SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
------------
Commission File No._______
------------
PENDARIES PETROLEUM LTD.
(Exact name of registrant as specified in its charter)
------------
PROVINCE OF NEW BRUNSWICK, CANADA
(Exact Name of Registrant as specified in its charter)
Internal Revenue Service - Employer Identification No. 52-2051576
8 Greenway Plaza, Suite 910, Houston, Texas 77046
(713) 355-2900
------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The total number of shares of the registrant's Common Shares, no par
value, outstanding on September 30, 1998, was 6,605,264.
1
<PAGE>
PENDARIES PETROLEUM LTD.
PART I - FINANCIAL INFORMATION PAGE
Consolidated Balance Sheet as of September 30, 1998
(Unaudited) With Comparative Figures for the Preceding Year............... 3
Statements of Consolidated Operations and Retained Deficit for the
three and nine months ended September 30, 1998
(Unaudited) With Comparative Figures for the Preceding Year............... 4
Consolidated Statement Cash Flows of Changes in Financial Position
for the nine months ended September 30, 1998 (Unaudited) With
Comparative Figures for the Preceding Year................................ 5
Notes to Consolidated Financial Statements (Unaudited).................... 6
PART II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................... 9
PART II. FINANCIAL INFORMATION
2
<PAGE>
<TABLE>
PENDARIES PETROLEUM LTD.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(Prepared from the accounts without audit)
(All figures are in U.S. dollars, unless otherwise stated)
<CAPTION>
September 30, December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 8,691,086 $ 15,133,285
Accounts receivable ............................................................. 144,704 213,243
Prepaid expenses and other assets ............................................... 162,443 18,457
------- ------
Total current assets .......................................... 8,998,233 15,364,985
--------- ----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, recorded under the full-cost method-
Proved ........................................................................ 6,682,708 6,556,094
Unproved ...................................................................... 13,975,613 9,729,119
Furniture, fixtures and other equipment ......................................... 211,609 227,657
Accumulated depreciation, depletion and amortization ............................ (639,225) (378,279)
-------- --------
Net property and equipment .................................... 20,230,705 16,134,591
---------- ----------
Total assets .................................................. $ 29,228,938 $ 31,499,576
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................ $ 17,403 $ 88,060
Accrued liabilities ............................................................. 43,376 187,891
------ -------
Total current liabilities ..................................... 60,779 275,951
------ -------
SHAREHOLDERS' EQUITY:
Common shares (Note 3)
Authorized
Unlimited number of common shares
Issued
8,781,970 and 8,726,470 common shares, respectively ....................... 32,501,842 32,328,761
Cumulative translation adjustment ............................................... - 4,180
Retained deficit ................................................................ (3,333,683) (1,109,316)
---------- ----------
Total shareholders' equity .................................... 29,168,159 31,223,625
---------- ----------
Total liabilities and shareholders' equity .................... $ 29,228,938 $ 31,499,576
============ ============
</TABLE>
The accompanying notes are an integral part of this
consolidated balance sheet.
3
<PAGE>
<TABLE>
PENDARIES PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
(Prepared from the accounts without audit)
(All figures are in U.S. dollars, unless otherwise stated)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Oil and gas income .......................................... $ 165,014 $ 176,418 $ 380,732 $ 411,070
----------- ----------- ----------- -----------
EXPENSES:
Oil and gas operating expenses .............................. 33,528 42,859 125,182 104,659
General and administrative expenses ......................... 596,371 492,381 1,799,431 1,406,179
Depreciation, depletion and amortization ......... 86,625 78,409 266,623 247,369
Exchange loss ............................................... 132,514 685 103,575 34,493
Write-off of registration costs (Note 2) ................... 299,397 - 299,397 -
Stock option settlement (Note 3) ............................ - - 450,000 -
1,148,435 614,334 3,044,208 1,792,700
OTHER INCOME:
Interest Income ............................................ 118,290 200,411 439,109 712,184
------- ------- ------- -------
LOSS BEFORE INCOME TAXES ....................................... (865,131) (237,505) (2,224,367) (669,446)
RECOVERY OF INCOME TAXES ....................................... - 83,127 - 234,306
--------- --------- ---------- ----------
NET LOSS .................................................... $ (865,131) $ (154,378) (2,224,367) (435,140)
RETAINED DEFICIT, beginning of period........................ (1,109,316) (224,975)
---------- --------
RETAINED DEFICIT, end of period ............................. $(3,333,683) $ (660,115)
=========== ===========
NET LOSS PER SHARE:
Basic ................................................... $ (.10) $ (.02) $ (.25) $ (.05)
=========== =========== =========== ===========
Fully Diluted ........................................... $ (.10) $ (.02) $ (.25) $ (.05)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this
consolidated statement.
4
<PAGE>
<TABLE>
PENDARIES PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Prepared from the accounts without audit)
(All figures are in U.S. dollars, unless otherwise stated)
<CAPTION>
For the For the
Nine-Month Nine-Month
Period Ended Period Ended
September September
30, 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................................ $ (2,224,367) $ (435,140)
Items not affecting cash-
Depreciation, depletion and amortization .......................................... 266,623 247,369
Decrease in future income taxes ................................................... - (234,306)
Loss on sale of fixed assets ................................................... 34,514 -
Change in non-cash working capital items-
Accounts receivable ............................................................ 68,539 (149,309)
Accounts payable ............................................................... (70,657) (201,433)
Accrued liabilities ............................................................ (144,515) (166,747)
Prepaid expenses and other ..................................................... (128,553) 5,915
-------- -----
Net cash used in operating activities ...................... (2,198,416) (933,651)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to proved oil and gas properties .......................................... - (1,683,085)
Additions to unproved oil and gas properties ........................................ (4,246,494) (3,985,429)
Additions to other property and equipment ........................................... (41,563) (42,042)
Proceeds from disposal of fixed assets .............................................. 6,454 -
---------- ----------
Net cash used in investing activities .................................................. (4,281,603) (5,710,556)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common shares ......................................... - 3,212,900
Net proceeds from exercise of common stock options .................................. 42,000 -
Cumulative translation effects ...................................................... (4,180) -
---------- ---------
Net cash provided by financing activities .................. 37,820 3,212,900
---------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ................................................. (6,442,199) (3,431,307)
CASH AND CASH EQUIVALENTS, beginning of period ......................................... 15,133,285 17,973,455
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ............................................... $ 8,691,086 $ 14,542,148
============ ============
</TABLE>
The accompanying notes are an integral part of this
consolidated statement.
5
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Prepared from the accounts without audit)
(All figures are in U.S. dollars, unless otherwise stated)
1. NATURE OF OPERATIONS:
Pendaries Petroleum Ltd."Pendaries" or the "Company" is a holding company whose
primary assets are interests in exploration, development and production of oil
and gas properties in the People's Republic of China.
2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION:
The Company completed an initial public offering and became a public company in
Canada on December 12, 1996.
The consolidated interim financial statements included herein have been prepared
by Pendaries without audit and reflect all adjustments which are, in the opinion
of management, necessary to present a fair statement of the results of the
interim period. These statements are presented on a basis consistent with the
annual audited consolidated financial statements. Certain information,
accounting policies and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted, although the Company believes that the disclosures
are adequate to make the information presented not misleading. These
consolidated interim financial statements should be read in conjunction with the
consolidated financial statements and the summary of significant accounting
policies and notes thereto included in the Company's latest annual financial
statements.
The consolidated financial statements include the accounts of Pendaries,
Pendaries Productions, Inc., Sino-American Energy Corporation (Sino-American)
and Sino-American Overseas Energy Corporation. All significant intercompany
transactions and balances have been eliminated.
The Company's registration statement filed on Form 20-F was declared effective
by the U.S. Securities and Exchange Commission in June 1998. This permitted the
Company to list its common shares for trading on the American Stock Exchange.
In the third quarter of 1998, the Company wrote-off approximately $300,000 in
deferred registration costs related to the Company's postponed initial cross-
border public offering in the United States.
The consolidated financial statements for the year ended December 31, 1997, were
audited by Arthur Andersen & Co., which issued an Auditors' Report without
reservation dated January 16, 1998.
3. COMMON SHARES:
Issuance of Stock Options
In January 1998, certain directors and officers of Pendaries were granted stock
options for a total of 79,500 common shares. The exercise price is $10.75 CDN
per common share and the options expire on January 8, 2003.
6
<PAGE>
Stock Option Legal Proceeding
In connection with litigation with the former President of Sino-American over
the number of stock options to which the former president was entitled, in April
1998, the parties entered into a Settlement Agreement pursuant to which the
former President received $450,000 and agreed to execute a new Stock Option
Agreement reflecting a grant of 100,000 stock options (the number of stock
options the Company claimed had originally been granted) and, with the exception
of certain restrictions not imposed on other option holders, containing terms
substantially similar to those contained in the Stock Option Agreements of all
other option holders who had been granted options prior to 1996.
Exercise of Stock Options
In the first nine months of 1998, 40,500 Sino-American stock options were
exercised for net proceeds of $42,000.
4. MURPHY AGREEMENT:
On April 24, 1998, Sino-American and the Company entered into an agreement with
Murphy to purchase its 45% interest in Block 04/36 (the "Murphy Agreement")
which was extended to December 21, 1998. Under the pertinent Operating
Agreement, Kerr-McGee had a 30-day right of first refusal to purchase a
proportionate share of such 45% interest. Kerr-McGee did not exercise its right
of first refusal, and its right expired on May 28, 1998. The Murphy Agreement
provides that the Company will pay a total of $38 million for Murphy's interest,
$35 million of the consideration to be paid in cash and $3 million in common
shares. The Company is currently assessing its capital requirements and
financing options for this transaction as well as associated future exploration
and development costs. As part of the agreement, Pendaries was required to
submit a deposit of $1,000,000. Should the transaction not close for any reason,
Pendaries' obligations in the transaction are restricted to the loss of the
aforementioned deposit.
5. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:
These consolidated financial statements are expressed in U.S. dollars and are
prepared in accordance with generally accepted accounting principles in Canada
("Canadian GAAP") which conform in all material respects with those in the
United States ("U.S. GAAP") for the periods presented, except as outlined below.
Oil and Gas Properties
In Canada, if the net capitalized costs of oil and gas properties in a cost
center exceed an amount equal to the sum of estimated future net revenues on an
undiscounted basis from proved oil and gas reserves in the cost center and the
costs of properties not being amortized, both adjusted for income tax effects,
such excess is charged to expense. Also, the total capitalized costs of all cost
centers are subject to a further recoverability test which includes, among other
things, provisions for site development and restoration, operating costs, future
general, administrative and financial costs. This is not consistent with U.S.
GAAP. For U.S. GAAP, Pendaries limits, on a country-by-country basis, the
capitalized costs of proved oil and gas properties, net of accumulated DD&A, to
the estimated future net cash flows from proved oil and gas reserves, net of
related tax effects, discounted at 10 percent. If capitalized costs exceed this
limit, the excess is charged to DD&A expense. Included in the estimated future
net cash flows are Canadian provincial tax credits expected to be realized
beyond the date at which the legislation, under its provisions, could be
repealed. To date, the Canadian provincial government has not indicated an
intention to repeal this legislation.
7
<PAGE>
If U.S. GAAP had been applied instead of Canadian GAAP, the Company would have
recognized an impairment of its oil and gas properties in Canada in the amount
of $510,800 in the second quarter of 1998. This amount is reflected in the
following summary as impairment of oil & gas properties.
The following is a summary of the significant adjustments to net loss for each
of the three and nine-month periods ended September 30, 1998 and 1997 and to the
retained deficit as of September 30, 1998 and 1997, which would be required if
U.S. GAAP had been applied instead of Canadian GAAP in the financial statements.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss according to the financial
statements, Canadian GAAP ........................... $ (865,131) $ (154,378) $(2,224,367) $ (435,140)
Decrease due to:
Impairment of oil & gas properties ............ - - (510,800) -
----------- ------------ ----------- -----------
Approximate net loss in accordance
with U.S. GAAP ...................................... (865,131) (154,378) (2,735,167) (435,140)
Add: Cumulative translation
adjustment loss ..................................... (21,443) - (4,180) -
----------- ----------- ----------- -----------
Comprehensive income ................................ $ (886,574) $ (154,378) (2,739,347) (435,140)
RETAINED DEFICIT, beginning of period ............... (1,109,316) (224,975)
---------- --------
RETAINED DEFICIT, end of period ..................... $(3,844,483) $ (660,115)
=========== ===========
NET LOSS PER SHARE:
Basic ........................................... $ (.10) $ (.02) $ (.31) $ (.05)
=========== =========== =========== ===========
Fully Diluted ................................... $ (.10) $ (.02) $ (.31) $ (.05)
=========== =========== =========== ===========
Weighted average common shares
outstanding ........................................ 8,781,970 8,316,111 8,779,839 8,282,505
Net loss per share
</TABLE>
Basic net loss per share is calculated on the basis of the weighted average
common shares outstanding shown on the above table for the three and nine-month
periods ended September 30, 1998 and 1997. The Company's stock options and
warrants were not included in the computation of fully diluted net loss per
share because to do so would have been antidilutive for the periods presented.
8
<PAGE>
PART II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements included elsewhere and with the
Company's Annual Report for the year ended December 31, 1997.
In April 1998, the Company entered into a purchase agreement with a working
interest owner in Block 04/36, Murphy Pacific Rim, Ltd. ("Murphy"), to acquire
Murphy's 45% interest. The purchase agreement provides that the Company will pay
$38 million for Murphy's interest, $35 million in cash and $3 million in common
stock of the Company. The Company was required to submit a deposit of $1
million. Should the Company elect not to close the transaction by December 21,
1998 for any reason, the Company's obligations in the transaction are limited to
forfeiture of the deposit. The Company is assessing its capital requirements and
options to finance the acquisition of Murphy's interest plus future associated
costs of exploration and development.
ACCOUNTING POLICIES
The unaudited consolidated financial statements and notes thereto included
herein have been prepared in accordance with accounting principles generally
accepted in Canada.
As of September 30, 1998, the Company's revenues were derived from interest
income and oil and gas production related to its activities in Canada.
Accumulated losses are presented on the balance sheet as "Retained Deficit." The
unaudited statements of operations presents revenues and expenses for the
quarter and year to date in comparison with the same periods for the previous
year. The statement of changes in financial position shows the inflows and
outflows for the period comparatively with those of the previous year.
The Company follows the full-cost method of accounting for oil and natural gas
properties. Under this method, all costs incurred in connection with the
exploration and development of oil and gas reserves are capitalized in separate
cost centers on a country-by-country basis. Such capitalized costs include
contract and concession acquisition; geological, geophysical and other
exploration work; drilling, completing and equipping oil and gas wells,
constructing production facilities and pipelines, and other related costs. The
Company also capitalizes interest costs related to unevaluated oil and gas
properties.
Capitalized costs associated with the acquisition and evaluation of unproved
properties are excluded from amortization until it is determined whether proved
reserves can be assigned to such properties, or until the value of the
properties is impaired. Unproved properties are assessed periodically to
determine whether any impairment has occurred.
If the net capitalized costs of oil and gas properties in a cost center exceed
an amount equal to the sum or estimated future net revenues from proved oil and
gas reserves in the cost center and the costs
9
<PAGE>
of properties not being amortized, both adjusted for income tax effects, such
excess is charged to expense. The total capitalized costs of all cost centers is
subject to a further recoverability test which includes, among other things,
provisions for site development and restoration, and future general,
administrative and financial costs.
Substantially all of the Company's exploration, development and production
activities are conducted jointly with others, and accordingly, the Company's
financial statements reflect only its proportionate interest in such activities.
The Company owns an interest in producing oil and gas properties in Alberta,
Canada. Depletion is provided based on the Company's proportionate interest of
production in respect of proved reserves.
The Company currently has no producing oil and gas properties in the People's
Republic of China. Therefore, related capitalized costs of oil and gas
properties are not currently subject to depletion.
CHINESE TAXES
The Company's future net income, as defined under Chinese law, from Chinese
sources, will be subject to Chinese corporate income tax at a rate of 33%. In
accordance with the terms of the tax treaty between the U.S. and China, such
taxes are creditable to U.S. corporate income taxes.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997:
The Company incurred a net loss of $865,131 and $154,378 for the quarter ended
September 30, 1998 and 1997, respectively, as a result of the following:
Oil and gas income from the Company's properties located in Alberta, Canada
decreased from $176,418 in the third quarter ended September 30, 1997 to
$165,014 for the same period in 1998. The $11,404 decrease was due to lower oil
and natural gas prices.
Interest income decreased by $82,121 from $200,411 in the third quarter of 1997
to $118,290 in the third quarter of 1998. The decrease was due to the reduction
of cash available for investment in 1998.
Oil and gas operating expenses and depreciation, depletion and amortization do
not differ materially for the third quarter of 1997 and the same period in 1998.
General and administrative expenses increased from $492,381 in the third quarter
of 1997 to $596,371 in the third quarter of 1998. The $103,990 increase was due
primarily to increased salaries
10
<PAGE>
and an increase in staff and costs associated with the Company's registration
with the U.S. Securities and Exchange Commission and its listing on the American
Stock Exchange.
The Company incurred an exchange loss of $132,514 in the third quarter of 1998
as compared to $685 in the same period in 1997. The losses were recorded in
consolidation due to the strength of the U.S. dollar as compared to the Canadian
dollar.
In the third quarter of 1998, the Company wrote off costs of $299,397 associated
with its registration with the U.S. Securities and Exchange Commission. These
costs were incurred primarily in the first and second quarters of 1998 and were
deferred on the balance sheet as "Prepaid Expenses and Other Assets" in
anticipation of an offering of securities in the U.S. and Canada. The Company
has elected to indefinitely postpone the offering and has, therefore, charged
these registration costs to expense.
The Company recorded a recovery of income taxes of $83,127 in the third quarter
of 1997. The Company follows Accounting Recommendation Section 3465, "Income
Taxes" of the Handbook of the Canadian Institute of Chartered Accountants and
determined that the loss incurred in the third quarter of 1998 did not meet the
criteria promulgated in Section 3465 to record a future income tax asset.
Nine Months Ended September 30, 1998 and 1997:
The Company incurred a net loss of $2,224,367 and $435,140 for the nine months
ended September 30, 1998 and 1997, respectively, as a result of the following:
Oil and gas income from the Company's properties located in Alberta, Canada
decreased from $411,070 in the nine months ended September 30, 1997 to $380,732
for the same period in 1998. The $30,338 decrease was due to lower oil and
natural gas prices.
Interest income decreased by $273,075 from $712,184 in the first nine months of
1997 to $439,109 in the first nine months of 1998. The decrease was due to the
reduction of cash available for investment in 1998.
Oil and gas operating expenses and depreciation, depletion and amortization were
essentially comparable for the first nine months of 1997 and the same period in
1998.
General and administrative expenses increased from $1,406,179 in the first nine
months of 1997 to $1,799,431 in the first nine months of 1998. The $393,252
increase was due primarily to increased salaries and an increase in staff and
costs associated with the Company's registration with the U.S. Securities and
Exchange Commission and its listing on the American Stock Exchange.
The Company incurred an exchange loss of $103,575 in the first nine months of
1998 as compared to $34,493 in the same period in 1997. The losses occurred were
recorded in consolidation due to the strength of the U.S. dollar as compared to
the Canadian dollar.
11
<PAGE>
As explained above, the Company wrote off costs of $299,397 associated with its
registration with the U.S. Securities and Exchange Commission.
During the nine months ended September 30, 1998, the Company settled litigation
with the former President of its wholly owned subsidiary, Sino-American Energy
Corporation, over the number of stock options to which the former president
was entitled, and in April 1998, the parties entered into a Settlement Agreement
pursuant to which the former president received $450,000 and agreed to execute a
new Stock Option Agreement reflecting a grant of 100,000 stock options (the
number of stock options the Company claimed had originally been granted) and,
with the exception of certain restrictions not imposed on other option holders,
containing terms substantially similar to those contained in the Stock Option
Agreements of all other option holders who had been granted options prior to
1996. The $450,000 settlement amount was charged to expense.
The Company recorded a recovery of income taxes of $234,306 in the first nine
months of 1997. The Company follows Accounting Recommendation Section 3465,
"Income Taxes" of the Handbook of the Canadian Institute of Chartered
Accountants and determined that the loss incurred in the first nine months of
1998 did not meet the criteria promulgated in Section 3465 to record a future
income tax asset.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred capital expenditures of $1,234,169 in 1995, $4,947,941 in
1996 and $7,739,641 in 1997. For the nine-month period ended September 30, 1998,
the Company incurred $4,288,057 in capital expenditures, with $559,478 incurred
in the period of June 30,1998 through September 30,1998.Except for approximately
$1,850,000 which was used in 1996 to purchase the Alberta properties, these
funds were used primarily to fund the Company's obligations under the petroleum
contracts associated with the Company's interests in China for its share of
drilling, geological and geophysical costs in its five concession areas
in China and to fund the $1,000,000 deposit for the proposed Murphy
interest acquisition and approximately $250,000 in evaluation costs associated
with this transaction.
In 1995, the Company raised capital of $1,886,500 through the private offering
of stock. In 1996, the Company raised additional capital privately and had net
proceeds from its initial public offering on the Toronto Stock Exchange for a
total of $22,832,658. The Company closed the overallotment portion of the
initial public offering in January 1997 resulting in additional net proceeds of
$2,823,247. Also, during 1997, the Company raised $3,385,356 as a result of the
exercise of stock options and warrants by the holders thereof. Thus,
cumulatively through 1997, the Company raised $30,927,761, and at the beginning
of 1998, had cash or cash equivalents of $15,133,285.
In the first three quarters of 1998 the Company raised $42,000 through the
exercise of stock options. On September 30, 1998 the Company had cash or cash
equivalents of $8,691,086. The Company had total shareholders' equity of
approximately $29,000,000 on September 30, 1998 compared with approximately
$31,000,000 at December 31, 1997. There is no credit facility with a financial
institution or any other outstanding debt.
12
<PAGE>
YEAR 2000 DISCLOSURE
The Year 2000 ("Y2K") issue relates to the possible problems associated with the
inability of computer hardware and software to properly recognize the Year 2000.
Hardware and software systems which only use a two-digit convention for keeping
track of dates would improperly read "00" as representing the Year 1900 instead
of the Year 2000. Although the extent of the problem is not yet known, the
ramifications of Y2K failures are expected to have a global impact.
The Company has completed its Internal Assessment Phase consisting of a review
of internal hardware, internal software and non-technology systems. After
reviewing current hardware systems applications and documenting software Y2K
compliance, the Company believes its computer systems and non-information
systems are Y2K compliant and therefore the Company will not be affected by
Y2K problems. Consequently, the Company does not anticipate the need to incur
any material remediation costs.
The Company has begun its Third-Party Integration Phase which includes
contacting third parties with whom the Company maintains relationships material
to the Company, such as banks, suppliers, and working interest owners. A survey
will be forwarded to these third parties to determine their status of Y2K
compliance. It is expected that the survey results will be compiled by the end
of the first quarter of 1999. Upon completing the assessment of third party
systems, the Company will develop, if necessary, a plan to respond to such
findings to be implemented by July 31, 1999. Such response plan may include
modifications of current systems, development of contingency plans or other such
necessary actions.
Having completed the internal Assessment Phase and having begun the Third-Party
Integration Phase, the Company believes that, at worst, material risks
concerning Y2K issues include loss of local or regional electrical power or
telecommunications services, delays or cancellations of shipping or
transportation, systems errors associated with exploration activities or other
aspects of operations, bank errors and computer errors by third parties. There
can be no assurance that governmental agencies or other third parties will
not suffer a Year 2000 business disruption that could have a material adverse
effect on the Company's business, financial condition and operating results.
Due to the nature of its operations, the Company does not believe any
contingency plan dealing with Y2K failures will have to be implemented. The
Company does not rely on any vendors or service providers which would pose a
significant risk for disruptions of the Company's operations in the event such
third parties are adversely affected by Y2K problems. The Company has and will
continue to utilize internal and external resources to address the Y2K issue.
13
<PAGE>
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q (Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements, as that
term is defined in Section 21E of the Securities and Exchange Act of 1934, as
amended, that involve a number of risks and uncertainties. Such forward-looking
statements may be or may concern, among other things, capital expenditures,
drilling activity, acquisition plans and proposals and dispositions, development
activities, cost savings, production efforts and volumes, hydrocarbon reserves,
hydrocarbon prices, liquidity, regulatory matters and competition. Such
forward-looking statements generally are accompanied by words such as "plan,"
"estimate," "expert," "predict," "anticipate," "projected," "should," "assume,"
"believe," or other words that convey the uncertainty of future events or
outcomes. Such forward-looking information is based upon management's current
plans, expectations, estimates and assumptions and is subject to a number of
risks and uncertainties that could significantly affect current plans,
anticipated actions, the timing of such actions and the Company's financial
condition and results of operations. As a consequence, actual results may differ
materially from expectations, estimates or assumptions expressed in or implied
by any forward looking statements made by or behalf of the Company. Among the
factors that could cause actual results to differ materially are: fluctuations
of the prices received or demand for the Company's oil and natural gas, the
uncertainty of drilling results and reserve estimates, operating hazards,
acquisition risks, requirements for capital, general economic conditions,
competition and government regulations, as well as the risks and uncertainties
discussed in this Quarterly Report, including, without limitation, the portions
referenced above, and the uncertainties set forth from time to time in the
Company's other public reports, filings and public statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENDARIES PETROLEUM LTD.
Date: November 13, 1998 By /s/Bobby J.Fogle
-----------------
Bobby J. Fogle
Vice President, Finance
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE PENDARIES PETROLEUM LTD. SEPTEMBER 30, 1998 FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 8,691
<SECURITIES> 0
<RECEIVABLES> 145
<ALLOWANCES> 162
<INVENTORY> 0
<CURRENT-ASSETS> 8,998
<PP&E> 20,870
<DEPRECIATION> (639)
<TOTAL-ASSETS> 29,229
<CURRENT-LIABILITIES> 61
<BONDS> 0
0
0
<COMMON> 32,502
<OTHER-SE> 3,334
<TOTAL-LIABILITY-AND-EQUITY> 29,229
<SALES> 0
<TOTAL-REVENUES> 283
<CGS> 0
<TOTAL-COSTS> 1,148
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (865)
<INCOME-TAX> (865)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (865)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
