as follows: (i) fifty percent (50%) as a net profits interest in the Investment Opportunity and (ii) fifty percent (50%) in cash. The amount of any CPI Incentive Fee shall be agreed to in writing between the Chairman of the Board of the Company and the Employee within five (5) business days subsequent to the CPI Submission. Such CPI Incentive Fee shall be based on the estimated value of the Investment Opportunity, the estimated development costs and capital expenditures, and the risk associated therewith as well as the value added by Employee. In the event Company elects in writing not to pursue the Investment Opportunity or does not respond within ten (10) business days of the CPI Submission, Employee shall then present the Investment Opportunity to Torch Energy Advisors Incorporated and its clients ("Torch"). In the event Torch elects, in writing within five (5) business days after Employee has submitted an Investment Opportunity to Torch in writing, to pursue in good faith such Investment Opportunity ("Torch Submission"), Torch shall pay Employee at closing of the Investment Opportunity, an incentive fee equal to a minimum of two percent (2%) and a maximum of five percent (5%) net profits interest in the Investment Opportunity based on the net purchase price and/or the fair market value of such Investment Opportunity at closing ("Torch Incentive Fee"). In the event the Investment Opportunity does not close for any reason, no fee shall be due by Torch to Employee. Employee may elect, by giving Torch written notice within ten (10) business days prior to the closing of an Investment Opportunity, to receive its Torch Incentive Fee as follows: (i) fifty percent (50%) as a net profits interest in the Investment Opportunity and (ii) fifty percent (50%) in cash. The amount of any Incentive Fee shall be agreed to in writing between the Chairman of the Board of Torch and the Employee within five (5) business days subsequent to the Torch Submission. Such Torch Incentive Fee shall be based on the estimated value of the Investment Opportunity, the estimated development costs and capital expenditures, and the risk associated therewith as well as the value added by Employee. The Torch Incentive Fee, if any, shall be divided equally between Company and Employee. If Torch does not respond in writing within such time period, Employee shall be free to broker the Investment Opportunity to a third party. In the event neither Company nor Torch elects to pursue the Investment Opportunity, then Employee will have the right to broker the Investment Opportunity to a third party and, if successful, the Incentive Fee will be divided seventy-five percent (75%) to Employee and twenty-five percent (25%) to Company. 2 (c) During the term of this Agreement, the Company shall pay or reimburse the Employee for all reasonable out-of-pocket expenses for travel, meals, hotel accommodations, entertainment and the like incurred by him in connection with the business of the Company upon submission by him of an appropriate statement documenting such expenses as required by the Internal Revenue Code of 1986, as amended (the "Code"). (d) The Employee shall be entitled to three (3) weeks of paid vacation during each calendar year during the term of this Agreement. Vacation shall accrue on the first day of each calendar year. The Company shall pay the Employee for any accrued but unused portion of vacation and any such unused portion of vacation shall not be carried forward to the next year. (e) During the term of this Agreement, the Employee shall pay and the Company shall reimburse Employee for the reasonable costs associated with premium payments for his medical and dental plan. 5. Termination. (a) Termination by Company; Discharge for Cause. The Company shall be entitled to terminate this Agreement and the Employee's employment with the Company at any time and for whatever reason; or at any time for "Cause" (as defined below) by written notice to the Employee. Termination of the Employee's employment by the Company shall constitute a termination for "Cause" if such termination is for one or more of the following reasons: (i) the willful failure or refusal of the Employee to render services to the Company in accordance with his obligations under this Agreement, including, without limitation, the failure or refusal of the Employee to comply with the work rules, policies, procedures, and directives as established by the Board of Directors and consistent with this Agreement; such failure or refusal to be uncured and continuing for a period of not less than fifteen (15) days after notice outlining the situation is given by the Company to the Employee; (ii) the commission by the Employee of an act of fraud or embezzlement; (iii) the commission by the Employee of any other action with the intent to injure the Company; (iv) the Employee having been convicted of a felony or a crime involving moral turpitude; (v) the Employee having misappropriate the property of the Company; (vi) the Employee having engaged in personal misconduct which materially injures the Company; or (vii) the Employee having willfully violated any law or regulation relating to the business of the company which results in material injury to the Company. In the event of the Employee's termination by the Company for Cause hereunder, the Employee shall be entitled to no severance or other termination benefits except for any unpaid Salary accrued through the date of termination. A termination of this Agreement by the Company without Cause pursuant to this Section 5(a) shall entitle the Employee to the Severance Payment and other benefits specified in Section 5(e) hereof. 3 (b) Death. If the Employee dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate and the Company shall have no further obligation to the Employee or his estate except that the Company shall pay to the Employee's estate that portion of his Salary and benefits accrued through the date of death. All such payments to the Employee's estate shall be made in the same manner and at the same time as the Employee's Salary. (c) Disability. If during the term of this Agreement, the Employee shall be prevented from performing his duties hereunder for a period of 60 days by reason of disability, then the Company, on 30 days' prior notice to the Employee, may terminate this Agreement. For purposes of this Agreement, the Employee shall be deemed to have become disabled when the Board of Directors of the Company, upon verification by a physician designated by the Company, shall have determined that the Employee has become physically or mentally unable (excluding infrequent and temporary absences due to ordinary illness) to perform the essential functions of his duties under this Agreement with reasonable accommodation. In the event of a termination pursuant to this paragraph (c), the Company shall be relieved of all its obligations under this Agreement, except that the Company shall pay to the Employee or his estate in the event of his subsequent death, that portion of the Employee's Salary and benefits accrued through the date of such termination. All such payments to the Employee or his estate shall be made in the same manner and at the same time as his Salary and would have been paid to him had he not become disabled. (d) Voluntary Termination. Notwithstanding anything to the contrary herein, the Employee shall be entitled to voluntarily terminate this Agreement and his employment with the Company at his pleasure upon thirty (30) days written notice to such effect. In such event, the Employee shall not be entitled to any further compensation other than any unpaid Salary and benefits accrued through the date of termination. At the Company's option, the Company may pay to the Employee the salary and benefits that the Employee would have received during such thirty (30) day period in lieu of requiring the Employee to remain in the employment of the Company for such thirty (30) day period. (e) Termination Benefits Upon Involuntary Termination. In the event that the Company terminates this Agreement and the Employee's employment with the Company for any reason other than for Cause (as defined in Section 5(a) hereof) or the death or disability (as defined in Section 5(b) and 5(c) hereof) of the Employee, then the Company shall pay the Employee, within thirty (30) days after the date of termination, an amount (the "Severance Payment") equal to the balance of Employee's Salary for the Term of this Agreement, minus applicable withholding and authorized salary reductions (the "Severance Payment"). In addition, following other such termination, the Employee shall be entitled to the following benefits (collectively, the "Additional Benefits"): (i) continued coverage, at the Employee's cost, under the Company's group health plan for the applicable coverage period under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") but only if Employee elects such COBRA continuation in accordance with the time limits and in the applicable COBRA regulations; and 4 (ii) an amount, in cash, equal to the sum of (A) any unreimbursed expenses incurred by the Employee in the performance of his duties hereunder through the date of termination, plus (B) any accrued and unused vacation time or other unpaid benefits as of the date of termination. The parties agree that, because there can be no exact measure of the damages which would occur to the Employee as a result of termination of employment, such payments contemplated in this Section 5(e) shall be deemed to constitute liquidated damages and not a penalty and the Company agrees that the Employee shall not be required to mitigate his damages. The termination compensation in this Section 5(e) shall be paid only if the Employee executes a termination agreement releasing all legally waivable claims arising from the Employee's employment. (f) Survival. Notwithstanding the termination of this Agreement under this Section 5, the provisions of Sections 7 and 8 of this Agreement, and all other provisions hereof which by their terms are to be performed following the termination hereof shall survive such termination and be continuing obligations. 6. Consent and Waiver by Third Parties. The Employee hereby represents and warrants that he has obtained all necessary waivers and/or consents from third parties as to enable him to accept employment with the Company on the terms and conditions set forth herein and to execute and perform this Agreement without being in conflict with any other agreement, obligations or understanding with any such third party. 7. Confidential Information. The Employee acknowledges that in the course of his employment with the Company, he has received and will receive access to confidential information of a special and unique value concerning the Company and its business, including, without limitation, trade secrets, know-how, lists of customers, employee records, books and records relating to operations, costs or providing service and equipment, operating an maintenance costs, pricing criteria and other confidential information and knowledge concerning the business of the Company and its affiliates (hereinafter collectively referred to as "information") which the Company desires to protect. The Employee acknowledges that such information is confidential and the protection of such confidential information against unauthorized use or disclosure is of critical importance to the Company. The Employee agrees that he will not reveal such information to any one outside the Company. The Employee further agrees that during the term of this Agreement and thereafter he will not use or disclose such information. Upon termination of his employment hereunder, the Employee shall surrender to the Company all papers, documents, writings and other property produced by him or coming into his possession by or through his employment hereunder and relating to the information referred to in this Section 7, and the Employee agrees that all such materials will at all times remain the property of the Company. The obligation of confidentiality, non-use and non-disclosure of know-how set forth in this Section 7 shall not extend to 5 know-how (i) which was in the public domain prior to disclosure by the disclosing party, (ii) which comes into the public domain other than through a breach of this Agreement, (iii) which is disclosed to the Employee after the termination of this Agreement by a third party having legitimate possession thereof and the unrestricted right to make such disclosure, or (iv) which is necessarily disclosed in the course of the Employee's performance of his duties to the Company as contemplated in this Agreement. The agreements in this Section 7 shall survive the termination of this Agreement. 8. No Solicitation. To support the agreements contained in Section 7 hereof, from the date hereof and for a period twelve (12) months after the Employee's employment with the Company is terminated for any reason, the Employee shall not, either directly or indirectly, through any person, firm, association or corporation with which the Employee is now or may hereafter become associated, (i) use in any competition, solicitation or marketing effort any information as to which the Employee has a duty of confidential treatment under paragraph 7 above, or (ii) hire, employ, solicit or engage any then current employee of the Company or its affiliates. 9. Notices. All notices, requests, consents and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or on the date mailed, postage prepaid, by certified mail, return receipt requested, or telegraphed and confirmed if addressed to the respective parties as follows: If to the Employee: Leslie C. Texas 1331 Lamar, Suite 1455 Houston, Texas 77010 If to the Company: Carpatsky Petroleum, Inc. 1331 Lamar, Suite 1455 Houston, Texas 77010-3039 Attn: Douglas G. Manner Either party hereto may designate a different address by providing written notice of such new address to the other party hereto. 10. Specific Performance. The Employee acknowledges that a remedy at law for any breach or attempted breach of Section 7 or 8 of this Agreement will be inadequate, agrees that the Company shall be entitled to specific performance and injunctive and other equitable relief in case of any such a breach or attempted breach, and further agrees to waive any requirement of the securing or posting of any bond in connection with the obtaining of any such injunctive or any other equitable relief. 12. Waivers and Modifications. This Agreement may be modified, and the rights and remedies of any provision hereof may be waived, only in accordance with this Section 12. No modification or waiver by the Company shall be effective without the consent of at least a majority of the Compensation Committee of the Board of Directors then in office at the time of such modification or waiver. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach 6 thereof or as a waiver of any other provision of this Agreement. This Agreement sets forth all the terms of the understandings between the parties with reference to the subject matter set forth herein and may not be waived, changed, discharged or terminated orally or by any course of dealing between the parties, but only by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought. 13. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Texas. 14. Severability. In case of one or more of the provisions contained in this Agreement for any reason shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never contained herein. 15. Arbitration. In the event that a dispute or controversy should arise between the Employee and the Company as to the meaning or application of any provision, term or condition of this Agreement, such dispute or controversy shall be settled only by binding arbitration in Houston, Texas and for said purpose each of the parties hereto hereby expressly consents to such arbitration in such place. Such arbitration shall be conducted in accordance with the existing rules and regulations of the American Arbitration Association governing commercial transactions. The expense of the arbitrator shall be shared equally by the Company and Employee. IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date and year first above written. COMPANY: CARPATSKY PETROLEUM, INC. By: /s/ ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- EMPLOYEE: /s/ ---------------------------------------- Leslie C. Texas EX-23.1 7 0007.txt CONSENT OF HEIN + ASSOCIATES LLP INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT'S CONSENT We consent to the use in the Registration Statement of Pease Oil and Gas Company (Pease) on Form S-4 of our report dated February 18, 2000 on our audit of the consolidated financial statements of Pease as of December 31, 1999, and for the years ended December 31, 1999 and 1998 and our report dated March 13, 2000 on our audit of the consolidated financial statements of Carpatsky Petroleum, Inc. (Carpatsky) as of December 31, 1999 and 1998 and for each of the years in the three-year period ended December 31, 1999, both of which are contained in such Form S-4 and to the use of our name and the statements with respect to us, as appearing under the heading "Experts" in the Prospectus. Our report on Pease included an explanatory paragraph regarding the uncertainty of Pease's ability to continue operations as a going concern. Our report on Carpatsky, included explanatory paragraphs regarding the uncertainties of conducting business in Ukraine and Carpatsky's ability to continue operations as a going concern. /s/ HEIN + ASSOCIATES LLP Denver, Colorado August 10, 2000 EX-23.2 8 0008.txt CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC. CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC. As oil and gas consultants, Netherland, Sewell & Associates, Inc. hereby consent to: (a) the use of our reserve report dated February 21, 2000 entitled "Estimate of Reserves and Future Revenue to the Pease Oil & Gas Company Interest in Certain Oil and Gas Properties Located in Louisiana and Texas as of January 1, 2000;" and (b) all references to our firm included in or made a part of Pease Oil & Gas Company's Registration Statement on Form S-4 in connection with a contemplated merger with Carpatsky Petroleum Inc. to be filed with the Securities and Exchange Commission on or about August 11, 2000, and which may be amended from time to time prior to becoming effective. NETHERLAND, SEWELL & ASSOCIATES, INC. By: /s/ Danny D. Simmons Danny D. Simmons Senior Vice President Houston, Texas August 9, 2000 EX-23.9 9 0009.txt CONSENT OF RYDER SCOTT COMPANY, L.P. CONSENT OF RYDER SCOTT COMPANY, L.P. As petroleum consultants, Ryder Scott Company, L.P. hereby consents to : a) the use of our three reserve reports dated May 26, 2000 entitled "Estimated Future Reserves and Income Attributable to Certain Leasehold Interests of Carpatsky Petroleum -- SEC Parameters" as of December 31, 1999; as of December 31, 1998 and, as of December 31, 1997; and b) all references to our firm included in or made a part of Pease Oil and Gas Company's Registration Statement on Form S-4 in connection with a contemplated merger with Carpatsky Petroleum, Inc. to be filed with the Securities and Exchange Commission on or about August 11, 2000. /s/ Ryder Scott Company, L.P. RYDER SCOTT COMPANY, L.P. Houston, Texas August 9, 2000 EX-24 10 0010.txt POWER OF ATTORNEY POWER OF ATTORNEY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Patrick J. Duncan his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities, to sign any and all amendments (including amendments that register additional securities of the same class to be declared effective in accordance with Rule 462(b) promulgated under the Securities Act of 1933 and post-effective amendments) to this Registration Statement, and to file the same, with all exhibits hereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute may lawfully do or cause to be done by virtue hereof. /s/ Patrick J. Duncan President and director January 24, 2000 - ----------------------- (Principal Executive Patrick J. Duncan Officer, Principal Financial and Accounting Officer /s/ Steve A. Antry Director January 24, 2000 - ------------------------ Steve A. Antry /s/ Stephen L. Fischer Director January 24, 2000 - ------------------------ Stephen L. Fischer /s/ Homer C. Osborne Director January 24, 2000 - ------------------------ Homer C. Osborne /s/ James C. Ruane Director January 24, 2000 - ------------------------ James C. Ruane /s/ Clemons F. Walter Director January 24, 2000 - ------------------------ Clemons F. Walker EX-99 11 0011.txt LETTER DATED 28 APRIL 2000--VASIL KISIL & PARTNERS PRIVATE AND CONFIDENTIAL BY FAX Carpatsky Petroleum Inc. Pease Oil & Gas Co. 6671 Southwest Fwy. 751 Horizon Court, Suite 203 Suite 303 P.O. Box 60219 Houston, Texas 77074-2284 Grand Junction, CO 81506-8758 Attn: Attn: Mr. Robert Bensch Mr. Patrick J. Duncan Vice President President 28 April 2000 Dear Mr. Bensch: RIGHTS OF CARPATSKY PETROLEUM CORPORATION IN RESPECT OF THE RC DEPOSIT Further to your request I am writing to comment(1) on certain legal aspects of the operations under the Agreement on Joint Investment and Production Activity No. 410/95 of September 14, 1995 (with all subsequent alterations) in which Carpatsky Petroleum Corporation is involved. - ------------- (1) Ukraine's tax and legal system is relatively new and undergoing rapid development. As such, there is little official interpretation available in that there has been an insufficient period of time for the laws to be thoroughly tested in practice either at an administrative or judicial level. Accordingly, our comments contained herein reflect our best understanding of the laws currently in effect based on the legislation in force, on available official interpretation and unofficial discussions with Ukrainian authorities. Please note that because of the lack of official interpretations available and the fact that the relevant Ukrainian authorities have little experience in interpreting such laws, we can provide no assurance that Ukrainian authorities will take a position consistent with the comments contained in this review. Furthermore, we express no comments as to changes in the laws on interpretations thereof, that may occur subsequent to the date of this review. Page 2 of 9 In rendering this opinion, we have examined such questions of law and such licenses, agreements and other documents executed between Carpatsky Petroleum Corporation and Poltavanaftogas as well as some third parties provided to us as we have deemed necessary including copies of the following documents: 1. Agreement on Joint Activities between Poltavanaftogas and Carpatsky Petroleum Corporation No. 410/95 of September 14, 1995; 2. Agreement of October 15, 1996 on Introducing Amendments and Addenda to the Agreement No. 410/95 of September 14, 1995 on Joint Activities between Poltavanaftogas and Carpatsky Petroleum Corporation (new version named as Agreement No. 410/95 of September 14, 1995 on Joint Investment and Production Activities as to Exploration and Development of the Rudivsko-Chervonozavodske Deposit); 3. Addenda of December 25, 1997 to Agreement No. 410/95 of September 14, 1995; 4. Amendments and Addenda of August 26, 1998 to Agreement No. 410/95 of September 14, 1995 on Joint Investment and Production Activities as to Exploration and Development of the Rudivsko-Chervonozavodske Deposit as of October 15, 1996, including amendments and addenda of December 25, 1997; 5. Amendments and Addenda of April 23, 1999 to Agreement No. 410/95 of September 14, 1995 on Joint Investment and Production Activities as to Exploration and Development of the Rudivsko-Chervonozavodske Deposit as of October 15, 1996, including amendments and addenda of December 25, 1997 and August 26, 1998; 6. Card of State registration dated April 4, 1997 of the Agreement No. 410/95 of September 14, 1995 with the Poltava Region Department of the Ministry of Foreign Economic Relations and Trade of Ukraine ; 7. License No. 470 of July 31, 1995 granted by the State Committee for Geology and Utilization of Subsoil to Poltavanaftogas for geological search (pilot production) of the Rudivsko- Chervonozavodske Deposit; 8. License No. 469 of July 31, 1995 granted by the State Committee for Geology and Utilization of Subsoil to Chernigivnaftogasgeologiya for geological search (pilot production) of the Rudivsko-Chervonozavodske Deposit; 9. License No. 968 of March 30, 1998 granted by the State Committee for Geology and Utilization of Subsoil to Ukrnafta for geological search including pilot production of the Rudivsko- Chervonozavodske Deposit; 10. Agreement No. 5/27 of December 30, 1997 "On Geological Search of Subsoil and Preparation for Industrial Development of the Rudivsko-Chervonozavodske Hydrocarbon Deposit" between Ukrnafta and Chernigivnaftogasgeologiya; Page 3 of 9 11. Agreement "On procedure of exploitation of wells of Rudivsko-Chervonozavodske deposits which are jointly owned by Ukrnafta and American company Carpatsky Petroleum Corporation, collection, preparation of gas and condensate from these wells" dated August 31, 1998; 12. Agreement on Joint Works on Pilot Production of Wells of the Rudivsko-Chervonozavodske Deposit by the state geological enterprise Chernigivnaftogasgeologiya and the enterprise Poltavanaftogas of May 16, 1995; 13. Agreement (Protocol) on Holding Joint Works on Pilot Production of Rudivsko- Chervonozavodske, Mekhedivske, Svistunkivske, Sviridovske, Chervonolutske gas condensate deposits by the state geological enterprise Chernigivnaftogasgeologiya and the enterprise Poltavanaftogas of May 16, 1995. Background Carpatsky Petroleum Corporation (CPC) is a party to the Agreement on Joint Investment and Production Activity (the JAA). Based on the JAA, CPC has agreed to participate with the open joint stock company Ukrnafta represented by Poltavanaftogas, the oil and gas extraction Department of Ukrnafta for the exploration, development and production of hydrocarbons on the Rudivsko- Chervonozavodske deposit (the RC deposit). According to Ukrainian legislation, exploration and production of mineral resources in Ukraine require obtaining a special license from the State Committee for Geology and Utilization of Subsoil(2). The license to operate on the RC deposit was granted to Ukrnafta which is an open joint stock company --60 - ------------- (2) Code of Subsoil of Ukraine of July 27, 1994 "Article 16. Licensing activities related to the utilisation of mineral resources Licensing activities related to the utilisation of mineral resources is the exclusive procedure for granting special permissions (licenses) for the use of mineral resources fields for designated purposes. Special permissions (licenses) for using mineral resources within certain areas shall be granted to specialised enterprises, institutions and organisations, as well as to citizens who have the appropriate qualifications, and the material, technical and economic capacities for the utilisation of mineral resources. The granting of special permissions (licenses) for the utilisation of mineral resources shall be carried out after the preliminary approval of the appropriate council of people's deputies for the allocation of a parcel of land for designated purposes, with the except of those cases when there is no need to allocate a parcel of land. In the event that certain types of work related to the utilisation of mineral resources are performed by persons who are not designated by special permission (license), the responsibility for observation of conditions stipulated in the special permission (license) shall be carried by the subject that received the special permission (license). Special limitations stipulated by the current legislation of Ukraine can be set in regard to certain types of subsurface utilisation or certain subsurface users. The special permissions (licenses) for the use of subsurface shall be provided by the State Committee for Geology and the Use of Subsurface with the consent of the Ministry of Ukraine on Environmental Protection generally on competitive terms and according to procedures established by the Cabinet of Ministers of Ukraine." Page 4 of 9 percent of which are owned by Ukrainian Government on March 30, 1998. This license No. 968 entitles Ukrnafta to carry out geological search (exploration), including pilot production of oil, gas and condensed gas. As indicated in the license, the purpose of the license is the exploration of oil and gas reserves, pilot exploitation of wells and determination of reserves for the purposes of future development of the deposit. Under the terms of the license, operations shall be carried out in accordance with the Agreement No. 5/27 of December 30, 1997 "On Geological Search of Subsoil and Preparation for Industrial Development of the Rudivsko-Chervonozavodske Hydrocarbon Deposit" between Ukrnafta and Chernigivnaftogasgeologiya. Chernigivnaftogasgeologiya is a state owned oil and gas exploration and prospecting company. Neither CPC nor the JAA are mentioned in the license. You have requested that we comment on whether CPC has the right to oil or natural gas reserves on the RC field. Rights of license holders According to the Code(3), subsoil is in the exclusive ownership of the Ukrainian people and may be granted to interested parties only for use. Any agreements that are in an indirect or hidden form violate the right of ownership of the Ukrainian people to subsoil shall be deemed invalid. The Ukrainian people realize the right of ownership to subsoil through the Verkhovna Rada of Ukraine (Ukrainian Parliament), Verkhovna Rada of the Republic of Crimea and local radas (councils of people's deputies). It follows from the above that the subsoil cannot be in the ownership of subsoil users. According to the Code(4), users of subsoil have the right to: - -------------- (3) Code "Article 4. Ownership of Mineral Resources Mineral resources shall be the exclusive property of the Ukrainian people and shall be transferred only on the basis of the right to use. Agreements or acts, which directly or indirectly violate the ownership right of the Ukrainian people to mineral resources, shall be null and void. The Ukrainian people shall exercise their ownership rights to mineral resources through the Parliament of Ukraine, the Parliament of the Republic of Crimea and local councils of people's deputies. Certain authority regarding the disposal of mineral resources may be delegated by Ukrainian legislation to the appropriate bodies of state executive power." (4) Code "Article 24. Rights and Obligations of Users of Mineral Resources Users of mineral resources shall have the right: 1) to conduct geological surveys and to carry out the comprehensive development of deposits of mineral resources within mineral resource fields allocated to them, unless provided otherwise in accordance with the conditions of a special permission (license); 2) to dispose of produced mineral resources, unless otherwise provided by legislation or the conditions of a special permission (license); 3) to preserve a mineral resource deposit or a portion thereof allocated for utilization pursuant to the conditions of a special permission (license); 4) the priority right to extend the term of a temporary subsoil use; 5) utilization of a mineral resource field. Users of mineral resources shall be obliged: 1) to utilize the mineral resource field in accordance with the purposes for which they were allocated; 2) to ensure complete geological analysis and the efficient and comprehensive utilization and protection of mineral resources; 3) to ensure safety for persons, property and the environment; 4) to bring parcels of land that were damaged during the process of the utilization of mineral resources into a condition acceptable for further utilization in public production; 5) to comply with all other requirements regarding utilization of mineral resources as established by Ukrainian legislation." Page 5 of 9 a) carry out geological search, development of mineral deposits and other operations in accordance with the terms of a special permit (license); b) dispose of extracted resources unless otherwise is provided by the terms of a special permit (license). Summarizing the above, it is possible to conclude that unless and until mineral resources are extracted from subsoil they remain in the ownership of the Ukrainian people. Entities or individuals holding a relevant license, depending on the terms of such license, have the right to use subsoil in order to search, explore or extract mineral resources. Users of the subsoil obtain the right of ownership to mineral resources once such resources are extracted from subsoil. Treatment of entities that are not license holders According to the Code(5), if entities, which are not mentioned in a license, perform certain works in connection with the use of subsoil, the responsibility for compliance with the terms established by the license falls on the license holder. Thus, the Code does not prohibit entities which do not hold the license or which are not mentioned in the license from performing certain works in connection with the use of subsoil by the license holder. It is not clear, however, whether this article of the Code should be interpreted as allowing other entities to carry out operations indicated in the license (e.g., geological exploration, pilot production or industrial exploitation) along with license holders or whether it may be interpreted as including only works supporting these operations (e.g., supply and assembling of equipment, provisions of certain technology, making available engineers and works, etc.). - ---------------- (5) Code "Article 16. Licensing activities related to the utilization of mineral resources Licensing activities related to the utilization of mineral resources is the exclusive procedure for granting special permissions (licenses) for the use of mineral resources fields for designated purposes. Special permissions (licenses) for using mineral resources within certain areas shall be granted to specialized enterprises, institutions and organizations, as well as to citizens who have the appropriate qualifications, and the material, technical and economic capacities for the utilization of mineral resources. The granting of special permissions (licenses) for the utilization of mineral resources shall be carried out after the preliminary approval of the appropriate council of people's deputies for the allocation of a parcel of land for designated purposes, with the except of those cases when there is no need to allocate a parcel of land. In the event that certain types of work related to the utilization of mineral resources are performed by persons who are not designated by special permission (license), the responsibility for observation of conditions stipulated in the special permission (license) shall be carried by the subject that received the special permission (license). Special limitations stipulated by the current legislation of Ukraine can be set in regard to certain types of subsurface utilization or certain subsurface users. The special permissions (licenses) for the use of subsurface shall be provided by the State Committee for Geology and the Use of Subsurface with the consent of the Ministry of Ukraine on Environmental Protection generally on competitive terms and according to procedures established by the Cabinet of Ministers of Ukraine." Page 6 of 9 We believe that the second interpretation seems the more likely of the two as, in our opinion, the Code distinguishes between operations as to the use of subsoil, which is subject to licensing, and particular works in connection with the use of subsoil, for the performance of which a license holder may contract with other entities. In addition the JAA for the Management Committee to decide operations. The Management Committee consists of four (4) representatives from each Poltavanaftogas and CPC. Ukrainian legislation does not restrict a license holder from selecting any forms of contracting with other entities for the performance of certain works on services connected with the use of subsoil. We believe that the only restriction is that a license holder cannot authorize other entities to carry out operations that are indicated in the license and share responsibility for compliance with the terms of the license and other required documents (e.g., project for pilot production, etc.). For instance, a license holder may contract with another entity for supply and assembly of certain equipment, etc. Also, a license holder may contract with other entities, including foreign companies, on a joint operation basis, which is allowed by Ukrainian legislation. The JAA is one of the allowed forms of contractual relations between a license holder and other entities. According to the JAA, Ukrnafta performs the functions of the operator. The rights and obligations of Poltavanaftogas as a division of Ukrnafta are defined in the Agreement "On procedure of exploitation of wells of Rudivsko-Chervonozavodske deposits which are jointly owned by Ukrnafta and American company Carpatsky Petroleum Corporation, collection, preparation of gas and condensate from these wells" dated August 31, 1998. Therefore, we believe it is very unlikely that CPC can be deemed to be carrying out operations indicated in the license without the right to do so. Summarizing this section, there appear to be good arguments to sustain the assertion that CPC's activities on the RC deposit do not contradict Ukrainian legislation or the terms of the license. Rights of CPC under the JAA As mentioned above, a license holder has the right to dispose of mineral products extracted from the subsoil if it is not otherwise established in the terms of the license. In this respect we believe that a license holder is not restricted from selecting the legal grounds and mechanisms of such disposal. For instance, having a service agreement with another entity a license holder may compensate for relevant services or works by means of a portion of products extracted from subsoil on the licensed field. Alternatively if operating on a joint operation basis a license holder and its partner(s) may allocate extracted products or revenues from the sale of extracted products on a pro rata basis or in such a different way as may be agreed between them. According to the Civil Code of Ukraine(6), parties to a joint activity agreement have the right of joint shared ownership to the assets of such joint activities. - ---------------- (6) Civil Code of Ukraine "Article 432. Joint estate of the parties to an agreement To attain the goal determined in Article 430 of this Code the parties to an agreement on joint operations shall make contributions in terms of money or other property or labour participation. The money or other property contributions of the parties to the agreement, and the property created or obtained as a result of the joint operations thereof, shall constitute their condominium. Neither party to an agreement on joint operations shall be entitled to dispose of its interest in the joint estate without consent of the other parties to the agreement." Page 7 of 9 Thus, assets that are shown in the accounts of the JAA, including equipment, extracted products, cash received as compensation for the sold products, etc. belong to the parties to the JAA under joint shared ownership. According to the JAA, hydrocarbons produced under the JAA are sold by the joint activity and reflected in its accounts. CPC and Ukrnafta do not distribute products. Rather, they distribute income from the sale of such products. Thus, according to the mechanism stipulated by the JAA, neither Ukrnafta nor CPC can dispose of any products extracted under the JAA. This means that CPC and Ukrnafta cannot dispose of these assets independently (i.e., without mutual consent). The management and disposal of the assets of the joint activities must be agreed between CPC and Ukrnafta in the JAA. Summarizing the above we conclude that CPC and Ukrnafta have the right of joint shared ownership to the assets of the JAA. Neither party to the JAA has the right to dispose of its share independently. This assertion is supported by the provisions of law and the JAA applicable to termination. In case of termination of the JAA each party has the right to obtain its share in the joint assets. According to the JAA, in case of termination of the JAA before the established date, Ukrnafta assumes an obligation to buy the share due to CPC at prices to be estimated by an independent licensed expert. This provision confirms the right of CPC to obtain fair compensation for its interest in the JAA and of joint activity created assets. Rights of CPC with regard to the existing license The current license entitles Ukrnafta to carry out the geological search and pilot production of hydrocarbons on the RC deposit. According to the Code(7), pilot production shall be carried out in accordance with a special project. Such a project should be approved in accordance with the established procedure. We do not comment in this letter on the procedure for the preparation and approval of these projects. In this respect, it is sufficient to mention that products extracted under a pilot production project may be sold normally. In other words the holder of a license for pilot production has the right to sell hydrocarbons extracted within the limits established by the respective project. For purposes of this letter we presume that Ukrnafta has a duly approved project for the pilot production on the RC deposit. Thus based on the above, Ukrnafta and CPC may mutually sell hydrocarbons produced within the duly approved project for the pilot production on the RC deposit through the JAA and CPC has the right to obtain its share in the revenue from such sales. In summary, we may conclude that although under the existing license CPC does not possess the right to carry out the geological search and pilot production on the RC field independently from Ukrnafta, the JAA allows CPC to obtain its due - ----------------- (7) Code "Article 20. Allocation of Mineral Resources for Geological Surveys Mineral resources shall be allocated without allocation of mining offsets after special permission (license) for geological surveys of mineral resources is obtained for geological surveys, including research and industrial development of state mineral resources. Research and industrial development of state mineral resources shall be carried out for the purpose of identifying their specific mining, geological and other parameters and selecting efficient methods of extraction of mineral substances on the basis of designs for such works approved by the State Committee on Supervision over Safety of Labour of Ukraine. Mineral resources extracted in the course of research and study development shall be subject to sale in accordance with general procedures." Page 8 of 9 share of income obtained from the sale of hydrocarbons produced with the limits established by the duly approved pilot production project. Rights to obtain production license. Based on the Code(8) the subsoil user has a priority right to prolong the term of temporary use of subsoil. This is uniformly understood, that the license holder for the specified area has the right to prolong the term of the existing license or prolong the use of subsoil by means of obtaining new license for the next stage of subsoil development (pilot production after exploration, and production license after pilot production). Please note, that pilot production (as a specified activity in the license) is limited in time and volume of produced minerals. The Order of the Ukrainian Committee on the Issues of Geology and Subsoil Use No. 40 dated March 15, 2000 "On approval of the Provisions on procedure of organization and performance of pilot production development (PPD) of the deposits of minerals of state importance", Section 2.1(9) limits the term of PPD to five years, and section 2.2(10) of the same Provisions limits the volume of minerals produced during PPD to ten percent of the preliminary estimates of the minerals deposits. Taking into account very recent issue of the Order No. 40, there is no information or interpretation wether and how its provisions may be applied retroactively (i.e. to companies license holders which for example exceeded volume of ten percent of the preliminary estimated reserves). Conclusions and recommendations In our opinion, using a JAA carries certain material disadvantages and potential risks. First, the Code does not provide entities that are not license holders with the right to use subsoil and to dispose of extracted products. Thus, the rights that CPC has under the JAA are not established by the Code. However, our opinion we believe CPC could enforce its rights under the JAA through injunctive relief in the Courts. Second, the existing license was granted under a special condition that operations on the RC deposit would be based on the agreement between Ukrnafta and Chernigivnaftogasgeologiya. In our opinion, this means that if this agreement is terminated or if the JAA is deemed contradictory to the terms of this agreement, the existing license may be at risk. We are not aware of any provision of the JAA which is contradictory to the agreement. - ----------------- (8) (9) Section 2.1 of the Provisions: "The time period for PPD of a deposit, the amount of and conditions for extraction, in so doing, of mineral resources shall be substantiated in PPD project. The time period for conducting PPD of a deposit cannot be beyond the limits of validity of a special permit (license) for geological exploration thereof and shall not have to exceed 5 years." (10) Section 2.2 of the Provisions: "The volume of mineral resources stipulated to be extracted during PPD shall not have to exceed 10 percent of the pre-assessed mineral reserves in the deposit." Page 9 of 9 Third, in order to have the right to commercial exploitation of the RC deposit after the exploration and pilot production license expires because of the term or the volume of minerals extracted, it will be necessary to obtain a new production license. According to the JAA, CPC's position under the agreement on this issue would therefore appear to be secure, unless Ukrnafta took the unlikely steps of deliberately acting against the terms of the agreement or seeking to terminate it. In those cases CPC's interests would be in the hands of the Courts. Fourth, the JAA is not mentioned in the license as a condition for carrying out operations under the license. In our opinion, this means that operation of Ukrnafta on the RC is not bound by the necessity to maintain activities under the JAA. However we are aware of no instance where Ukrnafta or other similar entity has failed to honour an agreement with a foreign entity. We would also anticipate that a Ukraine court would entertain a proper proceeding to enjoin clearly wrongful activity by a party to an agreement similar to the JAA. In summary, we conclude that under the JAA, CPC has certain rights in respect of the mineral resources on the RC deposit the main of which is to obtain the share of profits from the sale of hydrocarbons extracted within the project of the pilot production. To avoid some of the risks described in this letter, CPC may consider the option of concluding a production sharing agreement under the recently adopted Ukrainian legislation. This opinion is subject to the following qualifications: 1. We are attorneys who practice in Ukraine, and we express no opinion as to any laws of any jurisdiction other than the laws of Ukraine currently in force in Ukraine which are applicable to Ukrnafta, CPC and the JAA. We express no opinion with respect to the applicability or the effect in connection with the matters referred to herein of the laws of any other jurisdiction or as to any matters of municipal law or the laws of any subdivision of Ukraine or of any local agencies. 2. We have relied exclusively on the documents in arriving at the opinions expressed herein and the documents constitute the material documents relating to the rights and obligations of Ukrnafta and CPC. 3. With respect to all the documents that we reviewed, we have assumed, but have not independently verified, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity with the authentic originals of all documents submitted to us as copies. 4. Our opinions in this letter with respect to validity of contractual relations between Ukrnafta and CPC are based on the assumption that the parties to the JAA and other agreement mentioned above did not and do not violate any provisions of such agreements and that the terms and conditions of license are fully met by respective license holders. 5. The rights of Ukrnafta and CPC contained in the JAA may be limited by applicable bankruptcy, reorganization, insolvency or other similar laws of general application relating to or affecting the enforcement of the parties' rights. 6. The opinions expressed in this letter are specific to the transactions and the documents referred to herein and are based upon the facts known to use, the documents examined by us and the law as of the date hereof, and should not be assumed to state general principals of law applicable to transactions other then those which we have specifically referred. Therefore, this opinion may not be relied upon by persons other than the addressees, their stockholders and counsel, and the Securities and Exchange Commission in the United States. Yours sincerely, VASIL KISIL & PARTNERS /s/ Alexey N. Volkov - ------------------------ Alexey N. Volkov Attorney at Law cc: Mr. G. Sullivan ATTACHMENT 1 TO OPINION LETTER APPROVED Chairman of the Board of "Ukrneft" JSC .....................................B.V. Zaritsky September 22, 1995 AGREEMENT No. 410/95 on joint operations Poltava September 14, 1995 "Poltavaneftegas" enterprise and "Carpatsky Petroleum Corporation" company, hereinafter referred to as "Partners" have made and entered into this agreement as follows: DEFINITIONS OF THE PRINCIPAL TERMINOLOGY Partners shall be understood as "Poltavaneftegas" enterprise and "Carpatsky Petroleum Corporation" company that have initially entered into this Agreement and hereafter as any legal entities and individuals that join the Agreement. Enterprise - "PNG" shall be understood as "Poltavaneftegas" enterprise, a party hereto. Company - "CPC" shall be understood as "Carpatsky Petroleum Corporation" company, a party hereto. Managing Committee shall be understood as the supreme managing body consisting of the managers and authorized representatives of the Partners, and authorized to make decisions on the principal issues of the joint operations such as preparation of amendments and addenda hereto, approval of the Joint Operations Program and Agreed Budgets, termination of the joint operations. Joint Production shall be understood as production capacities and fixed assets to be created in the course of joint operations hereunder. Joint Operations Program shall be understood as a program of operations for a fiscal year based on the projects for exploration and operation of hydrocarbon deposits, including production and geophysical exploration of wells and strata, a set of works related to boring production wells, overhaul of wells, construction and operation of objects, collection, transportation and preparation of produce. Agreed Budget of Joint Operations shall be understood as a document determining the costs for performance of the Joint Operations Program. The Agreed Budget of Joint Operations shall account of all funding sources. 1 Licensee, Licensees shall be understood as "Chernigovneftegasgeologiya" state-run geological enterprise and "Poltavaneftegas" enterprise. Fiscal Year shall be understood as a calendar year, and, for the first year of the joint operations, a time period as from approval of the Joint Operations Program and Budget till the end of the calendar year. Operating Costs shall be understood as costs for production of gas and gas condensate to be referred to the produce self-cost under the legislation in force, less payments and deductions to the budget and non-budget funds. Effective Date shall be understood as the date of signing this Agreement. Engineer Centre shall be a working body of the Managing Committee. Upon an assignment of the latter and together with the services of "Poltavaneftegas" enterprise and "Carpatsky Petroleum Corporation" company it shall develop the Programs and Agreed Budgets of the joint operations, and shall exercise control over implementation thereof. ARTICLE I GENERAL PROVISIONS 1.1 This Agreement has been entered into for the purpose of: - obtaining a license for production development of the deposit; - providing for organizational and economic conditions, application of domestic and foreign technology for intensification of exploration and operation of Rudovsko- Krasnozavodsk deposit, increasing the volumes of gas and gas condensate production, achieving high economic indicators when developing the deposit with complying with requirements of labour safety, subsoil and environment protection under the legislation of Ukraine. - developing technical solutions with accounting of the advanced foreign expertise implementation of which would provide for efficient development of the deposit and safe operation of the wells up to 6000 m deep (including abnormally high seam pressures); - earning profits by the partners hereof. 1.2 The subject-matter of this Agreement shall be: - exercising joint business initially related to pilot production operation of Rudovsko-Krasnozavodsk gas condensate deposit; 2 - creation of the required production capacities for the subsequent production operation of the deposit (production wells) with application of the advanced foreign engineering and technologies in the field of production and geophysical exploration of wells and seams, overhaul of wells, intensification of hydrocarbons inflow, boring wells and in other fields where advisable. 1.3 The partners shall combine their pecuniary, material, labour resources, productive, technical and economic potentials for the purpose of implementation of the joint operations goals listed in Sections 1.1, 1.2. 1.4 The Partners shall maintain their legal and property independence. 1.5 The Partners shall incur losses from the joint operations hereunder independently (separately). 1.6 This Agreement cannot preclude performance by the Partners of their obligations as to third persons. 1.7 In the process of their joint operations the Partners shall be governed by the Legislation of Ukraine and this Agreement. 1.8 This Agreement shall be entered into for twenty (20) years. The Program and the Agreed Budget of Joint Operations for the first Fiscal Year shall have to be prepared within three months as from the date this Agreement is signed. If the practical joint business operations on exploration and operation of Rudovsko-Krasnozavodsk deposit is not launched within six (6) months as from the date this Agreement is signed, the partners shall consider the issue of repudiation of the Agreement. ARTICLE II LICENSE FOR EXPLORATION AND OPERATION OF THE HYDROCARBONS DEPOSIT 2.1 The license for exploration of Rudovsko-Krasnozavodsk deposit for the time period of 2 years was obtained on July 31, 1995, by "Chernigovneftegasgeologiya" state-run geological enterprise. 2.2 License No. 470 for the pilot production operation of Rudovsko-Krasnozavodskoi deposit for the time period of 2 years was obtained on July 31, 1995, by "Poltavaneftegas" enterprise. 2.3 The relationship between "Poltavaneftegas" enterprise and "Chernigovneftegasgeologiya" state-run geological enterprise shall be determined by the following documents 3 (Appendices 1 and 2): - "Agreement (protocol) on conducting joint operations for exploratory and production operation of Rudivsko-Krasnozavodsk, Mekhedivsk, Svystunovsk, Svyrydivsk, Chervonolutsk gas condensate deposits by "Chernihivnaftogasgeologiya" state-run geological enterprise and "Poltavanaftogas" enterprise" signed on May 16, 1995, by the Director General of "Poltavaneftegas" enterprise V.P. Kozak, by the Director General of "Chernigovneftegasgeologiya" state-run geological enterprise S.M. Guinda, approved by the Chairman of the Board of "Ukrneft" JSC B.V. Zaritsky and the Deputy Chairman of the State Committee of Ukraine for Geology B.O. Byalyuk; - "Agreement on conducting joint operations for exploratory and production operation of the wells of Rudivsko-Krasnozavodsk deposit by "Chernigovneftegasgeologiya" state- run geological enterprise and "Poltavanaftogas" enterprise" signed on May 16, 1995, by the Director General of "Poltavaneftegas" enterprise V.P. Kozak, by the Director General of "Chernigovneftegasgeologiya" state-run geological enterprise S.M. Guinda, approved by the Chairman of the Board of "Ukrneft" JSC B.V. Zaritsky and the Deputy Chairman of the State Committee of Ukraine for Geology B.O. Byalyuk. "Carpatsky Petroleum Corporation" company shall bind itself with promoting performance of agreements available between "Poltavaneftegas" enterprise and "Chernigovneftegasgeologiya" SGE. 2.4 Prior to expiration of the validity term of the License for pilot production operation "Poltavaneftegas" enterprise shall apply for a License for production operation of Rudovsko-Krasnozavodsk deposit. The Company and "Chernigovneftegasgeologiya" SGE shall not compete with "Poltavaneftegas" enterprise with respect to obtaining the above License and shall not facilitate other contenders in obtaining it. ARTICLE III ORGANIZATION OF WORKS FOR EXPLORATION AND OPERATION OF RUDOVSKO-KRASNOZAVODSKOI DEPOSIT 3.1 "PNG" enterprise and "CPC" company shall apply all efforts for putting the laying-up prospecting holes and the ones with drilling completion into pilot production operation as early as possible, for qualitative and complete exploration of wells and seams, for timely transfer of the obtained data to the services of "Chernigovneftegasgeologiya" state-run geological enterprise (SGE), and by participating in summarizing assessment of the geophysical, geological and production data, shall facilitate the services of "Chernigovneftegasgeologiya" SGE to complete calculations of hydrocarbons reserves in the deposit and to have them approved by the State Commission on Reserves by June of 1997. 4 3.2 In compliance with the provisions of Article 2 hereof "PNG" enterprise has determined that the contractor for drilling operating wells shall be "Chernigovneftegasgeologiya" SGE. The Company shall take steps for technical re-equipment of the drilling teams with the advanced foreign machinery, materials and technology, geophysical support of the drilling that would provide for decreasing well drilling duration and would facilitate for maintaining filtration properties of the opened seams. 3.3 The Company shall secure deliveries to Ukraine, repair and service of the progressive technological equipment for production and drilling, organize and fund performance of the highly technological operations in compliance with the subject-matter of the Agreement and the Joint Operations Program. ARTICLE IV RIGHTS OF THE PARTNERS TO THE AGREEMENT 4 The Partners shall be entitled to the following: 4.1 To participate in solution of the issues related to co-ordination of the joint operations and in managing the Joint Production under this Agreement; 4.2 To obtain free of charge all the information related to the joint operations, to have access to the accounting documents, reporting, to the initial financial and all geological production, technological and technical documents; 4.3 To receive into its ownership a portion of the produce made under this Agreement or a share of the incomes from the joint operations. ARTICLE V DUTIES OF THE PARTNERS TO THE AGREEMENT 5 The Partners to the Agreement shall have: 5.1 To perform decisions of the Managing Committee; 5.2 To perform their obligations hereunder including those related to the property participation in the Joint Operations in the amount, under the procedure and by the means stipulated hereby and approved by the Joint Operations Programs; 5 5.3 Not to disclose commercial secrets and confidential information on the joint operations; 5.4 To bear other obligations when stipulated by amendments hereto and by the Joint Operations Programs approved by the Managing Committee. 5.5 In addition to the general obligations "PNG" enterprise shall undertake: 5.5.1 To use the license for operation of Rudovsko-Krasnozavodsk deposit for the best interest of the joint operations. 5.5.2 To use for the best interest of the joint operations the existing improvement objects and those under construction in the deposit, and the wells launched but not yet put into operation prior to the Effective Date. 5.5.3 To incur the Operating Costs related to production of hydrocarbons of Rudovsko- Krasnozavodsk deposit. 5.5.4 To use efficiently for the best interest of the joint operations the equipment transferred thereto for operation and to keep it in due technical condition. To provide "CPC" company with the conditions for control over application of the equipment transferred thereby for use. 5.5.5 To act as a customer for construction of wells and improvement objects on the basis of a decision of the Managing Committee. 5.6 In addition to the general obligations "Carpatsky Petroleum Corporation" company shall undertake: 5.6.1 In compliance with the Joint Operations Programs for its own account: - to provide for deliveries to Ukraine, repair and maintenance of the progressive mobile, mountable technological equipment for production and repair-restoration works, and to transfer it to the Enterprise for use; - to provide for deliveries to Ukraine and to transfer to the Enterprise materials, chemical reagents and stationary equipment as a contractual foreign investment; - to organize and fund performance of the highly technological operations - hydraulic fracture of a seam, deep penetrating perforation under repressure with providing for maximum preservation of the trapping properties of a seam, etc.; - to indemnify 50% of the operating costs to "PNG" enterprise. 6 5.6.2 For the purpose of securing performance of the Joint Operations Programs to provide for deliveries to Ukraine, repair and maintenance of the progressive technological equipment and tools for drilling and to transfer it to "Chernigovneftegasgeologiya" state-run geological enterprise directly or through the Enterprise. ARTICLE VI JOINT OPERATIONS PROGRAM AND ITS FUNDING 6.1 The volumes of works related to drilling, repair and improvement of the wells with distribution among the customers and implicit contractors shall be annually approved in the form of the Joint Operations Program. The Joint Operations Program shall have to contain volumes of supplies of material and technical resources to be made by the Company and shall indicate the form of transfer thereof to the Enterprise or Ukrainian contractors, and the volumes of specific types of services rendered by foreign firms for the account of the Company. 6.2 The Joint Operations Program shall be prepared by the respective services of the Enterprise with participation of the Engineer Centre. 6.3 The Joint Operations Program shall have to be approved by the Managing Committee not later than thirty days prior to the beginning of a fiscal year except the first year and shall contain scientifically substantiated volumes and types of works related to exploration and operation of the deposit. 6.4 Repeated approval of the Joint Operations Program shall be performed when necessary with occurrance of new circumstances related to conditions of operation of the deposit, and when the incomes from sale of hydrocarbons and the assets allocated by the Partners are not sufficient for performance of volumes of the works earlier planned by the Program. 6.5 The Partners are intending to fund the works planned by the Joint Operations Programs in the ratio: - "Poltavaneftegas" enterprise - 50% - "Carpatsky Petroleum Corporation" company - 50% "CPC" company shall indemnify to "PNG" enterprise 50% of the operating costs under the requisites of "PNG" enterprise. When necessary a Partner shall obtain credits and settle with them on its own. 6.6 During the first year of the joint operations "CPC" company shall indemnify at the 7 contractual price the costs incurred by "PNG" enterprise prior to commencement of the joint operations for the objects of the further Joint Production. 6.7 For the purpose of co-ordination of the efforts of the Partners, the Joint Operations Agreed Budget shall be developed. 6.8 The Agreed Budget shall be approved by the Managing Committee for the next fiscal year, except the first year, 30 days prior to commencement thereof and shall be subject to revision and re-approval in case the Joint Operations Program is amended. 6.9 Implementation of the Joint Operations Program and the Agreed Budget shall be subject to control on the part of the Managing Committee. ARTICLE VII BASIC AND ADDITIONAL HYDROCARBONS 7.1 Gas and gas condensate produced in the deposit shall be divided into Basic and Additional Hydrocarbons. 7.2 The Basic Hydrocarbons shall be the volumes of gas and gas condensate produced from the wells (Krasnozavodsk wells Nos. 2, 3, 4, 5, 6, 7, 8, 9 and Rudovsk wells Nos. 2, 4, 10, 100, 101, 105, 371) to be put into operation by "PNG" enterprise. The Basic Hydrocarbons shall be the property of the Enterprise and shall not be the product of the joint operations hereunder. 7.3 The Additional Hydrocarbons shall be the volumes of gas and gas condensate produced with application of the production capacities created in the deposit after the Effective Date. The Additional Hydrocarbons shall be the difference between the total volumes of gas and gas condensate production and the volumes referred to the Basic Hydrocarbons. The Additional Hydrocarbons which are the produce of the joint operations shall be distributed between "PNG" enterprise and "CPC" company at the ratio of 60 and 40% under Section 9.4.2. ARTICLE VIII ACCOUNTING OF THE PRODUCE, COSTS AND RESULTS OF PRODUCTION 8.1 The Partners shall independently keep accounting of the produce obtained in the process of the joint operations, costs and financial results related to the joint operations hereunder. In compliance with Article 47 of the Decree of the Cabinet of Ministers "On Conditions for Foreign Investing" the Partners shall organize a separate accounting and reporting related to the operations connected with this Agreement. 8 8.2 The Partners of the joint operations shall have the right of control over and audit of all accounting documents related to the joint operations through performance of audits by independent auditing entities. The auditing shall be carried out in compliance with the legislation of Ukraine and shall be paid for by the Partners in proportion to the shares thereof. The audits which are not stipulated by the plan, shall be paid for by the initiators thereof. 8.3 The Enterprise shall keep the consolidated accounting of the produce, costs and results of the joint operations. All Partners shall promptly supply the required information for keeping such accounting. The consolidated accounting shall be kept in terms of the currency of the actual payments, and in terms of US dollars and the national currency of Ukraine. The data of the consolidated accounting shall be transferred to all partners to the Agreement on the systematic basis. 8.4 The accrued Capital Costs, the accrued operating costs and the Actual Shares of either Partner in the accrued Aggregate Costs shall be determined quaterly on the basis of the consolidated accounting data. 8.4.1 The accrued Capital Costs of the Enterprise shall have to include: - the costs for construction and overhaul of the wells and improvement objects incurred prior to the Effective Date and not related to production of the Basic Hydrocarbons; - the costs under the Joint Operations Programs for contractual drilling, industrial construction and overhaul at the actual contractual prices with accounting of the cost of the material resources given to the contractors; - the costs under the Joint Operations Programs for industrial construction and overhaul performed through its own efforts at the actual cost. 8.4.2 The accrued Capital Costs of the Company shall have to include: - the costs under the Joint Operations Programs for contractual drilling, industrial construction and overhaul at the actual contractual prices with accounting of the cost of the material resources given to the contractors; - the cost of the material resources transferred to the contractors or the Enterprise for the purpose of securing accomplishment of the joint Operations Programs; - depreciation deductions as to the equipment transferred to the Enterprise and Ukrainian contractors for use; 9 - cost of the services rendered by foreign firms at the expense of the Company under the approved Joint Operations Programs. 8.4.3 The Actual Share of either Partner shall be quarterly determined on the basis of the information about the Accrued Capital Costs. 8.5 The Accrued Capital Costs and the Actual Shares of the Partners shall be subject to approval by the Managing Committee. 8.6 The costs related to the wells from which the Basic Hydrocarbons are extracted, shall not be included into the Accrued Capital Costs. The Company can operate such wells under a separate agreement with the Enterprise. ARTICLE IX PROPERTY RELATIONS OF THE PARTNERS 9.1 The property created or acquired by any of the Partners in connection with implementation hereof shall be the property of the respective Partner. To perform the Joint Operations Program the property of one Partner can be transferred to the other Partner or a contractor for use. 9.2 The property owned by any of the Partners can be sold or transferred into ownership of the other Partner including as a foreign investment in compliance with the legislation of Ukraine. 9.3 The property owned by any of the Partners and used for the joint operations hereunder, can be sold or transferred into ownership of a legal entity or an individual which is not a Partner as agreed upon with the managing Committee. 9.4 Hydrocarbons produced in Rudovsko-Krasnozavodsk deposit shall become the property of the partners under the following terms and conditions: 9.4.1 the Basic Hydrocarbons are the property of the Enterprise. 9.4.2 the Additional Hydrocarbons are distributed between the Partners hereto depending on the Shares of the Partners in the Consolidated Accrued Costs. "CPC" company with 50% share in the Consolidated Accrued Costs shall be given 40% of the Additional Hydrocarbons. 10 ARTICLE X SALE OF THE PRODUCE FROM THE JOINT OPERATIONS 10.1 The produce from the joint operations can be sold by the Enterprise under an agreement with the Company or by either Partner independently. In the first case the payment for the sold produce shall be exercised under the requisites indicated by "CPC" company. ARTICLE XI PROCEDURE FOR CONDUCTING THE JOINT OPERATIONS 11.1 Management of the general business related to performance of the Agreement terms and conditions, to organization and management of the works, representation to third persons shall be assigned to the Enterprise which is vested with the respective authority on behalf of the Partners. The operative management of the operations shall be exercised by the charter managerial bodies of the Enterprise. 11.2 The procedure for selling the produce and for settlements shall be determined hereby and specific agreements with produce buyers. 11.3 The control over the financial and business operations of the partners shall be exercised by the auditing bodies of the Partners to be determined by the Partners. In so doing the Partners shall have the right to get familiarized with any documents within the scope of their joint operations. 11.4 Solution of the issues related to exercising the joint operations which require mutually agreed upon solutions, shall be carried out when necessary through convening meetings of the Managing Committee by the Chairman under the plans for the Committee operation, upon the own motion of the Chairman or upon a request of any of the Partners. Decisions may also be made through exchange of letters, cables, fax messages, etc., notices in writing. ARTICLE XII CO-ORDINATION OF THE JOINT OPERATIONS AND MANAGEMENT OF THE JOINT PRODUCTION 12.1 Co-ordination of the joint operations and management of the Joint Production shall be exercised on the basis of decisions of the Managing Committee. Initially the Managing Committee shall consist of 3 representatives from either Partner. The Chairman of the Managing Committee is the Director General of "Poltavaneftegas" enterprise. Upon expiration of i year of the joint operations hereunder the composition of the Managing Committee shall revised in such a way in order to account of the Actual Share of the Partners in the joint operations. Further on the composition of the Managing Committee shall be revised in compliance with the actual shares every two years. 12.2 The decisions of the Managing Committee shall be made through individual unanimous vote. 11 12.3 The operative control over the Joint Production shall be exercised by the services of the Enterprise. 12.4 The Enterprise in line with the Company and the Engineer Centre shall prepare the documents required to the Managing Committee for making decisions on co-ordination of the joint operations. The Engineer Centre shall be formed upon a decision of the Managing Committee. ARTICLE XIII CONFIDENTIALITY OF INFORMATION 13.1 Any information transferred by one Partner to the other one within the effective time period hereof and containing the information on the works performed, produce, prices, negotiations and proposals including the terms and conditions hereof disclosure of which may inflict losses to any of the Partners, shall be confidential and shall not be subject to disclosure to third persons except the cases stipulated by the legislation in force. 13.2 Any other information proposed by any of the Partners or proposals or ideas, shall not have to be considered as secret or confidential information except the cases when it is specially stipulated in an additional agreement signed by representatives of the Partners. ARTICLE XIV MUTUAL LIABILITY OF THE PARTNERS AND SETTLEMENT OF DISPUTES 14.1 Either Partner shall be materially liable for default or undue performance of the terms and conditions hereof and appendices hereto, and in case of violation thereof shall have to indemnify to other Partners direct losses occurred due to its fault. 14.2 The Partners to the Agreement shall be exempted from liability if the due performance thereby of their obligations have been interfered with circumstances of insuperable force, particularly acts of God, war operations or mass riots, changes in the legislation in force, substantial reduction in state prices on gas or other circumstances beyond the control of the Partners and affecting performance thereby of the obligations hereunder, etc. The affected Partner shall have to notify with no delay the other Partner on occurrence of such circumstances, anticipated time period of their effect and their termination. 14.3 Any disputes and discrepancies, differences arising from or in connection with this Agreement shall be settled through amicable negotiations. When the amicable settlement fails to be achieved within ninety (90) days as from the date of the notice of one of the 12 Partners about existence of a dispute, discrepancy, claim, the case shall be submitted to the Arbitration. 14.4 In case of failure to reach the agreed upon settlement the parties hereto shall aplly to the International Commercial Arbitration Court with the Chamber of Commerce and Industry of Ukraine in Kiev (3, Zhitomirskaya St.) for final settlement of the dispute. ARTICLE XV PROCEDURE FOR REPUDIATION OF THE AGREEMENT 15.1 If upon the opinion of one of the Partners it is unable to perform its obligations due to failure of the other Partner to comply with the contractual obligations or due to occurrence of the circumstances interfering with the proper performance of the Agreement, such Partner shall have to notify the other Partners in writing as to the reasons causing repudiation of the Agreement. 15.2 The Agreement can be terminated prematurely, prior to expiration of the established 20 year time period, when the Partners arrive to the conclusion that the goals of the Agreement cannot be achieved or continuation hereof is not advisable due to unprofitability of the joint operations. In such case a Liquidation Commission shall be formed which assumes all authority for completion of the joint operations including sale of the property, repayment of debts, settlements with the Partners. 15.3 In case one of the Partners intends to withdraw from the composition of the Partners hereto, it shall have to notify thereabout the other Partner not later than 3 months prior to the date of withdrawal. Upon expiration of the above time period the Partner shall be deemed departed from the composition of the Partners of the joint operations, and within the next three months mutual settlements therewith shall be carried out with reference to distribution of the produce and the profit. 15.4 In case of repudiation of the Agreement due to withdrawal of the Licensee from the composition of the Partners, it (the Licensee) shall within three (3) months indemnify to the other Partner its costs related to acquiring or creating the property on its balance sheet. 15.5 A Partner (except the Licensee) can be excluded from the number of the Partners to the Agreement in case it fails to perform its obligations under the Agreement. 15.6 In case of repudiation hereof or withdrawal herefrom, the property transferred by the Partners each other for use, shall be returned to the owner. 13 15.7 Article XV shall be subject to making it more precise in the process of development of the Working Program for the first fiscal year. ARTICLE XVI MISCELLANEOUS 16.1 As mutually agreed upon by the Partners this Agreement can be amended and supplemented including involvement of other Partners into the joint operations. 16.2 The Partners to the Agreement have agreed that within the time period of development of the Program and the Agreed Budget of the Joint Operations, an Accounting Agreement shall be prepared and signed. 16.3 The Partners represent: - that they have all powers required to sign this Agreement; - that they will not take actions that can be detrimental to goals and tasks hereof. 16.4 This Agreement has been made on 14 pages and signed in 2 duplicates of equal legal force, one for each of the Partners. THE AGREEMENT HAS BEEN SIGNED For "Poltavaneftegas" Enterprise V.P. Kozak (Director General) For "Carpatsky Petroleum Corporation" Company L. Texas (Company President) AGREED Article 2 and Sections 3.1, 3.2 Director General of "Chernigovneftegasgeologiya" state-run geological enterprise S.M. Guinda , 1995 14 ATTACHMENT 2 TO OPINION LETTER AGREEMENT on introducing amendments and addenda to agreement No. 410/95 dated September 14, 1995, on joint activity between "Poltavanaftogas" enterprise and "Carpatsky Petroleum Corporation" company, USA Poltava London October 15, 1996 "Poltavanaftogas" enterprise and "Carpatsky Petroleum Corporation" company, USA, on the basis of the provisions of the Law of Ukraine "On Treatment of Foreign Investments" passed by the Verkhovna Rada of Ukraine ans put into effect as from April 16, 1996, and on the basis of by-laws adopted for the purpose of creating the mechanism for implementation of the provisions of the above law, have agreed as follows: 1 Amendments and addenda shall have to be introduced into agreement No. 410/95 entered into between them on September 14, 1995, with setting it forth in the following (new) wording making the title of the agreement more precise: AGREEMENT No. 410/95 as of September 14, 1995, on joint investment and production activity for development and exploitation of Rudivsk-Chervonozavodsk deposit "Poltavanaftogas" enterprise and "Carpatsky Petroleum Corporation" company, USA, hereinafter referred to as the "Partners" have made and entered into this agreement as follows: DEFINITIONS OF THE PRINCIPAL TERMS Partners shall have to be understood as legal entities that have initially entered into this Agreement, and further on any legal entities and individuals that can join the Agreement. Enterprise shall have to be understood as "Poltavanaftogas" enterprise, a partner to this Agreement. Company shall have to be understood as "Carpatsky Petroleum Corporation" company registered in the State of Texas, USA, a partner to this Agreement. Joint Activity shall have to be understood as activity based on cooperation between the Partners to this Agreement and stipulating division of risks and results of such activity. Investments shall have to be understood as property and intellectual valuables contributed into development and exploitation of Rudivsk-Chervonozavodsk gas condensate deposit in compliance with this Agreement. 1 Initial Contribution shall have to be understood as property and intellectual valuables that initially (within 1996) are contributed by the Partners onto the Individual Balance Sheet for the purpose of exercising the Joint Activity for development and exploitation of Rudivsk- Chervonozavodsk gas condensate deposit. Development of Rudivsk-Chervonozavodsk deposit shall have to be understood as a package of works carried out under the projects for the pilot production operation of the deposit and performed during exploratory works in the deposit prior to approval of the reserves under the procedure prescribed by the State Commission for Reserves. Exploitation of Rudivsk-Chervonozavodsk deposit shall have to be understood as a package of works carried out within the time period of production exploitation of the deposit within the volumes determined by the exploitation project. Managing Committee shall have to be understood as the supreme leading body composed of executives and authorized representatives of the Partners and authorized to make decisions on the principal issues of the Joint Activity - preparation of amendments and addenda to this Agreement, approval of the Joint Activity Programs and Agreed Budgets, exercising control over performance thereof, selection of contractors for performance of works related to drilling boreholes, to comprehensive geophysical exploration, to hydrofracture of seams and/or other works of high value, to coordination of contracts for performance of works to the amount of over two million US dollars and contracts for purchase of the property to be transferred onto the Balance Sheet of the Joint Activity to the amount over five hundred thousand US dollars, to coordination of the terms and conditions for termination of the Joint Activity. Joint Venture shall have to be understood as the object of the Joint Activity under this Agreement namely the production capacities and capital funds of Rudivsk-Chervonozavodsk deposit initially allotted for the Individual Balance Sheet, and created in the process of the Joint Activity. Individual Balance Sheet, Balance Sheet of the Joint Activity shall have to be understood as the individual balance sheet of "Poltavanaftogas" enterprise designated for keeping records of the property combined by the Partners to this Agreement for the purpose of implementing the Joint Activity and created in the process of such activity, and for keeping records of business operations under the Joint Activity and of financial results. Individual Settlement Account shall have to be understood as an individual settlement account to be opened with one of the banks of Ukraine for ensuring the Joint Activity. Agreed Budget of the Joint Activity shall have to be understood as a document that determines the expenses for performance of the Joint Activity Program. The Agreed Budget of the Joint Activity shall account of all funding sources including the own assets of the Partners designated for acquiring material resources for the Joint Activity. 2 Licensee, Licensees shall have to be understood as "Chernihivnaftogasgeologiya" state-run geological enterprise and "Poltavanaftogas" enterprise. Fiscal Year shall have to be understood as a calendar year and for the first year of the Joint Activity the time period from the date of transfer of the Initial Contribution of "Poltavanaftogas" enterprise onto the Individual Balance Sheet through to the end of the calendar year. Capital Costs shall have to be understood as one time expenses for creation of the capital funds on Rudivsk-Chervonozavodsk deposit which expenses are incurred in compliance with the terms and conditions of this Agreement. Current Costs shall have to be understood as the expenses for production of gas and gas condensate which expenses under the legislation of Ukraine are calculated on the basis of the incomes from sale of the produce when determining the taxable profit (referred to self-cost of the produce). Effective Date shall have to be understood as the date Agreement No. 410/95 is agreed upon by the leading bodies of "Ukrnafta" OJSC, that is September 22, 1995. Engineering Centre shall have to be understood as a working body with the Managing Committee. ARTICLE I General Provisions 1.1 This Agreement is made and entered into for the purpose of: - earning incomes by the Partners hereof; - providing for organizational and economic conditions for joint investment of development and exploitation of Rudivsk-Chervonozavodsk gas and gas condensate deposit, application of the advanced technical facilities of domestic and foreign origin for intensifying exploration and operation thereof, increasing volumes of production of gas and gas condensate, achieving high economic indices when exploiting the deposit with compliance with requirements of labour safety, protection of the subsoil and the environment; - development of engineering solutions with accounting of the advanced foreign experience implementation of which would provide for efficient exploitation of the deposit and safe performance of works in the wells over 5000 m deep (under abnormally high seam pressures including). 3 1.2 The subject-matter of this Agreement shall be: - exercising the joint investment activity with creation of the required production capacities for operation of Rudivsk-Chervonozavodsk gas and gas condensate deposit, implementation of the advanced engineering and technologies in the field of productive and geophysical exploration of the wells and seams, overhaul of the wells and improvement thereof; - exercising the joint production and business activity related to production of gas and gas condensate in the process of the development and exploitation of Rudivsk- Chervonozavodsk gas and gas condensate deposit with application of production capacities and capital funds created in the process of the investment activity; - division of the incomes from the Joint Activity in the form of the balance profit or produce. 1.3 The Partners shall combine their pecuniary, material, labour resources, production, technical and economic potentials for the purpose of realization of the targets of the Joint Activity. 1.4 The Partners shall keep their legal independence. The property independence of the Partners shall be restricted in part of disposal of the property on records of the Individual Balance Sheet. 1.5 The Partners shall bear liability under the obligations kept on the records of the Individual Balance Sheet in proportion to their shares in investment of the Joint Activity. In case of bankruptcy of one of the Partners, the liability under the obligations kept on the records of the Individual Balance Sheet shall be re-distributed between other Partners in proportion to their shares in investment of the Joint Activity. 1.6 In case the obligations are not kept on the records of the Individual Balance Sheet but rather assumed by one of the partners on the basis of the powers of attorney of all other Partners, the liability under such obligations shall be borne by all Partners in proportion and under the procedure set forth in Section 1.5. The provisions of this Section shall in no way expand to the obligations related to the acquiring by the Foreign Partner of the equipment or other property subject to supplies to Ukraine as the foreign investment (a contribution into the Joint Activity). 1.7 The risk of accidental loss or damage of the property kept on the records of the Individual Balance Sheet and being the general share property, shall be borne by the Partners according to their shares. 4 1.8 The risk of accidental loss of the property used by the Partners in the operations related to performance of this Agreement but not transferred onto the Individual Balance Sheet, shall be borne by the respective Partner. 1.9 This Agreement cannot interfere with performance by the Partners of their obligations related to third persons. 1.10 In the process of their Joint Activity the Partners shall be governed by the legislation of Ukraine and this Agreement. 1.11 Amendments to this Agreement including amendments caused by joining it by new Partners, shall be introduced upon the mutual consent. 1.12 Termination of any section hereof in connection with such section becoming contradictory to changes in the legislation of Ukraine, shall not involve termination of the Agreement as a whole. In case of such contradictions available the Partners shall introduce amendments and addenda to the text of the Agreement. 1.13 This Agreement shall be entered into for twenty (20) years. ARTICLE II Terms and Conditions for Investment of Development and Exploitation of Rudivsk-Chervonozavodsk Deposit 2.1 The Partners intend to invest the Joint Activity on exploitation of Rudivsk- Chervonozavodsk gas and gas condensate deposit at the following ratio: - "Poltavanaftogas" enterprise - 50% - "Carpatsky Petroleum Corporation" company - 50% 2.2 "Carpatsky Petroleum Corporation" company shall in 1996 transfer onto the Individual Balance Sheet the Investments in the form of pecuniary assets and property to be its Initial Contribution into the Joint Activity to the total amount of 4 800 thousand US dollars including: - pecuniary assets in terms of free convertible foreign currency - 2 500 thousand US dollars; - property (equipment, tools, transport facilities and materials) to the amount of 2 300 thousand US dollars. 2.3 The list of the property contributed in 1996 as the Investment of "Carpatsky Petroleum Corporation" company is given in Appendix 1 5 hereto. Under an additional agreement of the Partners Appendix 1 can be re-approved without changing the total amount of the Initial Contribution and revision of other provisions hereof. 2.4 In 1996 "Poltavanaftogas" enterprise shall provide for transfer from the balance sheet of the principal activity onto the Individual Balance Sheet of the property including the objects of uncompleted construction assessed under the prescribed procedure by specialized entities having relevant licenses. 2.5 Commencing with 1997 investment of the Joint Activity shall be carried out in compliance with the Joint Activity Programs and the Agreed Budget. The Partners shall agree that the approved Joint Activity Program and the Agreed Budget of any year are the Appendices hereto. 2.6 Subsequently investment of the Joint Activity shall be carried out by the Partners in compliance with the Joint Activity Programs with observance of the relations set forth in Section 2.1. At the same time, if any of the Partners declares that it is not able to provide for 50% of the investment required for performance of the optimal Joint Activity Program and the other Partner can cover the deficit of the financial assets, the Managing Committee can make a decision on altering for a specific time period the proportional shares of the Partners in the investment through amending the Agreed Budget. ARTICLE III Licenses for Exploration and Operation of Hydrocarbon Deposits 3.1 The license for exploration of Rudivsk-Chervonozavodsk deposit for a time period of 2 years was obtained by "Chernihivnaftogasgeologiya" state-run geological enterprise (SGE) on July 31, 1995. 3.2 The license for pilot production operation of Rudivsk-Chervonozavodsk deposit for a time period of 2 years was obtained by "Poltavanaftogas" enterprise on July 31, 1995. 3.3 The following documents shall be considered as mutual between "Poltavanaftogas" enterprise and "Chernihivnaftogasgeologiya" SGE: - "Agreement (protocol) on conducting the joint works of pilot production operation of Rudivsk-Chernovozavodsk, Mekhedivsk, Svystunkiv, Svyrydivsk, Chervonolutsk gas and gas condensate deposits by "Chernihivnaftogasgeologiya" state-run geological enterprise and "Poltavanaftogas" enterprise" signed on May 16, 1995, by the Director General of "Poltavanaftogas" enterprise V.P. Kozak, by the Director 6 General of "Chernihivnaftogasgeologiya" state-run geological enterprise S.M. Guinda, approved by the Chairman of the Board of "Ukrnafta" JSC B.V. Zaritsky and the Deputy Chairman of the State Committee of Ukraine for Geology B.O. Byalyuk; - "Agreement on conducting joint works of pilot production operation of the wells of Rudivsk-Chernovozavodsk deposit by "Chernihivnaftogasgeologiya" state-run geological enterprise and "Poltavanaftogas" enterprise" signed on May 16, 1995, by the Director General of "Poltavanaftogas" enterprise V.P. Kozak, by the Director General of "Chernihivnaftogasgeologiya" state-run geological enterprise S.M. Guinda, and approved by the Chairman of the Board of "Ukrnafta" JSC B.V. Zaritsky and the Deputy Chairman of the State Committee of Ukraine for Geology B.O. Byalyuk. "Carpatsky Petroleum Corporation" company shall bind itself with promoting performance of agreements available between "Poltavanaftogas" enterprise and "Chernihivnaftogasgeologiya" SGE. 3.4 Prior to expiration of the validity term of the License for pilot production operation "Poltavanaftogas" enterprise shall apply for a License for production operation of Rudivsk-Chervonozavodsk deposit under the procedure established in "Ukrnafts" JSC. The application for obtaining the license shall have to set forth that "Poltavanaftogas" enterprise acts for the best interests of the Partners hereto. For the purpose of formulation of the contractual terms and conditions for use of the subsoil of Rudivsk- Chervonozavodsk deposit "Poltavanaftogas" enterprise with participation of specialists of the Company shall develop the draft License Agreement and shall organize its signing by the relevant governmental authorities. The Partners hereto shall not compete with "Poltavanaftogas" enterprise on issues of obtaining the above License, and shall not facilitate directly or indirectly other contenders in obtaining it. ARTICLE IV Organization of Works on Exploration and Operation of Rudivsk-Chervonozavodsk Deposit 4.1 "Poltavanaftogas" enterprise shall be recognized as the Operator as it is traditionally understood in the international oil and gas business and shall carry out the whole organizational and practical activity related to operation of Rudivsk-Chernovozavodsk deposit. Specific operations related to development of the deposit, drilling and overhaul of the wells under decisions of the Managing Committee can be performed/organized by the Company on its own or with involvement of foreign contractors. 4.2 In compliance with the provision of Article 2 hereof the Enterprise has determined that "Chernihivnaftogasgeologiya" SGE and the drilling entities of "Ukrnafta" JSC shall act as contractors for drilling production wells. 7 The Company shall implement measures for technical re-equipment of the drilling teams with foreign machinery, materials and technology, geophysical support of the drilling that would provide for reducing duration of wells drilling and would facilitate preservation of the filtering properties of seams to be opened. The specific measures for technical re- equipment of drilling teams shall have to be stipulated by the Joint Activity Programs. In November, 1996, the Company will receive a working group of Ukrainian specialists in Houston, USA, and will give them chance to study the experience of operation of the drilling entities of USA. The specialists of the Company and the Ukrainian specialists shall jointly prepare proposals on stage-by-stage technical re-equipment of the Ukrainian drilling entities involved in Rudivsk-Chernovozavodsk deposit. 4.3 The Enterprise and the Company shall implement measures for accelerated putting into pilot production operation of prospecting boreholes those which are in laying-up condition or being drilled, for qualitative and complete exploration of the wells and seams, for timely submission of the obtained data to services of "Chernihivnaftogasgeologiya" state-run geological enterprise (SGE), and, by participating in the summarizing evaluation of geophysical, geological and production data, shall facilitate the services of "Chernihivnaftogasgeologiya" SGE in completing calculations of hydrocarbon reserves in the deposit and approval thereof by the State Commission for Reserves by June of 1997. 4.4 The Company shall provide for supplies into Ukraine of the progressive equipment and tools for operation of the wells, their overhaul and exploration, shall organize performance of highly technological operations by foreign contractors in compliance with the subject-matter of the Agreement and the Joint Activity Program. ARTICLE V Rights of the Partners to the Agreement 5.1 The Partners shall have the following rights: 5.1.1 To participate in solution of the issues related to co-ordination of the Joint Activity and in managing the Joint Venture under this Agreement; 5.1.2 To obtain free of charge all the information related to the Joint Activity, to have access to the accounting documents, reporting, to the initial financial and all geological production, technological and technical documents; 5.1.3 To receive a portion of the incomes from the Joint Activity or a portion of the produce extracted under this Agreement. 8 ARTICLE VI Obligations of the Partners to the Agreement 6.1 The Partners to the Agreement shall have: 6.1.1 To comply with this Agreement and perform decisions of the Managing Committee; 6.1.2 To perform their obligations hereunder including those related to the property participation in the Joint Activity in the amount, under the procedure and by the assets stipulated hereby and approved by the Joint Activity Programs; 6.1.3 Not to disclose commercial secrets and confidential information on the Joint Activity; 6.1.4 To bear other obligations when stipulated by amendments hereto and by the Joint Activity Programs approved by the Managing Committee. 6.2 In addition to the general obligations the Enterprise shall undertake: 6.2.1 To perform the functions of the Operator on operation of Rudivsk-Chernovozavodsk deposit including keeping the accounting of the property of the Partners to be transferred for the Joint Activity, and the operations under the Joint Activity on the Individual Balance Sheet; 6.2.2 To use the license for operation of Rudovsko-Chernovozavodsk deposit for the best interest of the Joint Activity; 6.2.3 To use for the best interest of the Joint Activity the existing improvement objects and those under construction in the deposit, and the wells launched but not yet put into operation prior to the Effective Date; 6.2.4 To serve the objects of the Joint Activity (the Joint Venture) by the Enterprise personnel, to exercise day-today management of the Joint Venture, to perform specific technological operations on the conditions of cooperation; 6.2.5 To use efficiently for the best interest of the Joint Activity the equipment transferred thereto for use under the terms and conditions of individual agreements and designated for application when rendering services to the Joint Venture. To provide the Partners with the conditions for control over application of the equipment given thereby for use; 6.2.6 To act as a customer for construction of wells and improvement objects. 6.3 In addition to the general obligations "Carpatsky Petroleum Corporation" company shall undertake: 9 6.3.1 To supply the Enterprise with scientific and technical information on the advanced achievements in the field of exploration, development of hydrocarbon deposits, production of oil, gas and gas condensate, to organize the training of specialists abroad. 6.3.2 To ensure participation of foreign specialists in development of the Working programs and the agreed Budgets of the Joint Activity. ARTICLE VII Joint Activity Program and its Funding 7.1 The volumes of works related to drilling, repair and improvement of the wells with distribution among the customers and implicit contractors shall be annually approved in the form of the Joint Activity Program. The Joint Activity Program shall have to contain volumes of supplies of material and technical resources to be made by the Company with indicating the form of transfer thereof to the Enterprise or Ukrainian contractors, and the volumes of specific types of services rendered by foreign firms. 7.2 The Joint Activity Program shall be prepared by the respective services of the Enterprise with participation of the Engineer Centre. 7.3 The Joint Activity Program shall be approved by the Managing Committee not later than thirty days prior to the beginning of a Fiscal Year and contain scientifically substantiated volumes and types of works related to efficient exploitation of the deposit under the projects. 7.4 Repeated approval of the Joint Activity Program shall be performed when necessary with occurrence of new circumstances related to conditions of operation of the deposit, and when the incomes from sale of hydrocarbons and the assets allocated by the Partners are not sufficient for performance of volumes of the works earlier planned by the Program. 7.5 The Joint Activity programs shall be approved on the basis of the mutual consent of the Partners. In case contradictions arise with the Partners in connection with the principal positions of the Joint Activity Program, they can be separated as the Great Risk Operations as stipulated in Article IX. 7.6 The Partners shall have no right to carry out on Rudovsko-Chernovozavodsk deposit the works that are not stipulated by the Joint Activity Program or are not separated as the Great Risk Operations. 7.7 The demand in financial resources for conducting exploration works stipulated by the Joint Activity Program and the works related to creation of the capital funds, shall be covered at the expense of: 10 - pecuniary contributions (investments) of the Partners that are transferred onto the Individual Balance Sheet; - pecuniary assets of the Partners that are used thereby for acquiring or creating the property in the form of equipment, transport facilities, structure elements, other material; resources, and structures, buildings, transmitters transferred onto the Individual Balance Sheet. The demand in financial resources for performance of operations related to production of gas and gas condensate (for current expenses) during the initial period of activity under this Agreement, shall be covered at the expense of the pecuniary assets transferred by the Partners onto the Individual Balance Sheet and subsequently at the expense of the incomes from sale of the produce of the Joint Activity. 7.8 For the purpose of co-ordination of the efforts of the Partners, the Agreed Budget of the Joint Activity shall be developed. The Agreed Budget shall be developed on the basis of the anticipated expenses under the operations performed by "Poltavanaftogas" enterprise, of the market prices on services and produce of contractors and suppliers (hereinafter - the Settlement Prices), of the volumes of works and services, of the rates of taxation and compulsory payments. 7.9 The Agreed Budget shall be approved by the Managing Committee for the next fiscal year thirty days prior to commencement thereof and shall be subject to revision and re- approval in case of alteration of the Joint Activity program, and in case the settlement prices are changed due to objective reasons. The Agreed Budget shall be formed with compliance with the provisions of Section 2.1. At the same time, if one of the Partners cannot fund 50% of expenses required for performance of the optimal Joint Activity Program and the other Partner can cover the deficit of the financial assets, the Managing Committee can stipulate other ratio in funding as stipulated by Section 2.6 hereof. 7.10 If within a year it becomes evident that any of the Partners cannot fund the expenses stipulated by the Agreed Budget for the current year, it shall notify other Partners thereabout. The latter shall have to notify within 30 days as to their intent and possible time period for funding the expenses that are not covered by the Partner that has notified thereabout. Within the subsequent 15 days the Partners shall arrive to the consent on such issue or shall begin a special sitting of the Managing Committee that will decide the issue of updating the Joint Activity Program and the Agreed Budget. 7.11 A Partner shall have no right, with no consent of the other Partner, to fund performance of the Joint Activity Program at the rate that exceeds the amounts stipulated by the Agreed Budget. 11 7.12 The Company shall place pecuniary assets for the purposes of the Joint Activity from its accounts with foreign banks and from accounts of its representative office in Ukraine to the Individual Settlement Account to be opened by "Poltavanaftogasgeologiya" enterprise for implementation of the goals of this Agreement. 7.13 "Poltavanaftogas" enterprise shall in operative way (not less than once a decade) inform the Company as to the flow of the assets obtained therefrom (through submission of registers of the credit payment orders received from the serving bank). 7.14 Performance of the Joint Activity program and of the Agreed Budget shall be controlled by the Managing Committee that considers the results of operation for the first half of the year and the fiscal year. ARTICLE VIII Project of Pilot Production Operation of Rudovsko-Chernovozavodsk Deposit 8.1 The Partners have agreed that the project of pilot production operation developed by "UkrNGI" JSC in 1996 and approved through the established procedure, shall be the basis for development of the Joint Activity programs. 8.2 The Partners shall organize systematic control over realization of the project of pilot production operation of the deposit and, when necessary, shall carry out the works on adjusting the above project and its re-approval. ARTICLE IX Great Risk Operations 9.1 The Great Risk Operations herein shall be understood as implementation of the projects that are not included into the Joint Activity Programs due to disconsent of one of the Partners. 9.2 The following can be considered as the Great Risk Operation: - performance of the additional seismic survey on the lots where similar works have been carried out; - performance of three dimensional seismic explorations; - drilling additional prospecting boreholes and individual outstripping production wells in excess of the volumes stipulated by the projects of pilot production operation that has been in effect as on the moment of signing this Agreement. 12 9.3 The Great Risk Operations can be conducted by "Poltavanaftogas" enterprise at its own expense or can be funded by "Carpatsky Petroleum Corporation" company under the risk conditions. In case of the negative result of such Great Risk Operations, the expenses for performance thereof shall not be accounted of when determining the Actual Shares of the Partners. In case of the positive result the expenses for performance of the above operations shall be accounted of when determining the Actual Shares of the Partners with factor 2.0. 9.4 In case the Partners disagree as to assessment of the results of the Great Risk Operations mentioned in Section 9.3, the dispute shall be presented for consideration of a special expert group. The special expert group shall be formed of three (3) persons. The expert group shall have to be composed of: - one specialist of a Ukrainian research institute or VNZu; - one specialist of ANI or other internationally recognized scientific institution of oil type of one of European countries; - one specialist of a leading Russian oil research institute or VNZu. Two first experts shall be appointed by respective parties, and the third expert shall be appointed by the two first ones. The award of the expert group shall be final. ARTICLE X Basic and Additional Hydrocarbons 10.1 Gas and gas condensate produced on the deposit shall be divided into Basic and Additional Hydrocarbons. 10.2 Basic Hydrocarbons shall be the volumes of gas and gas condensate produced from the wells (Chervonozavodsk ones Nos. 2, 3, 4, 5, 6, 7, 8, 9 and Rudivsk ones Nos. 2, 4, 10, 101, 105, 371) that are put into operation by the Enterprise independently prior to the Effective Date and/or are not transferred onto the Individual Balance Sheet. Basic Hydrocrbons shall be the property of the Enterprise and shall not be the product of the Joint Activity under this Agreement. 10.3 Additional Hydrocarbons shall be the volumes of gas and gas condensate produced with application of the production capacities of the Joint 13 Venture. Additional Hydrocarbons shall be the difference between the total volumes of produced gas and gas condensate and the volumes referred to Basic Hydrocarbons. The Balance Profit from realization of Additional Hydrocarbons or they themselves, in case an additional agreement is signed, shall be distributed between the Partners to this Agreement. ARTICLE XI Accounting of the Property, of Operations under the Joint Activity, of Expenses for Performance Thereof and of Production Results 11.1 The accounting of the pecuniary assets and the property integrated by the Partners for performance of the Joint Activity, and of the property created in the process of such activity, shall be kept by "Poltavanaftogas" enterprise on the Individual Balance Sheet. 11.2 The expenses for performance of prospecting operations, for drilling the production wells, for capital construction including the acquiring of equipment in Ukraine, for performance of research works and other expenses that are not referred to self-cost of the produce of the Joint Activity, shall be paid from the Individual Settlement Account to be opened by "Poltavanaftogas" enterprise to ensure the Joint Activity and to be reflected in the Individual Balance Sheet. In addition to the above, when necessary and under the Joint Activity Programs, the Partners shall, at the expense of their own (unintegrated) assets, incur expenses of capital character with subsequently referring them to the value of the capital funds to be transferred onto the Individual Balance Sheet of the Joint Activity. 11.3 Under the terms and conditions of a separate Operating Agreement, "Poltavanaftogas" enterprise shall develop Rudivsk-Chervonozavodsk gas condensate deposit and shall bear current expenses for rendering services to the Joint Venture related to extraction of the produce of the Joint Activity. The services on extraction of the produce of the Joint Activity shall be paid from the Individual Settlement Account to the settlement account of "Poltavanaftogas" enterprise. 11.4 As stipulated by the Working Program the Company shall perform individual operations related to exploitation of the deposit under the terms and conditions similar to those listed in Section 11.3. 11.5 Self-cost of the produce of the Joint Activity shall be formed from the current expenses for payment for the services of "Poltavanaftogas" enterprise and the Company mentioned in Sections 11.3 and 11.4, and of other enterprises, from depreciation (amortization) of the fixed assets on the records of the Individual Balance Sheet, from compulsory 14 deductions and payments referred to the self-cost of the produce, from expenses for acquiring materials and energy resources, and other expenses referred to the self-cost of the produce in compliance with the legislation of Ukraine in force. 11.6 After the expenses for extraction of the produce are entered onto the Individual Balance Sheet the self-cost thereof and the financial results of the Joint Activity are formed. The balance profit from the Joint Activity shall be divided between the Partners. 11.7 The Partners shall fix the settlement prices on the services rendered to the Joint Venture on the level of actual expenses for rendering them. For the purpose of reliable determining of actual expenses for rendering services the Partners shall organize the accountancy of expenses for services to the Joint Venture with application of the system of sub-accounts. General production expenses of the Enterprise and the Company shall be referred to services to the Joint Venture at the criterion to be established by a separate addendum to this Agreement. 11.8 The Partners of the Joint Activity shall have the right of control over and audit of all accounting documents related to the Joint Activity through auditing by independent audit entities. The planned audits shall be carried out not less than once a year and shall be paid for by the Partners in proportion to their shares. Special audits shall be paid for by the initiators thereof. 11.9 The compulsory audit stipulated by the legislation of Ukraine shall be carried out within the prescribed time periods and shall be paid for from the Individual Settlement Account. 11.10 The accounting shall be kept in terms of the national monetary unit of Ukraine. ARTICLE XII Taxes and Payments to the Budget 12.1 Taxes and compulsory payments to the budget and non-budgetary funds referred to the self-cost of the produce, and the value-added tax and the rent shall be paid at the expense of the proceeds from realization of the joint produce and shall be accounted of by the Individual Balance Sheet. The tax on profit shall be paid by the Partners after having earned a portion of the balance profit due thereto. 12.2 In case of distribution of the produce between the Partners they shall pay independently the value-added tax, the rent, deductions for exploration operations and payment for use of the subsoil, taxes on property and land, and the tax on profit. 15 ARTICLE XIII Property Relations of the Partners 13.1 The property and the pecuniary assets transferred by the Partners onto the Individual Balance Sheet and those created, obtained or acquired in the process of the Joint Activity shall make up their joint property. The Partners shall have no right to dispose of their share in the joint property without consent of the other Partners to this Agreement. 13.2 The Balance Profit from realization of Additional Hydrocarbons produced on Rudivsk- Chervonozavodsk deposit shall be distributed between the Partners on the quarterly basis under the terms and conditions hereof. 13.3 The criterion of the profit distribution between the Partners shall be their Actual Share in investing the Joint Activity. The Actual Share of any of the Partners shall be determined by calculation as a ratio of the Accrued Capital Expenses of such Partner for the whole period of the Joint Activity hereunder to the total amount of the Accrued Capital Expenses for the time period of the Joint Activity. 13.4 The Accrued Capital Expenses of the Enterprise shall be calculated at the end of each quarter and shall include: - the expenses for construction of the wells and improvement objects (except the wells producing basic Hydrocarbons) incurred prior to the Effective Date and not related to production of the Basic Hydrocarbons; - pecuniary assets of the Enterprise entered to the Individual Balance Sheet for funding the works related to drilling and repair of the wells, to industrial construction which works are stipulated by the Joint Activity Programs; - the value of the material resources acquired for the assets of the Enterprise that are transferred to the Individual Balance Sheet; - the expenses of the Enterprise incurred for its own account on its own or by involving contractors for performance in compliance with the Joint Activity Program of the works related to contractual drilling, industrial construction and overhaul at the actual contractual prices with accounting of the value of material resources given to contractors. 13.5 The accrued Capital Expenses of the Company shall be calculated on the quarterly basis and shall include: - pecuniary assets of the Company entered to the Individual Balance Sheet for funding the works related to drilling and repair of the wells, to industrial construction which works are stipulated by the Joint Activity Programs; 16 - the value of the material resources given directly to contractors or the Enterprise for ensuring performance of the Joint Activity Programs; - the value of the services related to drilling, construction and overhaul rendered by the Company to the Joint Venture by way of production cooperation, and to other enterprises at the expense of the Company in compliance with the approved Joint Activity Programs. 13.6 The Actual Share of either Partner shall be determined on the basis of the data on the Accrued Capital Expenses every quarter. 13.7 The Accrued Capital Expenses and the Actual Shares of the Partners shall be subject to approval by the Managing Committee. 13.8 The Partners hereto have agreed that the Balance Profit from realization of Additional Hydrocarbons shall be distributed between them depending on the Actual Shares of Participation on the basis of the base ratio of profit division to be agreed upon by the parties. When the Parties comply with the Shares of Participation stipulated by Section 2.1 hereof and making up 50:50, the Share of the Enterprise in the Profit shall be 60% and respectively the Share of the Company shall be 40%. In case of deviation from the above correlation of the Shares of Participation, the actual Share in the Profit shall be determined for the Company as the product of the Actual participation of the Company by factor 0.8 (the ration of the agreed upon proportion of division of the profit in case of equal participation in investing, that is 40 divided by 50). The Actual Share of the Profit for the Enterprise shall be determined as 100% minus the Actual Share of the Company Profit. 13.9 In case of division of the produce between the Partners applicable shall be the above proportions and the mechanism of division. ARTICLE XIV Realization of the Joint Activity Produce 14.1 The Joint Activity produce shall be realized by the Enterprise under the popwers of attorney of other Partners to the Agreement , providing that in case of division of the produce it can be realized by either Partner on its own. ARTICLE XV Procedure for Conducting the Joint Activity 15.1 Management of the joint business related to performance of the Agreement terms and conditions, to organization and management of the works, representation to third persons shall be assigned to the 17 Enterprise which is vested with the respective authority on behalf of the Partners. The operative management of the activity shall be exercised by the charter managing bodies of the Enterprise. 15.2 The rights and obligations of the Enterprise assigned to manage the joint business shall be determined in the power of attorney for managing joint business to be filed in compliance with Article 66 of the Civil Code of Ukraine and signed by the other partners hereto. 15.3 The Enterprise assigned to manage the joint business shall enter into agreements related to ensuring the joint activity, shall obtain civilian rights on its own behalf and shall bear liabilities under agreements. The agreements entered into by the Enterprise shall formulate the rights and obligations for other Partners in compliance with the powers of attorney available. 15.4 The procedure for realization of the produce and for settlements shall be determined by this Agreement and specific agreements with buyers of the produce. 15.5 The control over the financial and business activity of the Partners shall be exercised by the auditing bodies of the Partners determined by their Charters. In so doing the Partners shall have the right to familiarize themselves with any documentation within the sphere of their Joint Activity. When necessary as the Partners may agree upon, independent audits shall be carried out. 15.6 The issues related to exercising the Joint Activity and requiring mutually agreed upon decisions shall be resolved, when necessary, through convening sittings of the Managing Committee under the plan of operation of the Committee, upon the initiave of the Chairman or upon a request of any Partner. Decisions can also be made through exchange of letters, cables, fax messages and so called written notices. In case the made decisions of the Managing Committee require to amend the provisions hereof, such amendments shall be filed by additional agreements. ARTICLE XVI Coordination of the Joint Activity and Management of the Joint Venture 16.1 Co-ordination of the Joint Activity and management of the Joint Venture shall be exercised on the basis of decisions of the Managing Committee. Initially the Managing Committee shall consist of 3 representatives from either Partner. The Chairman of the Managing Committee shall be the Director General of "Poltavanaftogas" enterprise. Upon expiration of the year of the Joint Activity hereunder the composition of the 18 Managing Committee shall be revised in such a way in order to account of the Actual Share of the Partners in the Joint Activity. Further on the composition of the Managing Committee shall be revised with accounting of the Actual Shares every two years. Upon a decision of the Board of "Ukrnafta" JSC the Managing Committee may include its (Board) representatives. 16.2 Decisions of the Managing Committee shall be made by individual vote. In case the Partners fail to make a decision on operating issues of the Joint Activity, such as selection of a contractor, approval of the contract for performance of works or purchase of equipment, the issue shall be submitted for consideration by an expert group to be formed and to operate under the procedure set forth in Section 9.4. 16.3 The operative management of the Joint Venture shall be exercised by the personnel of the Enterprise. 16.4 The Enterprise shall prepare the documents required for the Managing Committee for making decisions on coordination of the Joint Activity. ARTICLE XVII Concession of Rights and Legal Succession 17.1 The Partners cannot concede their rights and obligations hereunder. 17.2 Joining the Agreement by new Partners irrespective of the terms and conditions of such joining shall not constitute concession of the rights. 17.3 In case of termination of any Partner's activity due to liquidation or re-formation, the rights and obligation thereof under this Agreement shall pass to the official successor under the condition of legal confirmation of the rights of the latter. ARTICLE XVIII Joining the Agreement 18.1 This Agreement can be joined by any legal entity or a natural person under the condition of consent of all Partners. 18.2 Joining the Agreement by new Partners shall involve an additional agreement to be signed by all Partners. 19 ARTICLE XIX Confidentiality of Information 19.1 Any information transferred by one Partner to the other Partner within the effective time period hereof and containing the information on the works performed, produce, prices, negotiations and proposals including the terms and conditions hereof disclosure of which may inflict losses to any of the Partners, shall be confidential and shall not be subject to disclosure to third persons except the cases stipulated by the legislation in force. 19.2 Any other information proposed by any of the Partners or proposals or ideas, shall not have to be considered as secret or confidential information except the cases when it is specially stipulated in an additional agreement signed by representatives of the Partners. ARTICLE XX Mutual Liability of the Partners and Settlement of Disputes 20.1 Either Partner shall be materially liable for default or undue performance of the terms and conditions hereof and appendices hereto, and in case of violation thereof shall have to indemnify to other Partners direct losses occurred due to its fault. 20.2 The Partners to the Agreement shall be exempted from liability if the due performance thereby of their obligations have been interfered with circumstances of insuperable force (Force Majeure). Force Majeure shall mean any action or circumstance that does not depend on the Partner and is beyond the reasonable control of the Partner which has declared Force Majeure that restricts or interferes with activities of the Partner hereunder or ability to bear liability hereunder. Force Majeure shall include fires, explosions, epidemics, inevitable circumstances, military operations (declared and undeclared) or conditions occurring in connection therewith, strikes or other workers disturbances, land disputes and disputes related to use of the subsoil, absence or impossibility to obtain, or restrictions in use of required technology, information, equipment, personnel, and also floods, storms, earthquakes and other natural disasters; blockades, embargoes, riots, insurrections and other civil disturbances as well as changes in the legislation in force, substantial reduction of the state prices on gas. The affected Partner shall have to notify immediately the other Partner as to commencement of such circumstances, expected duration and termination thereof. 20.3 The Partners have agreed to apply all efforts to resolve disputes between them through negotiations. 20.4 In case the Partners fail to resolve the disputes through negotiations within sixty (60) days as from the moment of the notice of one of the Partners to the other partner as to the disputes available, their consideration shall be submitted to the International Commercial Arbitration Court with the Chamber of Commerce and Industry of Ukraine that will make the final award. 20 20.5 The Arbitrage shall consist of 3 arbiters to be appointed in the following way: the plaintiff and the defendant shall appoint one arbiter each which arbiters shall jointly appoint the third arbiter. In case the defendant fails to appoint the arbiter within 30 days as from the date of the notice on commencement of the arbitration proceedings, such arbiter upon the defendant's request shall be appointed by the Chairman of the International Commercial Arbitration Court. In case two arbiters fail to appoint the third arbiter within 60 days after appointment of the second arbiter, the third arbiter shall be appointed by the Chairman of the International Commercial Arbitration Court from among three arbiters proposed by the plaintiff. ARTICLE XXI Termination of Activity under the Agreement or its Severance 21.1 This Agreement shall become nill and void in case of expiration of the time period of its validity and in case of its premature severance. 21.2 The Partners can severe this Agreement on the basis of the mutual consent or unilaterally. 21.3 In case one of the Partners intends to severe this Agreement, it shall have to notify thereabout the other Partner not later than three (3) months. Upon expiration of the above time period the Agreement shall be considered as terminated and within the next 3 months the Partners shall perform mutual settlements related to distribution of the profit and division of the joint property. 21.4 Under the unanimous consent of the Partners the Agreement can be terminated in advance before expiration of the fixed 20 year time period if the Partners arrive to the conclusion that the goals of the Agreement cannot be achieved or that it is not advisable to continue it in connection with unprofitability of the Joint Activity. 21.5 In case of severance of the Agreement upon the initiative of the Enterprise, it (the Enterprise) shall, within six (6) months and under the procedure stipulated by the legislation in force, return to the foreign Partner its investments in pecuniary form with accounting of the actual wear and tear (amortization) of the joint property as on the moment of severance of the Agreement. 21.6 Upon expiration of the time period of the Agreement validity and in case of severance hereof under the mutual consent or upon the initiative of the Company, and when it is necessary, one shall consider the issue of liquidation of the wells, pipelines and processing plants under the established procedure. Liquidation shall be funded at the expense of the balance of assets on the Individual Settlement Account and the assets of the Partners that will fund the liquidation works at the ratio formed during the last actual distribution of the profit 21 from the Joint Activity. If liquidation of the above property is not advisable or impossible due to technical, geological or other reasons, it shall pass into disposal of the Liquidation Commission formed by the Partners which is fully authorized to terminate the Joint Activity including realization of the property, redemption of debts, settlements with the Partners. If the Liquidation Commission fails to realize such property as the wells, pipelines and processing plants within six months, they shall be transferred free of charge to the balance sheet of the principal activity of "Poltavanaftogas" enterprise. 21.7 Upon expiration of the time period of validity or after severance of this Agreement, the property given by the Partners for use to one another shall be returned to the owners. ARTICLE XXII Miscellaneous 22.1 As mutually agreed upon by the Partners this Agreement can be amended and supplemented including involvement of other Partners into the Joint Activity. 22.2 The Partners represent: - that they have all powers required to sign this Agreement; - that they will not take actions that can be detrimental to goals and tasks hereof. This Agreement has been signed in 6 duplicates in Ukrainian and 2 duplicates in Russian four duplicates for each of the Partners. All duplicates are of equal legal force. THE AGREEMENT HAS BEEN SIGNED For "Poltavanaftogas" Enterprise V.P. Kozak (Director General) For "Carpatsky Petroleum Corporation" Company L. Texas (Company President) AGREED Chairman of the Board "Ukrnafta" JSC P.M. Demchenko 22 Appendix No. to Agreement No. 410/95 as of September 14, 1995, on the joint production and investment activity related to development and exploitation of Rudivsk-Chervonozavodsk deposit with amendments and addenda dated October 15, 1996LIST of equipment, tools, appliances, materials and chemical reagents supplied by "Carpatsky Petroleum Corp." company as a foreign investment in 1996 Description ............................ Unit of Qty. Amount in measure thous. USD 1. Gushing fittings Py = 750 with the column head for pipes, total ... set 5 554 Including: 12 3/4" x 9 5/8" x 5 3/4" ........................ set 3 12 3/4" x 9 5/8" x 6 5/8" ........................ set 2 2. Drill pipes, total ............................ m 6090 940 Including 2 7/8" G-105 ..................................... m 6000 400 127 x 9.19 G-105 ................................. m 60 450 Y[BE]T 178 spiral ................................ m 30 90 3. Casing pipes, total ........................... m 5400 390 Including: 7" P-110 ......................................... m 2500 180 168 x 10.59 P-110 ................................ m 2900 210 3. Pump-compressor pipes 2 7/8" P-110 VAM R-2 ............................. m 15200 192 4. Drill bits, total ............................. piece 23 149 Including: 295 ATX-G3 ....................................... piece 3 20 215.9 ATJ ........................................ piece 10 65 215.9 ATJ22 ...................................... piece 5 32 215.9 ATX-G3 ..................................... piece 5 32 5. Sealing grease for threads .................... kg 60 3 23 Director General "Poltavanaftogas" enterprise V.P. Kozak President "Carpatsky Petroleum Corp." company L. Texas 24 ADDITIONAL AGREEMENT No. 1 to Agreement No. 410/95 as of September 14, 1995, with the amendments and addenda dated October 15, 1996, "On the joint investment and production activity related to development and exploitation of Rudivsk-Chervonozavodsk deposit" Poltava December 17, 1996 In compliance with Sections 2.2 and 2.3 the partners to the above agreement have agreed that in January-February, 1997, "Carpatsky Petroleum Corporation" company shall transfer to the balance of the joint activity as the initial contribution the property investment: six drilling bits of the following types Brand .............. Qty. Price Amount USD USD 8 1/2" EHP53A ER3465 ......... EA 1 2715.00 2715.00 8 1/2" EHP61A MR1112 BA1061 .. EA 2 2715.00 5430.00 8 1/2" EHP51H BA1459 ......... EA 1 2715.00 2715.00 8 1/2" EHP61 BA1191 BA1195 EA 2 2102.00 4204.00 The total cost FOB.RID, Houston - 15064 US dollars Transportation - 1441.78 ....................... ....................... ....................... Shipper - "Reed Tool Company" (USA, Houston) ......................... THE ADDITIONAL AGREEMENT HAS BEEN SIGNED BY: For "Poltavanaftogas" Enterprise V.P. Kozak Director General For "Carpatsky Petroleum Corporation" Company L.C. Texas President Addresses of the parties: 12, Radyanska St., Poltava, 314000, Ukraine 17098, Richmond, Avenue, 3000 room 100 Houston, the State of Texas, USA 25 ADDITIONAL AGREEMENT No. 2 to Agreement No. 410/95 as of September 14, 1995, with the amendments and addenda dated October 15, 1996, "On the joint investment and production activity related to development and exploitation of Rudivsk-Chervonozavodsk deposit" Poltava February 25, 1997 In compliance with Sections 2.2 and 2.3 the partners to the above agreement have agreed that in March-April, 1997, "Carpatsky Petroleum Corporation" company shall transfer to the balance of the joint activity as its contribution to the joint activity the following investment property: - - 15387.38 metres of seamless pump-compressor pipes, external diameter 2 7/8", steel quality P- 110, price $ 12.6 per 1 metre, the total cost CIP-Poltava one hundred and ninety three thousand eight hundred and sixty six US dollars and twenty four cents ($ 193866.24). Shipper - "Pipeco Services" (USA, Houston, 8223 Willow Place South, room 190) THE ADDITIONAL AGREEMENT HAS BEEN SIGNED BY: For "Poltavanaftogas" Enterprise V.P. Kozak Director General For "Carpatsky Petroleum Corporation" Company L.C. Texas President Addresses of the parties: 12, Radyanska St., Poltava, 314000, Ukraine 17098, Richmond, Avenue, 3000 room 100 Houston, the State of Texas, USA 26 ADDITIONAL AGREEMENT No. 3 to Agreement No. 410/95 as of September 14, 1995, with the amendments and addenda dated October 15, 1996, "On the joint investment and production activity related to development and exploitation of Rudivsk-Chervonozavodsk deposit" Poltava February 25, 1997 In compliance with Sections 2.2 and 2.3 the partners to the above agreement have agreed that in April-May, 1997, "Carpatsky Petroleum Corporation" company shall transfer to the balance of the joint activity as its contribution to the joint activity the property investment in the form of the following drilling bits: Nos.Size ............... Type Qty. Price Amount USD USD SIF Kiev SIF Kiev 1 6-1/2" ............. ATJ-S33 2 4725.00 9450.00 2 6-1/2" ............. ATJ-33C 2 4725.00 9450.00 3 6-1/2" ............. ATJ-55R 2 4725.00 9450.00 4 Tools for extensions 1 set 105.00 105.00 5 Extensions ......... "FF" (20/32) 6 sets Free of Free of charge charge Total cost SIF Kiev - 28455.00 US dollars Shipper - "Hughes Christensen Company", Houston, USA THE ADDITIONAL AGREEMENT HAS BEEN SIGNED BY: For "Poltavanaftogas" Enterprise V.P. Kozak Director General For "Carpatsky Petroleum Corporation" Company L.C. Texas President Addresses of the parties: 12, Radyanska St., Poltava, 314000, Ukraine 17098, Richmond, Avenue, 3000 room 100 Houston, the State of Texas, USA 27 of "Ukrnafta" OJSC" made by ""Dokhod" Production Scientific Implementation Company" having a general agreement with the State Property Fund of Ukraine, and governed by Order of the Ministry of finance of Ukraine "Amendments and addenda to the instruction on the procedure for filling out the forms of an annual accounting report of an enterprise" No. 30 dated February 10, 1997, have made this report that the investment cost of the objects of uncompleted construction transferred by "Poltavanaftogas" enterprise to the individual balance sheet of the joint activity is estimated in the amount of nine million thirty two thousand six hundred and ninety nine (9 032 699) hryvnyas that at the rate of NBU as on February 1, 1997, (1 US dollar = 1.8755 hryvnyas) equals to four million eight hundred and sixteen thousand one hundred and fifty five (4 816 155) US dollars. In addition to that, during distribution of the results of the joint activity one accounts of the value-added tax in the amount of 1 289 069 hryvnyas or 686 004 US dollars actually paid by "Poltavanaftogas" enterprise to the contractors. The investment cost of separate objects amounts to: 28
Description of the object Hole Bottom, Cost of paid VAT paid Cost of the m expenses for to the objects of uncompleted contractors uncompleted construction as on construction under the 1.02.1997, according to balance of hryvnyas the results of Poltavanaftogas the expert hryvnyas appraisal as on 1.02.1997, hryvnyas Project Actually as on 1.02.1997 Rudovsk well No. 102 5920 5101 3136585 612918 4264542 Rudovsk well No. 104 5920 3687 1591783 302741 1829032 Rudovsk well No. 106 5200 2629 1145421 221319 1372406 Rudovsk well No. 111 5200 2496 728346 134042 977610 Chervonozavodsk well No.100 5500 237785 1683 237785 Rudovsk well No. 109 5200 124339 16366 351324 Total 6964259 ................ 9032699
Director General of "Poltavanaftogas" Enterprise V.P. Kozak President of "Carpatsky Petroleum Corporation" Company L.C. Texas 29 ADDITIONAL AGREEMENT No. 5 to Agreement No. 410/95 as of September 14, 1995, with the amendments and addenda dated October 15, 1996, on the joint investment and production activity related to development and exploitation of Rudovsk-Chervonozavodsk deposit Poltava March 31, 1997 STATEMENT of transfer of the objects of uncompleted construction onto the individual balance sheet of the joint activity The Partners to Agreement No. 410/95 as of September 14, 1995, with the amendments and addenda dated October 15, 1996, on the joint investment and production activity related to development and exploitation of Rudovsk-Chervonozavodsk deposit, have familiarized themselves with the documentation for construction of the production wells of Rudovsk- Chervonozavodsk deposit, with the certificates for allocation of lands and the permits for use thereof, with the progress of works related to construction of the wells on the objects, and being governed by understandings of additional agreement No. 4 as of February 28, 1997, by the decision of "Ukrneft" JSC as of February 27, 1997, have drawn up this statement that in compliance with the terms and conditions of agreement No. 410/95 dated September 14, 1995, on the joint investment and production activity the following objects of uncompleted construction have been transferred from the balance sheet of the principal activity of "Poltavanaftogas" enterprise and entered to the balance sheet of the joint activity: 30
Description of the object Hole Bottom, Cost of objects of VAT paid to m uncompleted the contractors construction hryvnyas hryvnyas Project Actually as on 1.02.1997 Rudovsk well No. 102 5920 5101 4264542 612918 Rudovsk well No. 104 5920 3687 1829032 302741 Rudovsk well No. 106 5200 2629 1372406 221319 Rudovsk well No. 111 5200 2496 977610 134042 Chervonozavodsk well No.100 5500 237785 1683 Rudovsk well No. 109 5200 351324 16366 Total 9032699 1289069
Volumes of the works performed by Borislav department of drilling works for wells Nos. 102-P, 104-P, 109-P and by Pyryatin deep drilling expedition of "Chernigovneftegasgeologiya" SGE for wells Nos. 111-P and 100-Ch as from February 1, 1997, are subject to payment from the balance sheet of the joint activity. Director General of "Poltavanaftogas" Enterprise V.P. Kozak President of "Carpatsky Petroleum Corporation" Company L.C. Texas 31 ADDITIONAL AGREEMENT No. 6 to Agreement No. 410/95 as of September 14, 1995, with the amendments and addenda dated October 15, 1996, "On the joint investment and production activity related to development and exploitation of Rudivsk-Chervonozavodsk deposit" Poltava March 31, 1997 In compliance with Sections 2.2 and 2.3 the partners to the above agreement have agreed that in April-May, 1997, "Carpatsky Petroleum Corporation" company shall transfer to the balance of the joint activity as its contribution to the joint activity the property investment in the form of the following drilling bits: Nos. Size Type Qty. Price Amount USD USD SIF Kiev SIF Kiev 1 8-1/2" GT-20 4 6563.00 26252.00 Total cost SIF Kiev - 26262.00 US dollars Shipper - "Hughes Christensen Company", Houston, USA THE ADDITIONAL AGREEMENT HAS BEEN SIGNED BY: For "Poltavanaftogas" Enterprise V.P. Kozak Director General For "Carpatsky Petroleum Corporation" Company L.C. Texas President Addresses of the parties: 12, Radyanska St., Poltava, 314000, Ukraine 17098, Richmond, Avenue, 3000 room 100 Houston, the State of Texas, USA 32 ATTACHMENT 3 TO OPINION LETTER Addendum No. 5 to Agreement No. 410/95 dated September 14, 1995, (State registration as of April 4, 1997, under No. 1353-001K) Poltava December 25, 1997 The Partners to Agreement No. 410/95 dated September 14, 1995, with amendments and addenda as of October 15, 1996, "On Joint Investment and Production Activity on Development and Exploitation of Rudivsk-Chervonozavodsk Deposit" have agreed as follows: The following amendments shall have to be introduced into the text of Agreement No. 410/95 dated September 14, 1995, with amendments and addenda as of October 15, 1996, "On Joint Investment and Production Activity on Development and Exploitation of Rudivsk- Chervonozavodsk Deposit": 1 Section 2.2 of the Agreement shall have to be set forth in the following wording: 2.2 "Carpatsky Petroleum Corporation" company shall transfer in 1997 and the first half of 1998 Investments in the form of pecuniary assets and property onto the Individual Balance Sheet that will constitute the initial contribution into the Joint Activity to the total amount of 5000 thousand US dollars. The lists of the property to be transferred by "Carpatsky Petroleum Corporation" company shall be determined by separate addenda hereto. The Investments in the form of foreign currency shall be introduced by "Carpatsky Petroleum Corporation" company within the time period agreed upon by the Partners within the limits of the total amount of the investments fixed by this Section less investments in terms of property. 2 Section 2.2 of the Agreement shall have to be included as such which became nill and void under Addendum No. 3 as of August 12, 1997, to Agreement No. 410/95 dated September 14, 1995. Addresses of the Parties: "Poltavanaftogas" enterprise: 12, Radyanska St., Poltava, 814000, Ukraine "CARPATSKY PETROLEUM Corp." Company: 17098, Richmond Avenue, 3000, room 100, Houston, Texas, USA SIGNED BY: For "Poltavanaftogas" OGPD V.P. Kozak (Director General) S.V. Manyuk (Chief Engineer) For Carpatsky Petroleum Corporation" company L.K. Texas (President) REGISTERED Under No. 1353-013K as of February 3, 1998 Chief of Department ATTACHMENT 4 TO OPINION LETTER Amendments and Addenda to Agreement No. 410/95 as of September 14, 1995, on the joint investment and production activity related to development and exploitation of Rudivsk- Chervonozavodsk deposit in the wording as of October 15, 1996, with amendments and addenda dated December 25, 1997 (State registration as of April 4, 1997, under No. 1353-001K with the Department for foreign economic relations of Poltava oblast) Poltava August 26, 1998 "Ukrnafta" OJSC represented by the chairman of the board Kozak Yaroslav Ivanovych and the acting head of "Poltavanaftogas" oil and gas production department (OGPD) Kolisnyk Volodymyr Feodosiyovych acting under the power of attorney of "Ukrnafta" OJSC, on the one hand, and "Carpatsky Petroleum Corporation" company, USA, represented by the president Lesly K. Texas acting in compliance with the Charter, on the other hand, accounting of the fact that "Ukrnafta" OJSC is the successor of "Poltavanaftogas" enterprise under Agreement No. 410/95 and basing themselves on the provisions of the Law of Ukraine "On Introducing Amendments and Addenda to the Law of Ukraine "On Taxation of Enterprise Income" passed by the Verkhovna Rada of Ukraine and put into effect as from July 1, 1997, and accounting of the initial experience of the joint operations under the above agreement, have agreed to introduce the following amendments and addenda into some articles of Agreement No. 410/95: 1. The introductory clause of the Agreement shall have to be set forth in the following wording: "Ukrnafta" OJSC and "Carpatsky Petroleum Corporation" company, USA, hereinafter referred to as the "Partners" and severally as the "Partner" have made this Agreement as follows: 2. In the text of the Agreement "Poltavanaftogas" Enterprise", "Enterprise" shall have to be read and understood as "Ukrnafta" Open Joint Stock Company, "Ukrnafta" OJSC in Sections 2.1 and 10.2, and in Sections 2.4, 6.2.4, 7.1, 7.2, 7.8, 7.13, 11.3, 15.1, 15.2, 15.3 the above terms shall have to be read and understood as "Poltavanaftogas" oil and gas production department, OGPD. 3. In the chapter "DEFINITIONS OF PRINCIPAL TERMS" the definitions of the below given terms shall have to be set forth in the following new wording: Partners shall be understood as legal entities that have initially made and entered into this Agreement or successors thereof, and any legal entities and individuals that join the Agreement in the future. Joint Activity shall be understood as the investment and ptoduction activity based on the cooperation between the Partners to this Agreement on development and exploitation of Rudivsk-Chervonozavodsk deposit and stipulating division of risks and results of such operations governed by the Agreement of legal force, by the norms of the Civil Code of Ukraine as to the joint activity, by the Law of Ukraine "On Investment Activity", by the Law of Ukraine "On Treatment of Foreign Investment" and by other relevant normative legal acts of Ukraine. Investments shall be understood as the pecuniary assets, property, property rights and intangible assets including intellectual valuables transferred by the Partners onto the Balance Sheet of the Joint Activity and to be used for construction or improvement of the Investment Activity Objects in the process of development of Rudivsk-Chervonozavodsk oil, gas and gas condensate deposit. Initial Contribution (Initial Contributions) shall be understood as incompleted wells Nos. 102- Rudivsk, 104-Rudivsk, 106-Rudivsk, 109-Rudivsk, 111-Rudivsk and 100-Chervonozavodsk entered by "Ukrnafta" OJSC into the Individual Balance Sheet, and other tangible and intangible assets and money contributed within the time period of 1997-1999 and which will be contributed by the Partners to the Individual Balance Sheet till the date of full completion of construction of the above listed wells. The total amount of the Initial Contributions of all Partners shall have to be equal to the full value of the wells listed above in this paragraph. Managing Committee shall be understood as the supreme managerial body composed of the authorized representatives of the Partners, which body has the right of making decisions on the principal issues of the Joint Activity as stipulated in Article XVI hereof. Individual Balance Sheet, Joint Activity Balance Sheet shall be understood as an individual balance sheet that under the powers of attorney of the Partners to the Agreement has been kept by "Poltavanaftogas" OGPD as from February 1, 1997, and is designated for the accounting of assets and liabilities related to the Joint Activity including pecuniary assets, property, etc., that are pooled by the partners to this Agreement for the purpose of exercising the Joint Activity and that have been created in the process of the above operations, and for the accounting of the business operations under the Joint Activity and of the financial results. Agreed Budget of Joint Activity shall be understood as a financial plan of activity under the Agreement for any fiscal year or other time period depending on the context. The Agreed Budget of Joint Activity shall account of all funding sources including the own money of the Partners allocated for acquiring material resources to be transferred by the partners onto the Balance Sheet of the Joint Activity. Licensee shall be understood as "Ukrnafta" OJSC that in the person of "Poltavanaftogas" OGPD owns the license for geological exploration of the subsoil of Rudivsk-Chervonozavodsk oil, gas and gas condensate deposit including its pilot production operation and in the name of which a license will be obtained for its (Rudivsk-Chervonozavodsk oil, gas and gas condensate deposit) production development for the joint interests of the Partners to the Agreement. 2 Fiscal Year shall be understood as the time period as from February 1, 1997, through to December 31, 1997, and the next full calendar years. Capital Costs shall be understood as one-time expenses for creation or acquiring of the Capital Funds, and the Costs for Improvement of such Capital Funds that are created in connection with development and exploitation of Rudivsk-Chervonozavodsk deposit under the terms and conditions hereof and that are subject to depreciation under the procedure stipulated by the legislation of Ukraine. Current Costs (Gross Expenditures) shall be understood as the costs for production of Hydrocarbons that, in compliance with the legislation of Ukraine, are excluded (deducted) from the gross income erned from the Joint Activity when determining the taxable income. 4. The chapter "DEFINITIONS OF PRINCIPAL TERMS" shall have to be supplemented with definitions of the following terms: Manager shall be understood as "Poltavanaftogas" OGPD that in the person of the head thereof and other executives, exercises management of the Joint Activity and organizes transaction of the affairs of the Partners. Objects of Investment Activity (Investment Objects) shall be understood as the wells and surface structures existing in Rudivsk-Chervonozavodsk oil, gas and gas condensate deposit that upon consent of the Partners are separated for the Balance Sheet of the Joint Activity including those construction of which has not yet been completed, on which hereunder one carries out the works for completing construction, for overhaul, for intensifying inflow, etc., for the purpose of ensuring production of the Additional Hydrocarbons, and respectively new objects to be built in the deposit in the process of the Joint Activity. Contribution (Contributions) shall be understood as any money, tangible and intangible assets that are transferred onto the Individual Balance Sheet of the Joint Activity and under the terms and conditions hereof and are the Objects of Investment Activity and Investments, and also the services in the form of the Labour Contribution into the Joint Activity. Exception shall be made of the money designated for indemnification of the Gross Expenditures in case when the incomes from sale of the produce from the Joint Activity are not sufficient therefor, and the tangible assets that are transferred from the Balance Sheet of the Joint Activity to third entities for use which entities perform the works (render services) for the joint production as co-performers (subcontractors) of the Partners of the Joint Activity. Labour Contribution shall be understood as services and works related to construction or improvement of the Objects of Investment Activity performed by the Partners for their own money, and to maintenance thereof in the process of the subsequent operation and rendering services related to the Joint Activity and performed under similar terms and conditions. 3 Joint Property shall be understood as pecuniary assets, tangible and intangible assets, property and non-property rights integrated by the Partners hereunder, and other pecuniary assets, tangible and intangible assets, property and non-property rights created or acquired as a result of the Joint Investment Ptoduction activity which are reflected in the Individual Balance Sheet and belong to the Partners hereto by the Joint Ownership Right. Joint Ownership Right shall be understood as the right of joint possession, disposal of and use of the property, money, tangible and intangible assets which are on the records of the Individual Balance Sheet and are the Joint Property. The Joint property shall be used and disposed of as agreed upon by the Partners to the Agreement. Initial Period shall be understood as a period commencing as from the date of registration hereof and ending as on the date of putting the last of the six wells contributed by "Ukrnafta" OJSC into the Joint Property as the Initial Contribution into operation. Exploration of Rudivsk-Chervonozavodsk Deposit shall be understood as a package of works, including the drilling of the individual prospecting holes, performed for the purpose of the further exploration of the geological composition and reserves of Hydrocarbons of Rudivsk- Chervonozavodsk oil, gas and gas condensate deposit, and organization of calculations of the reserves and submission of the relevant materials for consideration by the State Commission on Reserves. Individual Account in Foreign Currency shall be understood as a separate account in foreign currency to be opened by any non-Ukrainian partner to this Agreement with one of the banks of Ukraine to provide for the Joint Activity. Great Risk Operations shall be understood as specific operations of exploration and development of Rudivsk-Chervonozavodsk deposit related to exercising capital costs necessity to include which into the Joint Activity Program is not recognized by the Managing Committee and which, upon a decision of the above Committee, are individually performed by one of the Partners under the procedure stipulated by Article IX hereof. Share in Investment of the Joint Activity (Actual Share) shall be understood as the ratio between the accumulated amount of the actual Contributions of any of the Partners to the Agreement and the total amount of the Contributions for the time period as from commencement of the Joint Activity the procedure for determining which ratio is established by Section 13.2 hereof. Obligations to Fund the Joint Activity (Obligations) shall be understood as a Contribution which under the Joint Activity program and the Agreed Budget is stipulated to be made by any partner within the current fiscal year. Planned Share in Funding the Joint Activity shall be understood as the ratio between the Accumulated Amount of the actual Contributions of any Partner to the 4 Agreement for the time period preceding the current fiscal year and its Obligations for the current fiscal year, and the total amount of the Contributions and the Obligations. Hydrocarbons shall be understood as the free and dissolved (oil) gas, gas condensate and oil being produced or will be produced in Rudivsk-Chervonozavodsk deposit. Basic Hydrocarbons shall be understood as a volume of Hydrocarbons that has been produced in Rudivsk-Chervonozavodsk deposit or can be produced therein in the future from the wells built prior to signing this Agreement, providing that there are no works carried out therein at the expense of the Joint Assests for the purpose of intensifying the inflow of Hydrocarbons. The volumes of Basic Hydrocarbons shall be determined through instrumentation measurements on the wells. In case when the Objects of Investment Activity for the purpose of intensifying the inflow of Hydrocarbons are the wells built prior to commencement of the Joint Activity, Basic Hydrocarbons shall be determined as on the date of commencement of the respective works through instrumentation measurements, and in the future through calculations. Additional Hydrocarbons (Hydrocarbons of Joint Activity) shall be understood as a volume of Hydrocarbons to be produced in the future in Rudivsk-Chervonozavodsk deposit in excess of basic Hydrocarbons at the expense of investments and application of up-to-date technologies therein. Incomes from Joint Activity (Incomes, Income) shall be understood as pecuniary receipts earned as a payment from sale of Hydrocarbons of Joint Activity. Gross Costs shall be reimbursed and depreciation deductions and the Profit from Joint Activity shall be formed at the expense of the Incomes Joint Activity. A portion of the Incomes from Joint Activity shall be distributed between the Partners under the procedure stipulated by the legislation of Ukraine. Profit from Joint Activity shall be understood as a profit determined for the purpose of taxation under the requirements of the legislation of Ukraine. Capital Funds shall be understood as material valuables applied in the business activity through the time period exceeding 365 calendar days and depreciated at the rates determined by the legislation of Ukraine. Expenses for Improvement of Capital Funds shall be understood as expenses for peformance of all types of repairs, reconstruction, modification and other types of improvement of the capital funds available on the Individual Balance Sheet of Joint Activity which are depreciated under the procedure stipulated by the legislation of Ukraine. 5. Sections 1.2 (the last paragraph), 1.5, 1.6, 1.7, 1.13 of Article I "GENERAL PROVISIONS" shall have to be set forth in the following wording: 5 1.2 ... - distribution of the Incomes from Joint Activity or the produce in cases stipulated by the legislation of Ukraine, under additional agreements (addenda to this Agreement). 1.5 Obligations arising in the process of the Joint Activity to third persons under civil agreements and recorded in the Individual Balance Sheet, shall be the subject-matter of the joint liability of the Partners. Either Partner shall bear liability under the above obligations in proportion to the Planned Shares. In case of bankruptcy of any of the Partners, the liability under the obligations kept on records in the Individual Balance Sheet shall be redistributed between other Partners in proportion to the Planned Shares. Obligations related to the Contributions to the Joint Activity shall be the subject-matter of the individual (separate) liability of either of the Partners. In case failure to perform the Obligations related to the Contributions results in failure to perform the obligations on the records in the Individual Balance Sheet, the claims originating from such situation may be enforced by the motion of a creditor against the Partner that has failed to perform the above Obligations. The Partners shall bear civil responsibility for the damage inflicted to the state or any legal entities or natural persons in the course of use of the subsoil in proportion to the Shares in the Obligations. If a faulty party of the inflicted damage is any of the contractors, recourse shall be taken thereupon under the procedure stipulated by the legislation of Ukraine. 1.6 In case when obligations are not recorded on the Individual Balance Sheet or assumed by one of the Partners on the basis of powers of attorney of all other Partners, the liability for the above obligations shall be born by all Partners in the proportion and under the procedure set forth in Section 1.5. The provisions of this Section shall in no way cover the obligations related to the acquiring by a Foreign Partner of the equipment or other property subject to supplies to Ukraine as a foreign investment (Contribution into Joint Activity). Obligations arising from performance of the Great Risk Operations shall be the subject- matter of the individual liability of the Partner that has initiated and is carying out such operations. 1.7 The risk of accidental loss or damage of the property that is on records of the individual Balance Sheet and is the general share ownership, shall be borne by the Partners according to their Shares in the Investment. 1.13 This Agreement with all amendments and addenda to be adopted by mutual consent of the Partners hereto, shall be valid till March 3, 2023. The Agreement may be terminated under the terms and conditions stipulated by Article XXI. 6 6. Article I "GENERAL PROVISIONS" shall have to be added with Section 1.14 as follows: 1.14 For the purpose of determining the ways for achieving the highest economic indices of the investment and other business activity the Partners to the Joint Activity shall consider the issue of deepening the cooperation related to development of Rudivsk-Chervonozavodsk deposit through creation of a new business entity (a joint venture) and of possible expansion of cooperation sphere onto other oil and gas deposits. In such case the Partners shall be governed by the principal arrangements achieved herein. 7. Article III "LICENSES FOR EXPLORATION AND OPERATION OF HYDROCARBONS DEPOSITS" shall be set forth in the following wording: 3.1 License No. 968 for exploration of Rudivsk-Chervonozavodsk deposit for the time period of 5 years was obtained by "Ukrnafta" OJSC on March 30, 1998. The purpose of the license (works) shall be exploration of oil and gas pools in the low-coal deposits, pilot production operation of the wells, approval of the deposit reserves by the State Commission on Reserves (SCR) of Ukraine with subsequent development of the deposit. The copies of the above License and appendices thereto shall be appendices hereto. 3.2 The license shall stipulate that the operations on exploration of the deposit will be carried out under the terms and conditions of the "Agreement on Joint Activity on Geological Exploration of the Subsoil and Preparation for production Developement of Rudivsk- Chervonozavodsk Oil, Gas and Gas Condensate Deposit" No. 5/27 as of December 30, 1997, between "Ukrnafta" OJSC and "Chernihivnaftogasgeologiya" SGE. The above agreement does not contain specific commercial terms and conditions for co-operation but rather determines the procedure for subsequent conduct of the exploratory operations, providing that, when the license belongs to "Ukrnafta" OJSC, "Chernihivnaftogasgeologiya" SGE participates in performance of exploratory operations on Rudivsk-Chervonozavodsk deposit on the grounds of separate contract agreements with the Licensee. The Company shall assume the obligation to facilitate the available arrangements between "Ukrnafta" OJSC and "Chernihivnaftogasgeologiya" SGE. 3.3 For the purpose of formation of the contractual terms and conditions for use of the subsoil of Rudivsk-Chervonozavodsk deposit "Ukrnafta" OJSC with participation of the Company experts shall prepare a draft License Agreement to determine the procedure and terms and conditions for use of the subsoil of Rudivsk-Chervonozavodsk deposit, the role, rights and obligations of "Ukrnafta" OJSC that will act as a Licensee, and the terms and conditions for participation of the Company in the above operations as well as other potential partners to this Agreement. "Ukrnafta" OJSC shall organize approval of the above License Agreement and the signing thereof by the relevant governmental authorities. 7 3.4 Upon completion of exploration of the deposit and approval of the reserves "Ukrnafta" OJSC shall apply for obtaining a License for production operation of Rudivsk- Chervonozavodsk deposit for the time period of 20 years. The application for the License shall set forth that "Ukrnafta" OJSC acts for the best interests of the Partners hereto. Other Partners hereto shall not compete with "Ukrnafta" OJSC in respect of obtaining the above License. 3.5 In case the Agreement is terminated in connection with making a decision on deepening co-operation in development of Rudivsk-Chervonozavodsk deposit through formation of a new business entity (a joint venture), "Ukrnafta" OJSC shall facilitate such venture in obtaining the License. 8. Article IV "ORGANIZATION OF WORKS FOR DEVELOPMENT AND OPERATION OF RUDIVSK-CHERVONOZAVODSK DEPOSIT" shall be set forth in the following wording: 4.1 As the Partners hereto agree and under the power of attorney of "Ukrnafta" OJSC "Poltavanaftogas" OGPD shall act as an Operator as it is understood traditionally in the international oil business and in compliance with decisions of the Managing Committee shall conduct all organizational and practical operations related to exploration and operation of Rudivsk-Chervonozavodsk deposit. 4.2 Individual operations related to development of the deposit, drilling and overhaul of the wells can, under decisions of the Managing Committee, be carried out by the Company individually or with involvement of Ukrainian and foreign co-performers (subcontractors). 4.3 The Partners have agreed that drilling entities of "Ukrnafta" OJSC and "Chernihivnaftogasgeologiya" SGE shall act as direct performers for drilling prospecting and production boreholes. The Company shall resort to technical re-equipment of the drilling teams with the advanced foreign engineering, materials and technology, geophysical support of the drilling that would provide for reduced time period of drilling the boreholes and would facilitate preservation of filtration properties of seams to be opened. The specific measures related to technical re-equipment of the drilling teams will be stipulated by the Joint Activity Programs. The value of the above measures will be accounted of as a Contribution into the Joint Activity. The Company is intending to organize that within the second half of 1998 the Ukrainian specialists would study the expertise of some drilling companies of the USA and Great Britain. The Company specialists and the Ukrainian specialists shall jointly develop a 8 program for stage-by-stage re-equipment of the Ukrainian drilling entities engaged in Rudivsk-Chervonozavodsk deposit which program will stipulate specific volumes of works and deliveries of the equipment and tools, sources for funding and organizational and legal forms for implementation of such measures. In case of implementation of the above intentions the organizational expenses for performance of the relevant measures will be accounted of as the Labour Contribution to the Joint Activity. 4.4 The Partners to the Agreement shall resort to the measures related to completion of the prospecting of Rudivsk-Chervonozavodsk deposit, qualitative and complete exploration of the wells and seams, timely transfer of the obtained data to "Chernihivnaftogasgeologiya" state-run geological enterprise (SGE), and by participating in the summarizing assessment of geophysical, geological and production data shall facilitate the services of "Chernihivnaftogasgeologiya" SGE in completing calculations of the reserves of hydrocarbons in Rudivsk-Chervonozavodsk deposit and approval thereof by the State Commission on Reserves by June, 2002, that is earlier than the date stipulated by the License. 4.5 The Company shall provide for supplies into Ukraine of the progressive equipment and tools for operation of the wells, their overhaul and exploration, shall organize performance of highly technological operations by foreign contractors in compliance with the subject-matter of the Agreement and the Joint Activity Program. 4.6 The business relations as to performance by the Partners of the operations (works, services) related to development and exploitation of Rudivsk-Chervonozavodsk deposit paid for from the joint accounts, shall be equalled to the relations connected with performance of individual civil agreements per sample of the contract agreements and agreements on rendering services and performing works. In such case the Partners that are performers of such operations shall bear material liability for timely, full and qualitative performance thereof in compliance with requirements of the legislation in force and appendices hereto (operation agreements). Performance of such operations free of charge shall be the Labour Contribution into the Joint Activity. Quality of the Labour Contribution shall be subject to mutual control by the Partners. 4.7 The business relations as to transfer of the property on records of the Balance Sheet of Joint Activity, used by any of the partners to the Agreement that uses such property when performing the works for the Joint Activity, shall be equalled to the relations connected with performance of individual civil agreements per sample of lease contract (leasing). 4.8 In the course of the Joint Activity the Partners shall consider the issues of alteration of the form of organization of the drilling works keeping in mind implementation of such a system when drilling entities are performers of works (services related to drilling) rather than 9 prime contractors. In so doing organization and logistic support of the construction of the wells shall be exercised by the Manager who at the same time supervises formation of the total value of the wells and funding their construction. 9. Section 5.1.3 of Article V "RIGHTS OF THE PARTNERS TO THE AGREEMENT" shall have to be set forth in the following wording: 5.1.3 To obtain a share of the Incomes from the Joint Activity and in cases stipulated by the legislation of Ukraine, on the basis of an additional agreement - a share of the produce extracted hereunder. 10. The first and second paragraphs of Section 6.2 and Section 6.3 of Article VI "DUTIES OF THE PARTNERS TO THE AGREEMENT" shall have to be set forth in the following wording: 6.2 In addition to the general duties "Ukrnafta" OJSC shall undertake: 6.2.1 To organize works related to exploration and operation of Rudivsk-Chervonozavodsk deposit, to keeping records of the Individual Balance Sheet of the property of the Partners, of the business operations and the financial results of the Joint Activity thereof, and to assign to "Poltavanaftogas" OGPD performance of all deeds related to the duties of the Operator. 6.3 In addition to the general obligations the Company shall upon the request of the Manager undertake .... 11. Section 7.6 of Article VII "Joint Activity PROGRAM AND FUNDING THEREOF" shall have to be set forth in the following wording: 7.6 The Joint Activity Programs in line with the Great Risk Operations shall have to provide for compliance with the requirements of the design documents for exploration and development of Rudivsk-Chervonozavodsk deposit approved under the established procedure, licenses and the license agreement. The Partners shall have no right to carry out in Rudivsk-Chervonozavodsk deposit works that are not stipulated by the Joint Activity programs and are not separated as the Great Risk Operations. 12. The title of Article VIII "DESIGN FOR PILOT PRODUCTION OPERATION OF RUDIVSK-CHERVONOZAVODSK DEPOSIT" shall have to be changed into "DESIGN DOCUMETATION FOR OPERATION OF RUDIVSK-CHERVONOZAVODSK DEPOSIT" and to supplement the above article with Sections 8.3, 8.4, 8.5 in the following wording: 10 8.3 Within the Initial Period the Partners to the Agreement shall carry out the works on making more precise the geological structure of the deposit, and shall assess substantiation of placement of the production wells planned for drilling, their number and advisability of use of six derricks for subsequent construction of wells. 8.4 The Company is intending to submit for consideration of the Managing Committee the proposals on application of the up-to-date technologies for drilling wells with slant-straight and horizontal borehole, for perforation of the wells, for seam hydrofracture, for simultaneous and separate operation of a number of levels in one well, etc., for the purpose of formation of an optimal grid of wells on Rudivsk-Chervonozavodsk deposit, of achieving the highest economic indices of development thereof. 8.5 The technological documentation for production development shall be prepared not later than in a year after the reserves of Rudivsk-Chervonozavodsk deposit are approved. 13. Sections 9.2 and 9.3 of Article IX "GREAT RISK OPERATIONS" shall have to be set forth in the following wording: 9.2 The following can be considered as a Great Risk Operation: - carrying out additional seismic prospecting in plots of the earlier similar works carried out; - carrying out three-dimensional seismic studies; - drilling additional prospecting wells, and individual production wells; - other operations related to exploration and development of the deposit. 9.3 The Great Risk Operations can be carried out by the Partners at their own expense under risk terms and conditions. In case of a negative result of such Great Risk Operations the expenses for carrying out shall not be accounted of when determining the Partners' Actual Shares. In case of obtaining a positive result, as the Partners to this Agreement agree upon, the initiator of the Great Risk Operations shall be entitled to use the results of such operations, namely to obtain 100% of Hydrocarbons produced from the wells built or renovated under the Great Risk Operations until the expenses incurred when performing the above are reimbursed in the double amount. After that Hydrocarbons produced from the above wells shall be considered as the produce of the Joint Activity, and the value of the Great Risk Operations have no impact whatsoever upon distribution of the incomes between the Partners 11 of the Joint Activity. In such case when seismic works are determined as the Great Risk Operations, the expenses allocated for conducting the above operations can, upon a decision of the Managing Committee, be referred to the Balance Sheet of Joint Activity and shall be accounted of when determining the Partners' Actual Shares. 14. In Article X "BASIC AND ADDITIONAL HYDROCARBONS" the last paragraph of Section 10.3 shall have to be amended and the article shall have to be supplemented with Sections 10.4 and 10.5, 10.6 having set them forth in the following wording: 10.3 ... the Income from sale of the Additional Hydrocarbons or they themselves, in case an additional agreement is signed, shall be distributed between the partners to this Agreement. 10.4 "Poltavanaftogas" OGPD, prior to putting into operation the wells that are the Objects of Investment Activity, shall have to provide for technical facilities to measure the produce from each well, the total volume of produce extracted in the deposit and the commercial produce. Representatives of the Partners to the Agreement together with specialists of OGPD shall have to check operation of the measuring units prior to launching the first well and later on not less than once a quarter. Operation of the wells shall not be allowed for over 10 days in case the measuring units are not available or out of operation. 10.5 Division of the commercial produce of Rudivsk-Chervonozavodsk deposit into the Basic and Additional Hydrocarbons shall be exercised on the grounds of individual measurements of the produce from each well. OGPD shall keep records of production of the Basic and Additional Hydrocarbons, of the commercial produce per each day. The Balance Sheet of Joint Activity shall keep records of the volumes of the Additional Hydrocarbons under the reports made by representatives of the Partners upon the end of a month. 10.6 OGPD shall bear liability for improper performance of the obligations related to operation of the wells in compliance with technological conditions, for superstandard idleness of the wells, for loss and short production under the conditions to be determined in a separate Operation Agreement. 15. Sections 11.2, 11.5, 11.6, 11.7, 11.10 of Article XI "ACCOUNTING OF PROPERTY, ACTIVITIES UNDER Joint Activity, EXPENSES FOR IMPLEMENTATION THEREOF AND RESULTS OF PRODUCTION" shall have to be set forth in the following wording: 12 11.2 Expenses for carrying out exploratory works, drilling of production wells, capital construction including acquiring equipment in Ukraine, performance of research and other expenses that are not referred to the Gross Costs on extracting the produce of the Joint Activity, shall be paid for from the Individual Settlement Account to be kept by "Poltavanaftogas" OGPD in order to provide for the Joint Activity, and are reflected in the Individual Balance Sheet. When necessary, under the Joint Activity Programs, the Partners, at the expense of the own (unintegrated) assets, shall incur expenses of the capital type and shall refer them to the value of the capital funds which later on are put into records of the Individual Balance Sheet of Joint Activity. 11.5 The Gross Costs for extraction of the produce of the Joint Activity shall be formed from the current expenses for payment for the services of "Poltavanaftogas" OGPD and the Company listed in Sections 11.3 and 11.4, and the services of other enterprises, from compulsory deductions and payments referred to the Gross Costs in compliance with the legislation in force, from expenses for acquiring materials and energy resources, and other expenses. Wear and tear (amortization) of the fixed assets on the records of the Individual Balance Sheet shall be calculated under the procedure established by the legislation of Ukraine in force. 11.6 After the expenses for extraction of the produce are recorded into the Individual Balance Sheet, the financial results of the Joint Activity shall be formed. Payment of the tax on the Profit from the Joint Activity and distribution of thwe Incomes between the Partners shall be exercised in compliance with the requirements of the legislation of Ukraine in force. 11.7 The Partners shall fix reasonable settlement prices of the services for the Joint Venture on the basis of actual expenses related to rendering such services. For the purpose of reliable determining of the actual expenses for rendering services the Partners shall organize the accounting of expenses for services rendered to the Joint Venture with application of a system of sub-accounts. The general production expenses of OGPD and the Company shall be referred to services to the Joint Venture at the criterion to be determined by a separate agreement. 11.10 The accounting shall be kept under the rules fixed in Ukraine, and additionally under the rules of the country of origin of the Company, as from January 1, 1999, unless it (the Company) declares other, later dates. 16. Section 12.1 of Article XII "TAXES AND PAYMENTS TO THE BUDGET" shall have to be set forth in the following wording: 13 12.1 Taxes and compulsory payments to the budget and non-budgetary funds shall be paid in compliance with the requirements of the legislation of Ukraine in force at the expense of receipts from sale of the Joint Produce and shall be kept on records of the Individual Balance Sheet. 17. Article XIII "PROPERTY RELATIONS OF THE PARTNERS" shall have to be set forth in the following wording: 13.1 The property and pecuniary assets transferred by the Partners onto the Individual Balance Sheet as well as those created, obtained or acquired in the process of the Joint Activity and recorded into the Individual Balance Sheet, shall form the Joint Share Property. The Partners shall have no right to dispose of their share in the Joint Property without consent of the other Partners to this Agreement. 13.2 The incomes from the Joint Activity shall be distributed between the Partners to this Agreement depending on the Actual Shares. The Partners to the Agreement have agreed that if the Accrued Contributions of the Partners make up the ratio of 50:50 as stipulated by Section 21 hereof, the Actual Share of "Ukrnafta" OJSC shall be 55% and the Actual Share of the Company shall be 45%. In case of deviation from the above ratio of the Accrued Contributions, the Actual Share of the Company shall be determined as the product of a share of its Contribution in the total amount of the Contributions by the factor 0.9 (the ratio of the agreed upon percentage of distribution of the Incomes to the agreed upon percentage of participation in investment, that is 45 divided by 50). The Actual Share of "Ukrnafta" shall be determined as 100% minus the Actual Share of the Company. 13.3 The Accrued Contributions of "Ukrnafta" OJSC shall be calculated at the end of each quarter and shall include: - expenses for construction and overhaul of the wells and objects of improvement transferred to the Individual Balance Sheet which are not related to production of Basic Hydrocarbons (on the basis of a report on assessment of the above tangible assets at the estimating value to be determined by a licensed specialized entity, which report to be signed by all Partners); - pecuniary assets transferred onto the Individual Balance Sheet for funding the works of drilling and repair of the wells, industrial construction, acquiring the equipment and tools that are stipulated by the Joint Activity Programs; 14 - the value of the material resources acquired at the expense of the assets of "Ukrnafta" OJSC that are transferred onto the Individual Balance Sheet; - the Labour Contribution namely the costs of OGPD incurred by way of cooperation at its own expense for performance in compliance with the Joint Activity Program of the work, on its own or with involvement of contractors, related to contractual drilling, industrial construction and overhaul at actual contractual prices with accounting of the value of the material resources transferred to the contractors. 13.4 The Accrued Contributions of the Company shall be calculated on the quarterly basis and shall include: - pecuniary assets transferred onto the Individual Balance Sheet for funding the works stipulated by the Joint Activity Programs for drilling and repair of the wells, industrial construction, acquiring the equipment and tools; - value of the material resources transferred onto the Individual Balance Sheet as a Contribution; - value of the services related to drilling, construction and overhaul rendered by the Company to the Joint Venture by way of production cooperation (the Labour Contribution) in compliance with the approved Joint Activity Programs. 13.5 In case the incomes from the Joint Activity are not distributed within a quarter of accounting, they shall be deemed distributed hereunder and shall be subject to entering into the Accrued Contributions of the Partners in the amounts of due payments. 13.6 The Accrued Contributions and the Shares in the Investment shall be subject to approval by the Managing Committee. 13.7 In case of distribution of the produce between the Partners one shall account of the requirements of the legislation of Ukraine and the agreements achieved herein as to the ratio for distribution of the Incomes. 18. Article XIV "SALE OF PRODUCE OF THE Joint Activity" shall have to be set forth in the following wording: 14.1 The produce of the Joint Activity shall be sold by OGPD under the powers of attorney of other Partners to the Agreement. In case of the produce distribution on the basis of an additional agreement sale thereof shall be carried out by either partner independently. 14.2 The business relations as to performance by OGPD of operations related to sale of Hydrocarbons of the Joint Activity shall be equalled to the relations connected with performance of specific civil agreements per sample of the commission agreements. In case such sale is not 15 exercised within 30 days and there are no pecuniary assets received on the Individual Settlement Account of the Joint Activity, "Ukrnafta" OJSC, within the subsequent 30 days, can and will transfer into the Joint Property oil, gas condensate or other highly liquid produce in the amount equivalent to the value of the gas subject to payment. Recalculation into the natural equivalent (oil, gas condensate or other highly liquid produce) shall be made at the prices in effect as on the moment of its (such produce) transfer into the Joint Property. (This provision shall be in effect within the time period of aggravations in sale of and payments for gas). 19. Article XVI "COORDINATION OF THE Joint Activity AND MANAGEMENT OF THE JOINT VENTURE" shall have to be set forth in the following wording: 16.1 Coordination of the Joint Activity and management of the Joint Venture shall be exercised on the basis of decisions of the Managing Committee. The exclusive competence of the managing Committee shall include: - preparation of amendments and addenda hereto; - reconciliation of projects for development of deposits and projects of improvement, and submission for approval by governmental authorities; - approval of the Joint Activity Programs and of the Agreed Budgets, and control over performance of such decisions; - selection of contractors for performance of the works related to drilling the boreholes, comprehensive geophysical explorations, hydrofracture of seams and/or other works of high value; - reconciliation of contracts for performance of works for the amount in excess of one hundred thousand US dollars and contracts for purchase of the property to be transfered onto the Individual Balance Sheet in the amount over fifty thousand US dollars; - reconciliation of the terms and conditions for termination of the Joint Activity; - disposal of the Joint Property including determining the procedure for sale of the produce of the Joint Venture. 16.2 Within the Initial Period of the Joint Activity in 1997-1999 the Managing Committee shall constitute of 4 representatives from either Partner. Upon expiration of the above time period the composition of the Managing Committee shall have to be revised in such a way in order 16 to account of the Actual Share of the Partners in the Joint Activity. Further on the composition of the Managing Committee shall be revised every two years depending on the Actual Shares. The Managing Committee shall be headed by an executive of "Poltavanaftogas" OGPD. The expenses for organization of operation of the Managing Committee shall be funded from the Balance of the Joint Activity. 16.3 Decisions of the Managing Committee shall be made through the majority individual vote of the Committee members. In case the Partners fail to make a decision on day-to-day issues of the Joint Activity such as selection of a contractor, reconciliation of a contract for performance works or purchase of equipment, the issue shall be submitted for consideration by an expert group to be formed and operate under the procedure set forth in Section 9.4, and after that the Managing Committee shall make the final decision. 16.4 The operative management of the Joint Activity shall be exercised by the Manager's staff. The Company shall have the right to recommend specialists from among foreign or Ukrainian citizens to be included into the personnel of "Poltavanaftogas" OGPD to the position of the deputy Manager and 3 leading engineers. 16.5 The Manager shall prepare documents required for the Managing Committee to make decisions on coordination of the Joint Activity. 16.6 The Partners have agreed to consider, within six months as from the date this wording of the Agreement is signed, the issues of advisability of and terms and conditions for use of foreign specialists recommended by the Company in the Manager's staff. 20. Article XVIII "JOINING THE AGREEMENT" shall have to be supplemented by Section 18.3 in the following wording: 18.3 Any new Partner to the Agreement joining it upon consent of all other Partners can purchase from any of them a portion of the share in the Joint Property that will also require a relevant consent of all Partners. 21. Sections 20.4 and 20.5 of Article XX "MUTUAL RESPONSIBILITY OF THE PARTNERS AND RESOLUTION OF DISPUTES" shall have to be set forth in the following wording: 20.4 In case the Partners fail to agree upon the issues of dispute through negotiations within 60 (sixty) days as from the date of forwarding a 17 notice by one partner to the other Partner on the dispute available, the dispute shall be submitted for consideration to the Arbitration Institute of Stockholm Chamber of Commerce that finally resolves the dispute. The Partners have agreed that the Arbitration shall be carried out in compliance with the provisions of UNCITRAL Arbitration Rules. The place of the Arbitrage shall be Stockholm, Sweden. The law of substance of Ukraine - the country of performance hereof shall be applied in the course of consideration of disputes. The Arbitration proceedings shall have to be carried out in Ukrainian and English. 20.5 The Arbitrage shall be constituted of 3 arbiters to be appointed in the following way: the plaintiff and the defendant shall appoint one arbiter each who will jointly appoint the third arbiter. If within 30 days after the date of a notice on commencement of the arbitration proceeding the defendant fails to appoint an arbiter, such arbiter upon request of the plaintiff shall be appointed by the Institute. If two arbiters fail to appoint the third arbiter within 30 days after appointment of the second arbiter, such third arbiter shall be appointed by the Institute from among three arbiters proposed by the plaintiff. 22. Article XXI "TERMINATION OF OPERATIONS UNDER THE AGREEMENT OR SEVERANCE THEREOF" shall have to be set forth in the following wording: 21.1 This Agreement shall become nill and void upon expiration of the time period of its validity and in case of its premature severance. 21.2 Under the unanimous consent of the Partners the Agreement can be terminated prematurely, prior to expiration of the fixed 25 year time period in case the Partners arrive to a conclusion that the goals of the Agreement cannot be achieved or that it is not advisable to continue it in connection with unprofitability of the Joint Activity. 21.3 Either Partner can sever this Agreement unilaterally in case other Partners fail to perform or improperly perform the terms and conditions of the Agreement. 21.4 In case one of the Partners intends to withdraw from the composition of the partners to this Agreement, it shall have to notify the other Partner thereabout indicating the reasons thereof. In case the latter has no objections, it shall notify about that within a fortnight. In case of objections available it shall also notify about its objections within the same time period and about its plans to remedy the reasons that have initiated severance of the Agreement. The Partner acting as the initiator of severance of the Agreement shall have to declare confirmation of its intent or continuation of the Joint Activity. In case the Partner - the initiator of severance of the Agreement - declares its confirmation of the intent to sever the Agreement and the other Partner proceeds with objections, the issue shall be submitted to the Arbitrage. 18 21.5 In case of the Partners' consent to sever the Agreement or of a respective award of the Arbitrage, the Managing Committee can consider the issue of situation with creditor indebtedness. In case of the credit indebtedness available, the issue of repayment thereof shall have to be resolved. 21.6 In case the credit indebtedness is not available or fully repaid, the Agreement shall be deemed as terminated after expiration of the three month time period after the consent for severance of the Agreement is received or a relevant award of the Arbitrage is made, and within the next three months the Partners shall perform mutual settlements related to distribution of the profit and division of the Joint Property. 21.7 In case of severance of the Agreement "Ukrnafta" OJSC shall undertake to buy from the Company a share of the Joint Property owned thereby. In so doing the price of the share of the property to be redeemed by "Ukrnafta" OJSC shall have to equal to its estimate value determined by an expert (experts) having a relevant license. The expert (experts) shall be appointed upon the mutual consent of the Partners, their services shall be paid for from the Balance of the Joint Activity. In such case if the Partners fail to agree as to candidature for the expert, the issue shall be forwarded to the Arbitrage. In such case the Company shall act as the plaintiff. Settlements related to redemption of a share in the Joint property, shall be exercised within six (6) months under the procedure stipulated by the legislation in force. 21.8 Upon termination of the Agreement "Ukrnafta" OJSC can redeem the share of the Joint Property owned by the Company at any prices to be respectively agreed upon. If the Partners disagree as to sale-and-buy of the share of the Joint Property owned by the Company, the following procedures shall be exercised. Firstly, one shall consider the issues related to liquidation of wells, pipelines and process plants under the prescribed procedure. Liquidation shall be funded at the expense of balance of assets on the Individual Settlement Account and assets of the Partners that will fund the liquidation works at the ratio formed under the last actual distribution of the profit from the Joint Activity. In case liquidation of the above property is not advisable or impossible due to technical, geological or other reasons, it shall pass at the disposal of the Liquidation Commission to be formed by the Partners which commission is fully authorized to terminate the Joint Activity, to realize the property including its sale at auctions with no starting price fixed, settlements with the Partners. In case the Liquidation Commission fails to realize such property as wells, pipelines and process plants within six months, they shall be transferred onto the balance sheet of the principal activity of "Ukrnafta" OJSC. 21.9 Upon termination or severance of this Agreement the property given by the Partners for use to one another shall be given back to the owners. 19 21.10 The Partners agree that this Agreement can be terminated in case they create an individual business subject (a joint venture) that will be given the rights for development of Rudivsk- Chervonozavodsk deposit. In such case the shares of the Partners in the Joint Property shall be transferred onto the balance of such business subject as a contribution to the charter fund. 23. The Agreement shall remain valid with accounting of amendments listed in Sections 1 - 22 of these amendments and addenda. As from the moment of the state registration of the above amendments and addenda "The Amendments to Agreement No. 410/95 as of September 14, 1995, between "Poltavanaftogas" enterprise and "Carpatsky Petroleum Corporation" company, USA, on the joint investment and ptoduction activity related to development and exploitation of Rudivsk-Chervonozavodsk deposit" dated May 12, 1998, shall become nill and void. Signed in 4 duplicates in Ukrainian and 4 duplicates in Russian 4 duplicates for either Partner. All duplicates are of similar legal force. SIGNED BY: For "Ukrnafta" OJSC Ya.I. Kozak (Chairman of the Board) V.F. Kolisnyk (acting head of "Poltavanaftogas" OGPD under a power of attorney) For Carpatsky Petroleum Corporation" company L.K. Texas (President) 20 ATTACHMENT 5 TO OPINION LETTER Additions and Changes to the Contract # 410/95 dated September 14, 1995 for the investment, exploration and operation of Rudivsko-Krasnozavodskoye field revised on October 15, 1996 with amendments dated December 25, 1997 and August 26, 1998 (State Registration #1353-OO1K dated April 4, 1997 Registered in Poltava Regional Foreign Relations Department) City of Poltava April 23, 1999 OJSC Ukrnafta, represented by its Chairman of the Board Eger Dmitrii Alexandrovich, who is acting in accordance with the Charter, and by the Head of the Production Department (NGDU) of Poltavanaftogas Kozak Vladimir Pavlovich, who is acting in accordance with the Power of Attorney from OJSC Ukrnafta on one side, and Carpatsky Petroleum Corporation, USA, represented by its President Leslie Texas and by the Member of the Board of Directors Fred Khofheins, who are acting in accordance with the Charter on the other side, taking into account the initial experience of joint implementation of this Contract, have agreed to the following changes and additions to the said Contract # 410/95: Section XIV "SALE OF TIM PRODUCTION OUTPUT" shall be read as follows: 14.1 Sale of the joint production output shall be conducted by OJSC Ukrnafta represented by NGDU Poltavanaftogas through Powers of Attorney form the other parties. If the Company is not satisfied with the work performed by NGDU, it has the right to propose to the Managing Committee that the sale of the joint production output, or any part of it, for a certain period of time will be conducted by the Company though Powers of Attorney from the other parties. If an additional agreement provides that the output shall be divided between the parties, each party is responsible for the sale of its share of the output. 14.2. The relationship between parties with respect to the We of the output performed by NGDU or the Company is the same as in the contract of agency. 14.3. If NGDU, performing its obligations defined in Section 14.1 of this Contract, does not transfer the money into the Joint Account during the period of 30 days from the date of the sale, OJSC Ukrnafta has the right, during next 30 days, to transfer into the Joint Assets the oil, condensate and other output in the amount equal to the price of gas sold by NGDU. The volume of the oil, condensate, and other output transferred into the Joint Assets shall be calculated based on the prices on the day of the transfer. This Section also applies when difficulties with sale or collection of payments exist. This document is executed in four counterparts for each Party to the Contract. All four counterparts are in the Russian language and have equal legal force. Signed: OJSC Ukrnafta Carpatsky Petroleum Corporation By: D. A. Eger By: L.K. Texas (Chairman of the Board) (President) By: V.P. Kozak By: Fred Khofheins (Head of NGDU Poltavanaftogas (Member of the Board of Directors) through Power of Attorney) ATTACHMENT 6 TO OPINION LETTER APPROVED By the decree of the Ministry of Foreign Economic Relations and Trade of Ukraine 20 February 1997, #125 CARD OF STATE REGISTRATION OF THE CONTRACT ON JOINT INVESTMENT ACTIVITY WITH PARTICIPATION OF THE FOREIGN INVESTOR. Contract #410/95 of September 14, 1995 1. The subject of foreign economic activity of Ukraine - contract participant to whom is entrusted with conducting joint businesses of the participants. (Name, pattern of property, legal address, code ZUKPO, surname, name of the chief, telephone) The enterprise "Poltavnaftogas" of open joint-stock company "Ukrnafta" The collective property Ukraine, 314000, city Poltava, 12 Radyanska Street Code ZUKPO 22525915 General director - Kozak Vladimir Tel: 7-45-91 fax: 7-91-57 2. Other participants of the contract (Name, pattern of property, legal address, code ZUKPO, surname, name of the chief, telephone) Carpatsky Petroleum Corporation The corporate property 3000 Richmond Ave. Houston, TX 77098 President - Leslie Texas Tel: 713 524-1745 fax: 713 524-2427 Registered representation in Ukraine: #II I-1249 from April 24, 1996 Code 23735804 Address of representation: room 505, Kudryavsky spusk 7, Kiev, Ukraine Tel: 417-4371 fax: 417-1046 3. Kind of joint investment activity, stipulated in the contract: Joint investment activity and joint production in the field of production of gas and condensate, development of Rudovsko-Chervonozavodsky gas-condensate field. 4. Validity of the contract 20 (twenty) years from the moment of the conclusion Post, surname, name of the chief of the state registration body Head of foreign economic relations department of Poltava area - - Peretyatko Petro -------------------- (Signature) Date of issue - April 4, 1997 Registration number #1353-001k ATTACHMENT 7 TO OPINION LETTER State Committee of Ukraine for Geology and Subsoil Use L I C E N S E for exploratory operations Kiev The license is issued for geological exploration (exploratory & production development) Object name Rudivske-Chervonozavodske deposit Mineral resources hydrocarbons Object location Poltava oblast, Lokhvytsky rayon NL 50o 30' - EL 33o 19' NL 50o 27' - EL 33o 32' NL 50o 24' - EL 33o 32' NL 50o 24' - EL 33o 18 License holder "Poltavanaftogas" a subsidiary enterprise of "Ukrnafta" JSC License holder's address 12, Radyanska St., Poltava Purpose of operations Studies into the geological & production characteristics of deposits and determining optimal conditions for operation of the wells Special conditions Extraction of hydrocarbons must not exceed 10% of the assessed reserves The license validity term has been extended for two (2) years Deputy Chairman of the State Committee of Ukraine for Geology B.O. Vyalyuk January 28, 1997 License validity term 2 (two) years Date of issue July 31, 1995 License registration number 470 Head of organization Chairman of the State Committee of Ukraine for Geology M. Gavrylenko ATTACHMENT 8 TO OPINION LETTER State Committee of Ukraine for Geology and Subsoil Use L I C E N S E for exploratory operations Kiev The license is issued for geological exploration Object name Rudivske-Chervonozavodske deposit Mineral resources hydrocarbons Object location Poltava oblast, Lokhvytsky rayon NL 50o 30' - EL 33o 19' NL 50o 27' - EL 33o 32' NL 50o 24' - EL 33o 32' NL 50o 24' - EL 33o 18 License holder "Chernihivnaftogasgeologiya" SGE License holder's address 15, Shevchenko St., Chernihiv Purpose of operations Exploration of the geological structure of the deposit, assessment of hydrocarbons reserves Special conditions License validity term 2 (two) years Date of issue July 31, 1995 License registration number 469 Head of organization Chairman of the State Committee of Ukraine for Geology M. Gavrylenko ATTACHMENT 9 TO OPINION LETTER STATE COMMITTEE OF UKRAINE ON GEOLOGY AND USE OF MINERAL RESOURCES THE L I C E N S E (special resolution on use of mineral resources) Registered No 968 from March 30, 1998 Type of use by mineral resources: geological investigation (exploration) including pilot- commercial development geological investigation, (search, exploration), recovery etc. Object of licensing: Ruduvsko-Chervonozavodskoye field Title of the field, section, geological territories etc. Mineral resources: oil, gas, condensate main, associated, range of application Object location: Poltava Administrative region: Lokhvitsky Landmarks: village Ruda and Chervonozavodskoye Direction, distance from the nearest locality, railway station, points of natural conservations Geographic coordinates: Northern Latitude 50'30'05" 50'30'00" 50'25'40" 50'23'40" 50'23'35" East Longitude 33'17'30" 33'22'55" 33'35'10" 33'21'20" 33'17'50" Area: 189.5 km2 quantity, unit The purpose of the license (operations): Exploration of oil and gas reservoirs in Low-Carbonic depositions, pilot- commercial development of wells, reserves distribution approval by State Commission of Reserves of Ukraine with consequent industrial development of the field Special (additional) license conditions: 1. The operations are conducted according to the terms and conditions of contract "About joint activity on geological investigation of mineral resources and preparation for industrial development of Rudovkso- Chervonozavodskoye oil-gas-condensate field "from December 30, 1997, #5/27 between joint-stock company "Ukrnafta" and GGP "Chernigivnaftogasgeologia". 2. Fulfillment the conditions of State Control of ecological safety in Poltava region from February 19, 1998 #07-06-340 (ecological card No. 97) The license owner: 1. Opened joint-stock company "Ukrnafta" (NGDU "Poltavanaftogas") Code 00135390 254655, Kiev, Nesterovsky by-str. 3/5 The license is agreed: 1. State control of ecological safety in Poltava region from February 19, 1998 No. 07-06-340 (ecological card No. 97) Validity of the license: 5 (five) years Chairman of the Committee S.V. Goshovsky C:\1US-USER\CARPATSK\License 968.wpd ATTACHMENT 10 TO OPINION LETTER Approval from: Agreed with: Deputy Head of State Pozalin Y., Kozak Y.I. Committee of Geology Signature Tkach I. V. (SEAL) Agreement No. 5/27 on joint productive activity for geological exploration of subsoils and preparation to production development of Rudivsko-Chervonozavodske oil and gas condensate field city of Poltava December 30, 199__ Guiding by the Directive to grant licenses to gas and oil extraction enterprises for geological exploration of subsoils with right to subsequent production development of fields within IV quarter of 1997, formulated in Protocol Resolution of Cabinet of Ministers of Ukraine on immediate measures for stabilization of oil and gas extraction dated July 31, 1997; guiding by the Directive of operational conference determining further works at fields of Mehedivsko- Rudivska zone with view to accelerate and increase effectiveness of pilot production exploitation (PPE), attended by representatives from State Committee of Oil and Gas Industry, State Committee of Geology and OJSC "Ukrnafta" on December 13, 1997; ChernigivNaftogasGeologia, state geological enterprise, hereinafter referred to as the SGE "CNGG" in person of Maruhnyak V.M. as acting General Director, acting in virtue of charter of the enterprise from one side, OJSC Ukrnafta, acting in virtue of the charter, in person of Kozak V.P. as acting manager of NGVU "Poltavanaftogaz", structural subdivision of OJSC Ukrnafta, acting in virtue of power of attorney, from another side, hereinafter referred to as the "Participants" have entered into this Agreement as follows: 1. Basis of agreement NGVU Poltavanaftogaz of OJSC Ukrnafta shall obtain licenses for geological exploration of subsoils with right to subsequent production development of Rudivsko-Chervonozavodske, Svistunkovske, Chervono-lutske gas condensate fields up to ___________ 1998. NGVU Poltavanaftogaz of OJSC Ukrnafta shall be responsible for completion of exploration, PPE of said fields, calculation of hydrocarbons' deposits and preparation thereof for production development. The "participants" shall act jointly and coordinately for implementation of aforementioned assignments based on the terms hereof. 2. Subject of agreement The subject of agreement shall constitute activity on geological exploration of subsoils at Rudivsko-Chervonozavodske, Svistunkovske, Chervonolutske fields and preparation thereof for production development. 3. Performance procedure Joint activities of participants hereto shall be carried out as per their joint approval. The profit shall be attributable to each party with due account to the results of its business activity and no liability shall be incurred for business activity of other party. 3.1. The parties shall arrange for completion of exploration, PPE, calculation of hydrocarbons' deposits and submission thereof to State Commission of Ukraine on Subsoil Reserves with view to explicitly research the operation regimes, parameters of deposits, and evaluation of productive potential thereof. 3.2. Implementation of present agreement within five years. 3.3. The parties agree for search of investor to finance drilling and wells equipping works at said fields. 3.4. Oil and gas explorative expeditions of CNGG shall drill explorative, exploitative wells on the basis of bilateral agreements with NGVU Poltavanaftogaz. 3.5. The Participants shall have joint thematic geological accompaniment of works for geological research of field under specific agreement. 4. Obligations of parties 4.1. CNGG shall acquire the following obligations: 4.1.1. To construct wells, to test objects and to prepare them for PPE. 4.1.2. To dismantle drilling equipment and reclaim the soil on territory adjacent to wells in accordance with schedule. 4.1.3. To transfer deposits at Rudivsko-Chervonozavodske, Svistunkovske, Chervonolutske fields on balance of OJSC Ukrnafta up to April 1, 1998. 4.1.4. To compile a summary on geological constitution and calculation of hydrocarbons' deposits and jointly with NGVU Poltavanaftogaz of OJSC Ukrnafta to obtain approval for it in State Commission of Ukraine on Subsoil Reserves. 4.2. NGVU Poltavanaftogaz of OJSC Uknafta shall acquire the following obligations: 4.2.1. to finance wells drilling works on customer-contractor terms. 4.2.2. to enter into agreements (contracts) for investments with investors. 4.2.3. to issue engagements for construction of explorative, exploitative wells, allocation of land plot for constructing and equipping wells. 4.2.4. to prepare and approve plans for exploitation and drilling wells with CNGG 4.2.5. to arrange for extraction of oil and gas, equipping wells, inputting thereof into PPE. 4.2.6. to exploit wells in accordance with PPE plans and to quarterly transfer the results of research and information on wells to CNGG. 4.2.7. to prepare jointly with CNGG calculation of hydrocarbons' deposits at Rudivsko- Chervonozavodske field for submission to consideration of State Commission of Ukraine on Subsoil Reserves and to finance these works. 5. Special provisions 5.1. The financing of joint works shall be made from various sources: of internal origin, from state budget and in form of investments. 5.2. Settlements with CNGG for the works done shall be made in accordance with project-budget documentation (based on acts [EF]-2) 5.3. SGE CNGG shall drill not less than three explorative and exploitative wells yearly. 5.4. In case of impossibility for reasons not dependent upon parties to perform the terms of this agreement, the parties shall resolve to concretize its certain provisions within five days. 6. Liability of parties 6.1. For non-performance or undue performance of this agreement, the parties shall be liable in accordance with effective legislation of Ukraine. 6.2. If the parties came to no compromise, the dispute shall be settled in Arbitrage. 7. Term of agreement The agreement having been executed in two copies each with equal force shall be effective as of the date of its signing and shall act under sec. 3.2 8. Addresses and requisites of parties "Poltavanaftogaz" enterprise SGE "ChernigivNaftogasGeologia" Radyanska str., 12, city of Poltava, Shevchenko str.,15, city of Chernigiv, 314000 250006 tel: 7-45-91, facsimile 7-91-57 tel: 7-70-81, facimile: 7-48-56 teletype 164106 "[EF]ak[ie][el]" teletype 192196 "Ikap" Checking account Checking account 208503 in Regional 209713, MFO 331478 Department of Prominvestbank Code of enterprise 22525915 MFO 353456 in Zhovtneve branch of JS city of Chernigiv Prominvestbank, city of Poltava (SEAL) General Director of Poltavanaftogaz Acting General Director (Signature) Kozak V.P. (Signature) Maruhnyak V. M. Agreed with: Deputy Head of State Committee of Oil and Gas Industry Signature Zarubin Y.O. January 25, 1999 ATTACHMENT 11 TO OPINION LETTER Appendix No. to Agreement No. 410/95 as of September 14, 1995, on the joint production and investment operations related to development and working of Rudivsk-Chervonozavodsk deposit with amendments and addenda dated August 28, 1998 (State registration as of April 4, 1997, under No. 1353-0015 with the Department for foreign economic relations of Poltava oblast) AGREEMENT on the procedure for operation of the wells of Rudivsk-Chervonozavodsk deposit to be the joint property of "Ukrnafta" OJSC and "Carpatsky Petroleum Corporation" American company, collection, preparation, transportation of gas and gas condensate from the above wells Poltava August 31, 1998 The Partners to Agreement No. 410/95 dated September 14, 1995, on the joint production and investment operations related to development and working of Rudivsk-Chervonozavodsk deposit "Ukrnafta" CJSC represented by the chairman of the board Kozak Yaroslav Ivanovych and the acting head of "Poltavanaftogas" OGPE Kolisnyk Volodymyr Feodosiyovych, on the one hand, and "Carpatsky Petroleum Corporation" company represented by the president Lesly K. Texas, on the other hand, have agreed as follows: 1. General Provisions 1.1 This Agreement has been entered into in compliance with the provisions of Agreement No. 410/95 (Sections 4.1, 4.6, 10.4, 10.5, 10.6, 11.3, 11.5). 1.2 This Agreement shall stipulate operation of the wells of Rudivsk-Chervonozavodsk deposit Nos. 106-P, 102-P, 104-P, 109-P, 111-Ch, 100-Ch that are the joint property of "Ukrnafta" CJSC and "Carpatsky Petroleum Corporation" company, and of other wells which will be built in the future at the expense of the assets of the Partners to Agreement No. 410/95, maintenance of the pipelines running from the above wells. 1.3 The relations between the Partners in connection with performance of works related to operation of the wells listed in Section 1.2, with collection, preparation and transportation of gas and gas condensate from the above wells, shall be equalled to performance of works under specific civil agreements per sample of agreements for performance of works (rendering services). The Partners to Agreement No. 410/95 "Ukrnafta" CJSC and "Carpatsky Petroleum Corporation" company have agreed that under their powers of attorney the functions of the Customer as to operation of the property shall be performed by "Poltavanaftogas" OGPE, a division of "Ukrnafta" CJSC. At the same time "Poltavanaftogas" OGPE shall act as a performer of works for the joint interests of the Partners in the Joint Operations. Acceptance of the works performed hereunder and taxation thereof shall be exercised similar to agreements on performance of works (rendering services). 1.4 Operation of the wells listed in Section 1.2 shall be exercised in line with the wells of Rudivsk-Chervonozavodsk deposit, the objects of the deposit improvement for collection, preparation, transportation of the produce, other structures and objects that are not the subject-matter of Agreement No. 410/95. The indices of operation of the above wells shall be reflected in the statistic reporting, geological reports to be prepared by "Poltavanaftogas" OGPE for the deposit as a whole. 1.5 The terms meaningful for understanding the content of the text hereof and the terms specifically defined in Agreement No. 410/95 shall be written in the text of this Agreement with capital letter. 2. Subject-Matter of the Agreement 2.1 In compliance with the terms and conditions of Agreement No. 410/95 "Ukrnafta" CJSC and "Carpatsky Petroleum Corporation" company shall assign and "Poltavanaftogas" OGPE shall assume the obligations as to performance of the following works: - operation and maintenance of the wells and pipelines in compliance with the effective standards and rules for protection of the subsoil, for protection of the environment, industrial safety, and in compliance with the processing conditions approved by the Managing Committee; - organization and performance of exploration of the wells and seams; - provision for intra-deposit collection of well produce, systematic measurement of discharge of the wells, accounting total volumes of production of the natural gas and gas condensate; - preparation of the natural gas, gas condensate, transportation of the commercial produce to consumers; - underground repair of the wells; - current repairs of the capital funds of joint ownership. 2.2 The procedure for sale of the natural gas and gas condensate (Joint Operations Hydrocarbons) shall be determined by a separate agreement (per sample of a commission agreement) to be signed by the chairman of the board of "Ukrnafta" CJSC, by the president of "Carpatsky Petroleum Corporation" company and the head of "Poltavanaftogas" OGPE, and it shall not be the subject-matter hereof. 3. Organization and Procedure for Performance of Works 3.1 The works listed in Section 2.1 (except the works stipulated by the last two paragraphs of the above Section 2.1) shall be performed by "Poltavanaftogas" OGPE in line with the respective operations related to other objects of the deposit which are not the Joint Property. Such works shall be hereinafter referred to as the Complex Operations. The works listed in the two last paragraphs of Section 2.1 shall be performed as separate Individual Operations. 3.2 "Poltavanaftogas" OGPE shall perform the works in compliance with this Agreement through its own capacities as well as with participation of other divisions of "Ukrnafta" CJSC and other entities. The agreements entered into by "Poltavanaftogas" OGPE with other divisions and other entities as to performance of the Complex Operations, shall not correspond hereto as sub-contracts. 3.3 OGPE shall guarantee access to any objects of the deposit for representatives of the Company who have been properly briefed as to the industrial safety as well as submission to the Company representatives all initial documents necessary for analysing operation of the wells and preparing proposals as to optimization of their functioning, implementation of geological and technical measures for intensifying the influx, for ensuring accident-free operation of structures and equipment. 3.4 Technological conditions for operation of the wells shall be developed by OGPE services and shall be subject to approval by the management of "Ukrnafta" CJSC and "Carpatsky Petroleum Corporation" company. The Company shall submit proposals on operation of the wells, on performance of works related to exploration of the wells and optimization of their functioning including involvement of specialized foreign and Ukrainian enterprises in writing to OGPE or to "Ukrnafta" CJSC. Within a week time period OGPE shall have to accept the Company proposals or to notify in writing that they cannot be implemented with setting forth the reasons. The Company proposals disapproved by OGPE shall be considered by the Managing Committee as the Company may require. 3.5 The operating data as to the wells functioning, the works performed thereon, the results of measurements of discharges shall be presented to the Company representative in Ukraine (contact telephone number in Kiev 2-61). Measurement of discharge of the wells shall have to be made not less than once in ten days. OGPE shall have to ensure performance of the check measurements upon request of the Company with participation of representatives thereof. A relevant report shall have to be drawn according to the results of the check measurements of the well discharges to be signed by representatives of OGPE and the Company. 3.6 OGPE shall provide for implementation of organizational and technological measures for efficient protection of the underground and surface equipment against corrosion, for preventing hydration. The above organizational and technological measures to be developed by OGPE services with participation of the Company representatives, shall be subject to consideration and approval by the Managing Committee. 3.7 OGPE shall provide for bringing gas and gas condensate to commercial conditions in compliance with the effective state standards and technical requirements of consumers. OGPE shall bear property liability for the produce failure to comply with such standards and requirements. 4. Requirements to Performance of Works 4.1 The works related to production of gas and gas condensate, maintenance of the wells and other objects to be the Joint Property of the Partners to the Agreement, shall be carried out by complying with the effective standards and rules. OGPE shall be liable for preservation of the environment. 4.2 The works related to collection and itra-deposit transportation of the well produce, separation, drying, ............ and supply thereof to the system of the main transportation, shall be performed by OGPE capacities with application of the property thereof, and with participation of other divisions of "Ukrnafta" CJSC and other entities. 5. Accounting of the Produce 5.1 OGPE shall keep the accounting of the gross and commercial gas and gas condensate. The total volume of the commercial gas and gas condensate shall be calculated as a sum of production of the natural gas ( gas condensate respectively) from individual wells. In its turn the volume of production shall be calculated as product of the discharge and duration of operation less technological costs for the system of collection, preparation, storage and transportation which costs exceed the standard costs effective in OGPE. 5.2 "Poltavanaftogas" OGPE shall draw up reports as to the volumes of production, transportation of the natural gas and gas condensate from the wells that are the joint property of the Partners to Agreement No. 410/95. The above reports shall be subject to being agreed upon with representatives of "Carpatsky Petroleum Corporation" company and transferred to the service of "Poltavanaftogas" OGPE in charge of keeping the Individual Balance Sheet of the Joint Operations in compliance with Agreement No. 410/95 (the samples of the reports are given in Appendices 1 and 2). 6. Cost of Works 6.1 The cost of the Complex Operations related to maintenance of the wells in III quarter of 1998 is given in Appendix 3 hereto. 6.2 Further on the cost of the Complex Operations shall be determined on the basis of actual expenses on production of gas and oil with gas condensate incurred in "Poltavanaftogas" OGPE within a quarter. The cost of performance of the Complex Operations shall be determined upon completion of each quarter and approved by the Partners to Agreement No. 410/95. 6.3 When determining the cost of the Complex Operations the following calculations shall have to be made. The total sum of the actual costs of OGPE for production of the own gross produce and rendering services related to production of Hydrocarbons of the Joint Operations shall be calculated with accounting of the following items: 1. Power for production of oil. 2. The basic wage of the principal employees. 3. Additional wage. 4. Deductions for social insurance. 5. Amortization of the wells. 6. Costs for maintaining seam pressure. 7. Costs for collection and transportation of oil and gas. 8. Costs for preparation of oil, gas condensate and gas. 9. Costs for maintenance and operation of the equipment. 10. Department costs. 11. Total production costs, including a) charge for use of ............, state levy and a charge into the innovation fund. 12 Other production costs. The total sum of the costs under the above listed items shall be allocated for production of the own produce and for rendering services related to production of Hydrocarbons of the Joint Operations. In so doing the costs under Items 1, 5, 6, 11a and 12 shall be referred to the produce of the own production exclusively. The costs under Items 2, 3, 4 shall be referred to the self-cost of the own produce and services related to production of Hydrocarbons of the Joint Operations on the basis of the initial documents on the actual labour consumption. The costs under Item 7 shall be referred to the own produce and Hydrocarbone of the Joint Operations in proportion to the volumes of production thereof. The costs under Item 8 shall be referred to oil and gas condensate of the own production and the services related to production of the respective types of Hydrocarbons of the Joint Operations in proportion to the volumes of production thereof. The costs under Items 9, 10, 11 (less 11a) shall be referred to the produce of the own production and the services related to production of Hydrocarbons of the Joint Operations in proportion to the effective fund of the production wells. The costs under Item 11 less 11a shall be referred to the produce of the own production and the services related to production of Hydrocarbons of the Joint Operations in proportion to the volumes of production thereof. On the basis of such allocation the total sum of costs shall be determined relative to rendering services related to production of Hydrocarbons of the Joint Operations. The total value of the works performed and the services rendered for production of the produce of the Joint Operations shall be equal to the above costs. VAT shall be paid in addition to the above. 6.4 The value of ............performance of such works. The estimates shall be developed by "Poltavanaftogas" OGPE services and approved by the Managing Committee. 7. Procedure for Settlements 7.1 Settlements for the Complex Operations performed shall be exercised by .............payments by the 29th day of each month in the amount of 15% of the value of the anticipated volume of production of the Joint Operations Produce in a quarter. The balance settlement shall be exercised upon the end of the quarter, after having determined the cost of the services, within 10 days after a relevant report has been signed (a sample is given in Appendix 4). 7.2 Settlements for performance of the works determined as the Individual Operations shall be exercised within a 10 day time period after a relevant report has been signed. The Individual Operations performance of which is caused due to the fault of OGPE as a result of violation of the technological conditions of the wells functioning or of the requirements to operation of structures, equipment through ........................ organizational and technological measures for protection of the equipment and structures agaunst corrosion, and prevention of hydration, shall not be subject to payment from ............. of the Joint Operations. 8. Procedure for Acceptance of Works 8.1 The works determined as the Complex Operations and the Individual Operations shall be considered as performed after the relevant reports on the works performed have been approved by the head of "Poltavanaftogas" OGPE. The above reports shall be subject to mandatory agreement on the part of a representative of "Carpatsky Petroleum Corporation" company. ATTACHMENT 12 TO OPINION LETTER APPROVED APPROVED Chairman of the Board Vice Chairman of Opened JSC Ukmafta Goskomgeology _______________B.V. Zaritsky ______________B.O. Byaluk May 16,1995 May 16,1995 City of Poltava CONTRACT between Chernigovneftegasgeologiya and Poltavaneftegas for the joint exploration and operation of Rudivsko-Krasnozavodskoye field The state geological entity Chernigovneftegasgeologiya, represented by its General Manager Ginda Stepan Mefodievich (hereinafter called "ChNGG") on one side, and JSC Ukrnafta of Poltavaneftegas, represented by its General Manager Kazak Vladimir Pavlovich (hereinafter called "PNG") on the other side, have entered into this contract for the joint exploration and operation of wells #2,3,4,5,6,7,8, and 9 of Krasnozavodskoye field and wells #7 and 9 of Rudivskoye field. 1. Subject and Implementation of the Contract Both parties have agreed to the following: 1.1 To ensure detailed evaluation of the field parameters and working conditions, and accurate assessment of the industrial value of the filed, both parties agreed to jointly commence a final construction stage for the above-listed wells, as well as to jointly explore, operate, process, transport and sell raw materials (gas, condensate) on both internal and international markets. 1.2. This contract shall be implemented in two stages. Stage one is to finish well construction in 1995-1996, and stage two is to complete wells (according to the exploration data) and to commence well operation in 1995-1996. 1.3. Production volumes shall be calculated based on the exploration data and according to the IPE schedules. 2. Obligations of the Parties 2.1. ChNGG shall: 2.1.1. Complete the construction of wells, test them and transfer to PNG as assets in accordance with the agreed schedule. 2.1.2. Disassemble the drilling equipment and reclaim the land around wells in accordance with the timetable. 2.1.3. Furnish equipment and drilling crews for the completion of wells of Krasnozavodskoye field. 2.2. PNG shall: 2.2.1. Finance and procure casing, tubing X-mas Trees. 2.2.2. Create the exploration and production schedules and submit them to PNG for approval. 2.2.3. Ensure well completion. 2.2.4. Ensure that wells operate in accordance with the IPE schedules, current Well Operation Rules and published standards. 2.2.5. Conduct all exploration according to the IPE schedules and transfer the results to ChNGG. 2.2.6. Produce, collect, and pre-process the well output, as well as transport gas (gas condensate) from the well to the railroad (pipeline). A special two-party agreement shall be executed when gas is delivered to the pipeline. 2.2.7. Finance well completion performed by the Nezhinsk NGREVC. 3. Important Conditions 3.1. ChNGG shall prepare separate transfer-acceptance documents when unloading the ChNGG's share of gas (gas condensate) to the consumer. 3.2. Well output (gas and gas condensate) shall be divided as follows: 3.2.1. From the wells that belong to PNG, PNG shall receive 70%, and ChNGG shall receive 30%. 3.2.2. From Krasnozavodskoye wells #2,3,4,5,6, and 7 that belong to PNG, PNG shall receive 80%, and ChNGG shall receive 20%. 3.3. Production cost of gas and gas condensate that is transferred to ChNGG shall be calculated according to the wholesale prices on the day of the transaction. These prices shall include the applicable taxes established by the Ukrainian Government. In 1996 PNG shall reimburse ChNGG with oil (condensate) for the drilling of production wells. The volume shall be calculated in accordance with prices listed in Section 3.3. 3.4. ChNGG has a right to inspect the timing and quality of the exploration works. 3.5. If the performance of this contract is prevented by a cause that is beyond the control of both parties, the parties have five days to make a decision on adjusting the conditions of the contract. 4. Responsibilities of the Parties 4.1. Parties are responsible for nonperformance or incomplete performance of their obligations set forth in this contract according to the current laws of the state of Llkraine. 4.2. All disputes between parties that cannot be settled by the mutual agreement shall be referred to arbitration. 5. Term of the Contract 5.1. This contract is executed in two counterparts, which have equal legal force, and is valid from the date of its execution until January 1, 1997. 6. Addresses, Bank Accounts Poltavaneftegas 314000 Poltava Ul. Sovietskaya, 2 Tel: 7-4591 Fax: 7-9157 Telex: 164106 "Fakel" Account Number: 209713 MFO 331478 Code: 2252915 at Oktyabrskoye branch of AK Prominvestbank City of Poltava GGP Chernigovneftegasgeologiya 250006 Chernigov Ul.Shevchenka,15 Tel: 7-7081 Fax: 7-4856 Telex: 192196 "Ikar" Account Number: 208503 at regional branch of Prominvestbank, MFO 353456, City of Chernigov General Manager, PNG General Manager, ChNGG V.P. Kazak S.M. Ginda May 16, 1995 May 16, 1995 ATTACHMENT 13 TO OPINION LETTER AGREEMENT (PROTOCOL) between Chernigovneftegasgeologia and Poltavaneftegas for the joint exploration and operation of Rudivsko-Krasnozavodskoye, Mekhedivskoye, Svistunkovskoye, Sviridovskoye, and Chervonolutskoye gas condensate fields City of Poltava 1995 1. Subject and Implementation of the Agreement The state geological entity Chernigovneftegasgeologiya, represented by its General Manager Ginda Stepan Mefodievich (hereinafter called "ChNGG") on one side, and JSC Ukrnafta of Poltavaneftegas, represented by its General Manager Kazak Vladimir Pavlovich (hereinafter called "PNG") on the other side, have entered into this agreement for the joint exploration and operation of Rudivsko-Krasnozavodskoye, Sviridovskoye, Mekhedivskoye and other fields. Both parties have agreed to the following: 1. To ensure detailed evaluation of the field parameters and working conditions, and accurate assessment of the industrial value of the filed, both parties agreed to jointly commence a construction of exploration and pilot production wells for exploration, production, transportation and sale of raw materials (gas, condensate). 2. Both parties agreed to jointly look for an Investor to finance the final stage of exploration, as well as IPE and well completion at Rudivsko-Krasnozavodskoye, Sviridovskoye, Mekhedivskoye and other fields. PNG, after ChNGG's approval, shall execute the agreement with an Investor for the performance of said services. 3. Both parties shall jointly create a budget that accounts for: 1. Upgrading of ChNGG's drilling equipment-up to 5 drilling rigs (in 1995-1996). 2. Financing of construction of surface facilities. 3. Financing of utilization of western technologies such as GRN, development of productive horizons within hydrocarbon bearing basin, and others. 3.1. Both parties shall name the Investor in a separate agreement and then shall agree to the amount of the investment. 4. Production volumes shall be calculated based on the exploration data and according to the IPE schedules. 4.1. Both parties agreed to the following division of the well output: 30% ChNGG 70% PNG 4.2. Additional output that was produced due to the utilization of new technologies financed by the Investor shall be divided as follows: 1. PNG and ChNGG jointly define the Investor's share that shall be detailed in a three party agreement. 2. The rest of the output shall be divided as follows: ChNGG receives 25%, PNG receives 75%. 3. Payments between PNG and ChNGG shall be calculated based on the wholesale prices for PNG on the day of the transaction. 4. Each party receives profit based on its activity and is not responsible for the activity of the other party. PNG shall finance the following: 1. Pilot production drilling 2. Surface facilities 3. Loan payments (including interest) [**TRANSLATOR'S NOTE: Sections 5 and 6 are missing from the original**] 7. Within three months from the date of execution of the Agreement, ChNGG and PNG shall receive licenses for the geological exploration and operation of Rudivsko- Krasnozavodskoye, Sviridovskoye, Mekhedivskoye, Svistunkovskoye, and Chervonolutskoye fields. 8. PNG shall: 1. Transfer to ChNGG all drilling sites at Rudivsko-Krasnozavodskoye, Sviridovskoye, and Mekhedivskoye fields upon the completion of wells # 102, 103, and 105 of Rudivskoye field. 2. Finance the next stage of pilot production at the above-listed fields. 9. Parties are responsible for non-performance or incomplete performance of their obligations set forth in this agreement in accordance with the current laws of the state of Ukraine. 10. his agreement is executed in two counterparts, which have equal legal force, and is valid from the date of its execution until January 1, 1997. 11. Addresses, Bank Accounts: 11.1. Poltavaneftegas 314000 Poltava Ul. Sovietskaya, 2 Tel: 7-4591 Fax: 7-9157 Telex: 164106 "Fakel" Account Number: 209713 MFO 331478 Code: 2252915 at Oktyabrskoye branch of AK Prominvestbank City of Poltava 11.2. GGP Chernigovneftegasgeologiya 250006 Chernigov Ul. Shevchenka, 15 Tel: 7-7081 Fax: 7-4856 Telex: 192196 "Ikar" Account Number: 208503 at regional branch of Prominvestbank, MFO 353456, City of Chernigov General Manager, PNG General Manager, ChNGG V.P. Kazak S.M. Ginda May 16, 1995 May 16, 1995 APPROVED APPROVED Chairman of the Board Vice Chairman of JSC Ukrnafta Goskomgeology _____________B.V. Zan'tsky _________________B.O. Byaluk May 16, 1995 May 16,1995 EX-27.1 12 0012.txt FINANCIAL DATA SCHEDULE--PEASE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 0000076878 PEASE OIL AND GAS CO 3-MOS DEC-31-2000 MAR-31-2000 909,000 0 553,000 16,000 0 1,519,000 20,754,000 15,115,000 7,362,000 317,000 2,561,000 0 1,000 173,000 0 7,362,000 799,000 799,000 163,000 588,000 0 0 90,000 130,000 0 130,000 0 0 0 130,000 0.04 0.01
EX-27.2 13 0013.txt FINANCIAL DATA SCHEDULE--CARPATSKY
5 US 3-MOS DEC-31-2000 MAR-31-2000 5.47 1,976,000 0 2,247,000 1,944,304 120,000 2,654,000 9,723,000 5,768,000 6,938,000 3,142,000 0 0 4,000,000 9,395,000 0 6,938,000 575,000 575,000 336,000 1,615,000 0 0 23,000 (984,000) 82,000 (1,066,000) 0 0 0 (1,066,000) (0.01) (0.01)
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