<PAGE>
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 June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
-----------------
Commission File No. 1-14754
-----------------
PENDARIES PETROLEUM LTD.
(Exact name of registrant as specified in its charter)
-----------------
PROVINCE OF NEW BRUNSWICK, CANADA
(State or other jurisdiction of incorporation)
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 June 30, 1999, was 8,879,470.
1
<PAGE>
PENDARIES PETROLEUM LTD.
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998....................................3
Consolidated Statements of Operations for the
three and six months ended June 30, 1999
With Comparative Figures for the Preceding Year (Unaudited)..........4
Consolidated Statements of Cash Flows
for the six months ended June 30, 1999
With Comparative Figures for the Preceding Year (Unaudited)..........5
Notes to Consolidated Financial Statements (Unaudited)...............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........None
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................14
Item 2. Changes in Securities and Use of Proceeds...........................14
Item 3. Defaults Upon Senior Securities.....................................14
Item 4. Submission of Matters to a Vote of Security Holders.................14
Item 5. Other Information...................................................14
Item 6. Exhibits and Reports of Form 8-K....................................14
SIGNATURES...................................................................15
2
<PAGE>
PART I:
Item 1. FINANCIAL STATEMENTS
PENDARIES PETROLEUM LTD.
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and December 31, 1998
(All figures are in U.S. dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------ ------------------------
ASSETS (Unaudited)
------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 6,732,350 $ 7,873,280
Accounts receivable 148,311 105,750
Prepaid expenses and other assets 252,653 208,451
------------------------ -------------------
Total current assets 7,133,314 8,187,481
------------------------ -------------------
PROPERTY AND EQUIPMENT
Oil and gas properties, recorded under the full cost method
Proved 10,337,926 7,890,804
Unproved 11,298,375 13,238,236
Furniture, fixtures and office equipment 168,679 169,938
Accumulated depreciation, depletion and amortization (733,800) (644,449)
------------------------- -------------------
Net property and equipment 21,071,180 20,654,529
------------------------- -------------------
Total Assets $ 28,204,494 $ 28,842,010
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 37,400 $ 44,627
Accrued liabilities 38,206 115,235
------------------------ -------------------
Total current liabilities 75,606 159,862
------------------------ -------------------
SHAREHOLDERS' EQUITY
Common shares
Authorized, unlimited number of common shares
Issued 8,879,470 and 8,781,970 common shares, respectively 32,580,051 32,501,842
Deficit (4,451,163) (3,819,694)
------------------------- -------------------
Total sharesholders' equity 28,128,888 28,682,148
------------------------ -------------------
Total liabilities and shareholders' equity $ 28,204,494 $ 28,842,010
======================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
PENDARIES PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(All figures are in U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Three-Month Six-Month
Period Ended Period Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
REVENUE
<S> <C> <C> <C> <C>
Oil and gas income $ 71,050 $ 102,864 $ 172,265 $ 215,718
---------------- ----------------- ---------------- ---------------
EXPENSES
Oil and gas operating expenses 61,208 38,210 156,849 91,653
General and administrative expenses 381,357 668,427 757,277 1,203,060
Depreciation, depletion and amortization 42,301 94,832 90,053 179,998
Exchange gain (25,691) (28,178) (35,846) (28,939)
Stock option settlement - - - 450,000
---------------- ---------------- ----------------- ----------------
$ 459,175 $ 773,291 $ 968,333 $ 1,895,772
---------------- ---------------- ----------------- ----------------
OTHER INCOME
Interest Income 76,036 142,425 164,599 320,819
---------------- ---------------- ----------------- ----------------
NET LOSS (312,089) (528,002) (631,469) (1,359,235)
================ ================ ================= ================
NET LOSS PER SHARE
Basic $ (.04) $ (.06) $ (.07) $ (.15)
================ ================ ================= ================
Fully diluted $ (.04) $ (.06) $ (.07) $ (.15)
================ ================ ================= ================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
PENDARIES PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All figures are in U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Six-Month Six-Month
Period Ended Period Ended
June 30, June 30,
1999 1998
---- ----
CASH FLOW FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (631,469) $ (1,359,235)
Items not affecting cash:
Depreciation, depletion and amortization 90,053 179,998
Changes in non-cash working capital items-
Accounts receivable (42,561) 4,477
Accounts payable (7,227) (68,853)
Accrued liabilities (48,820) (111,196)
Prepaid expenses and other assets (44,202) (53,366)
---------------------- ----------------------
Net cash used in operating activities (684,226) (1,408,175)
---------------------- ----------------------
CASH FLOW USED IN INVESTING ACTIVITIES
Additions to unproved oil and gas properties (507,261) (3,673,925)
Additions to furniture, fixtures and office equipment 557 (54,654)
--------------------- ----------------------
Net cash used in investing activities (506,704) (3,728,579)
---------------------- ----------------------
CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from exercise of common stock options 50,000 42,000
Deferred financing costs - (206,794)
Cumulative translation effects - 2,213
--------------------- ---------------------
Net cash provided by financing activities 50,000 (162,581)
--------------------- ----------------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,140,930) (5,299,335)
CASH AND CASH EQUIVALENTS, beginning of period 7,873,280 15,133,285
--------------------- ---------------------
CASH AND CASH EQUIVALENTS, end of period $ 6,732,350 $ 9,833,950
===================== =====================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
(All figures are in U.S. dollars)
1. Nature of Operations
--------------------
Pendaries Petroleum Ltd. ("Pendaries" or "the Company"), a New Brunswick,
Canada corporation, is a holding company whose primary interests are in
exploration, development and production of oil and gas properties in the
People's Republic of China.
2. NATURE 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 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 Production, 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.
3. OIL AND GAS PROPERTIES - BOHAI BAY, CHINA
-----------------------------------------
Laopu Block Relinquishment - During the first quarter of 1999, the
petroleum contract on the Laopu Block in the Bohai Bay, China, covering
approximately 78,000 gross acres was terminated by Pendaries and the other
foreign contractors. All obligations had been fulfilled on this block.
Block 05/36 -On March 4, 1999, the Operator,Kerr-McGee, and China National
Offshore Oil Corp. ("CNOOC") agreed to extend the petroleum contract on
Block 05/36 into its second phase which covers the period March 31, 1999
to February 28, 2001. Block 05/36 is located in the Bohai Bay, China and
covers approximately 415,000 gross acres. Under the terms of the petroleum
contract, the foreign contractors are required to relinquish 25% of the
acreage in the block upon electing to proceed to the second exploration
phase. The Operator is negotiating the acreage to be relinquished with
6
<PAGE>
CNOOC at this time. The Company does not believe that the relinquishment
will materially affect the future potential of the block. Entry into the
second exploration phase carries with it a bonus payment to CNOOC of
$250,000 ($37,500 net to Pendaries) and a one well commitment to be drilled
during the second phase period by the foreign contractors.
4. COMMON SHARES
-------------
Issuance of Stock Options
-------------------------
In February 1999, certain outside directors of Pendaries were granted
options to purchase an aggregate of 107,100 common shares. The exercise
price of the options is $0.59 per common share and have an expiration date
of March 9, 2004. On March 9, 1999, 84,500 options were issued under the
February 1999 grant as a result of two former directors electing to forego
their respective stock option grants. There were no stock options issued
under the Stock Option Plan in the second quarter of 1999.
Issuance of Common Shares
-------------------------
In February 1999, certain outside directors of Pendaries were granted
62,500 common shares as compensation for directors' fees. The value of
the share compensation was $36,875 and was accrued at December 31, 1998.
On March 9, 1999, 47,500 shares were issued under the February 1999 grant
as a result of two former directors electing to forego their respective
stock compensation grants. The value of the shares issued was $28,209.
There were no shares issued under the Stock Compensation Plan in the
second quarter of 1999.
Stock Option Exercise and Cancellations
---------------------------------------
In June 1999, a director exercised 50,000 Sino-American options at an
exercise price of $1.00 per share for total proceeds to the Company of
$50,000. Pursuant to the Exchange Rights Agreement between the Company and
Sino-American, the 50,000 Sino-American shares issued as a result of the
exercise will be converted to 50,000 common shares of the Company. On June
30, 1999, 80,000 Sino-American options, 50,000 of which were owned by the
same director, expired unexercised. Additionally, 3,500 options to
purchase shares of the Company, granted under the Company's Stock Option
Plan, and held by a former employee expired unexercised. As a result of
the expiration of 83,500 shares of unexercised options, the number of
fully diluted shares of the Company is reduced to 9,968,470 from
10,051,970.
Stock Option Settlement
-----------------------
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 (which was
accrued as of March 31, 1998) 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,
contains terms substantially similar to those contained in the Stock
Option Agreements of all other option holders who had been granted options
prior to 1996.
7
<PAGE>
Net Loss Per Share
------------------
Basic net loss per share is calculated on the basis of the weighted
average common shares outstanding for the three and six month periods
ended June 30, 1999 and 1998 respectively. The Company's stock options
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.
5. MURPHY AGREEMENT
----------------
On April 24, 1998, Sino-American and the Company entered into an agreement
with Murphy Exploration & Production Company ("Murphy") to purchase its
45% interest in Block 04/36 (the "Murphy Agreement"), which was extended
to December 21, 1998 and then to March 22, 1999. The Murphy Agreement
provided that the Company would pay a total of $38 million for Murphy's
interest; $35 million of the consideration was to be paid in cash and $3
million in Pendaries Common Shares. Due to the adverse change in the
condition of the oil and gas industry subsequent to the signing of the
Murphy Agreement, the Company elected on March 22, 1999 to let the agree-
ment expire. The Company's non-refundable deposit of $1 million paid to
Murphy in April 1998 has been recorded as an additional investment in its
oil and gas properties related to this opportunity to increase its
interest in Block 04/36.
6. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
------------------------------------------------------------------------
These consolidated financial statements are expressed in U.S. dollars,
which is the functional currency in all areas of operation, 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 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, provision for site development and
restoration and future general, administrative and financial costs. This
is not consistent with U.S. GAAP. For U.S. GAAP, if the net capitalized
costs of oil and gas properties in a cost center exceed an amount equal to
the sum of estimated discounted present value at 10% of future net
revenues 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. 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.
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 $549,555 and $2,195,799 in China in 1998. There were no
material differences between Canadian GAAP and U.S. GAAP during the
quarters ended June 30,1999 and 1998.
8
<PAGE>
ITEM 2. 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 Form 10-K for the year ended December 31, 1998.
ACCOUNTING POLICIES
The unaudited consolidated financial statements and notes thereto included
herein have been prepared in accordance with Canadian GAAP.
As of June 30, 1999, 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 "Deficit." The
unaudited statements of operations present revenues and expenses for the
quarter and year to date in comparison with the same periods for the
previous year. The unaudited statements of cash flows show 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 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 of estimated future net revenues 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. 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.
9
<PAGE>
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 June 30, 1999 and 1998:
The Company incurred a net loss of $312,089 and $528,002 for the three
months ended June 30, 1999 and 1998, respectively. The $215,913 decrease in
net loss was a result of the following:
Oil and gas income from the Company's properties located in Alberta,
Canada, decreased from $102,864 for the three months ended June 30, 1998 to
$71,050 for the same period in 1999. The $31,814 decrease was due to loss
of income from the Morinville Field in Alberta,Canada, relating to workover
operations carried out on that field and normal reservoir depletion.
Oil and gas operating expenses increased from $38,210 for the three months
ended June 30, 1998 to $61,208 for the same period in 1999. The increase
was due to workover operations carried out in 1999 on a well located in the
Morinville Field in Alberta, Canada.
General and administrative expenses decreased from $668,427 in the second
three months of 1998 to $381,357 for the comparable period of 1999. The
$287,070 decrease was due primarily to reduced salaries and related costs,
cost savings in connection with the closing of the Toronto, Canada office,
and reduced outside legal and professional costs.
Interest income decreased by $66,389 from $142,425 in the three month
period ended June 30, 1998 to $76,036 for the comparable period of 1999.
The decrease was due to the reduction of cash available for investment in
1999.
Six Months Ended June 30, 1999 and 1998:
The Company incurred a net loss of $631,469 and $1,359,235 for the six
months ended June 30, 1999 and 1998, respectively. The $727,766 decrease in
net loss was a result of the following:
Oil and gas income from the Company's properties located in Alberta,
Canada, decreased from $215,718 for the six months ended June 30, 1998 to
$172,265 for the same period in 1999. The $43,453 decrease was due to loss
of income from the Wintering Hills Field and the Morinville Field in
Alberta, Canada, relating to workover operations carried out on the two
fields as well as natural reservoir depletion.
Oil and gas operating expenses increased from $91,653 for the six months
ended June 30, 1998 to $156,849 for the same period in 1999. The increase
was due to workover operations carried out in 1999 on one well located in
each of the Wintering Hills and Morinville fields in Alberta, Canada.
General and administrative expenses decreased from $1,203,060 in the first
six months of 1998 to $757,277 for the comparable period of 1999. The
$445,783 decrease was due primarily to reduced salaries and related costs,
cost savings in connection with the closing of the Toronto, Canada office,
and reduced outside legal and professional costs.
10
<PAGE>
During the six months ended June 30, 1998, the Company recorded the
settlement of 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,
contains 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 as of March
31, 1998. There were no such expenses in the first six month period of
1999.
Interest income decreased by $156,220 from $320,819 in the six month period
ended June 30, 1998 to $164,599 for the comparable period of 1999. The
decrease was due to the reduction of cash available for investment in 1999.
LIQUIDITY AND CAPITAL RESOURCES
From inception (July 5, 1994) the Company's capital by year is shown below.
Of the total, $31,027,761 represents cash raised by issuance of common
shares, $1,325,000 represents oil and gas properties paid for by issuance
of common shares, and $227,290 represents services paid for by issuance of
common shares.
<TABLE>
<CAPTION>
Common
Share Exercise of Exercise of
Period Equity Warrants Options Total
------ ------ -------- ------- -----
<S> <C> <C> <C> <C>
Year - 1995 $ 3,287,500 $ - $ - $ 3,287,500
Year - 1996 22,812,658 - 20,000 22,832,658
Year - 1997 68,000 944,488 5,196,115 6,208,603
Year - 1998 131,081 - 42,000 173,081
Year - 1999 28,209 - 50,000 78,209
------------ ----------- --------------- ------------
Totals $ 26,327,448 $ 944,488 $ 5,308,115 $ 32,580,051
============ =========== =============== ============
</TABLE>
During the same periods, the Company incurred capital expenditures as follows:
<TABLE>
<CAPTION>
Oil and Gas Oil and Gas Furniture,
Properties Properties Fixtures and
Period Canada China Equipment Total
------ ------ ----- --------- -----
<S> <C> <C> <C> <C>
Year - 1995 $ - $ 3,597,631 $ 59,758 $ 3,657,389
Year - 1996 1,966,088 2,981,853 62,613 5,010,554
Year - 1997 - 7,739,641 105,286 7,844,927
Year - 1998 - 4,843,827 (57,719) 4,786,108
Year - 1999 - 507,261 (1,259) 506,002
------------ ------------ --------------- ------------
Totals $ 1,966,088 $ 19,670,213 $ 168,679 $ 21,804,980
============ ============ =============== ============
</TABLE>
After capital expenditures and funds used in operations the Company had
cash of $6,732,350 at June 30, 1999. There is no credit facility with a
financial institution or any other outstanding debt.
11
<PAGE>
YEAR 2000 DISCLOSURE
The Year 2000 issue relates to the problems associated with the inability
of computer programs and equipment to properly calculate, store or use
dates after December 31, 1999. Hardware and software systems which only use
a two-digit convention for keeping track of dates would improperly
interpret the Year 2000 as the Year 1900. Errors of this type can result in
system failures, miscalculations and the disruption of operations,
including, among other things, a temporary inability to engage in normal
business. In response to the Year 2000 issue, the Company has developed a
strategic plan divided into the following phases: inventory assessment and
review of vendor representations, in-house testing, third party integration
and development of a contingency plan.
The Company has completed its initial assessment phase by compiling an
inventory listing of all in-house systems and reviewing all vendor
representations regarding the Year 2000 issue that the Company has received
to date. The licensor of the Company's in-house software system has
certified that such software is programmed to properly address Year 2000
scenarios. In addition, the initial assessment has shown that less critical
in-house software and non-information technology or equipment are either
not date specific or are capable of addressing the Year 2000. Based on the
initial review and reliance on vendor representations, the Company expects
that all such in-house systems will perform their respective functions in a
customary manner when faced with Year 2000 scenarios. In addition, the
Company has determined that functions which have been out-sourced to third
parties, consisting mainly of processing needs, are performed by systems
purchased within the last few years and are programmed to recognize the
Year 2000.
The Company conducted its in-house testing phase, reviewing core systems
and core-non-information technology. To date, the Company has not
encountered any material system disruption during in-house testing, and
therefore, the Company expects that the performance of such systems will
not be substantially disrupted by Year 2000 scenarios. However, being
primarily involved in the acquisition, development and exploration of oil
and gas internationally, the Company's "mission critical" equipment and
technology is off-site under the control of the operators of the Company's
properties. Although these systems are primarily non-information technology
systems which are not date specific, they rely on external power sources,
such as electricity, supplied by third parties. The Company is relying upon
representations by these operators and their third party suppliers that no
material disruption of services is anticipated as a result of the Year
2000. However, the most reasonably likely worst case Year 2000 scenario for
the Company would involve a prolonged disruption of third party services
affecting the productivity of core equipment, which could result in
substantial decrease in the Company's oil and gas production. It may
not be economically feasible for the operator to maintain a separate and
duplicate secondary power supply for every major component of the
operator's "mission critical" equipment. Therefore, unanticipated prolonged
losses of certain services could cause material disruptions for which no
economically feasible contingency plan has been developed. Such event could
result in a business interruption that could have a material adverse effect
on the Company's production payments from its properties and the Company's
results of operations and financial condition.
In addition to its internal review and testing, the Company has
communicated with its third party suppliers, service providers and
customers to determine the status of their Year 2000 compliance programs.
The Company has received and is relying on Year 2000 readiness reports
periodically issued by various third parties, such as financial services
providers. The Company will continue to have formal communications with its
significant suppliers and business partners to determine the extent to
which the Company is vulnerable to either the third parties' or its own
failure to correct Year 2000 issues. Third party notification and
integration was completed during the second quarter of 1999. All of these
third parties have responded and have provided favorable representations as
to their Year 2000 readiness. These third parties have received similar
representations from the Company. While there can be no guarantee that the
systems of other companies on which the Company relies will be timely
converted or that the conversion will be compatible with the Company's
systems, based on representations received to date, the Company does not
foresee material disruptions in the Company's business as a result of Year
2000 issues involving third parties.
12
<PAGE>
During its assessment, the Company has taken steps to prevent anticipated
Year 2000 disruptions. However, based on the readiness surveys received
through the second quarter of 1999 from its third party suppliers and
service providers, the Company does not believe it will need to further
develop its existing contingency plan to address Year 2000 related
disruptions. Although the effects of Year 2000 issues cannot be predicted
with certainty, to date, all systems tested have performed adequately, and
therefore, the Company believes that the potential impact, if any, of such
disruption will, at most, require employees to manually complete otherwise
automated tasks of calculations. The Company does not expect that any
additional training would be required to perform these tasks on a manual
basis. The Company does not believe that such event would materially affect
the Company's ability to continue business activities, although performing
such tasks may require additional time or personnel. In addition, if
needed, the Company will identify and arrange for other vendors, purchasers
and third party contractors to provide such services in order to maintain
normal business operations.
The Company has, and will continue to, utilize both internal and external
resources to complete tasks and perform testing necessary to address the
Year 2000 issues. The Company has not incurred, and does not anticipate
that it will incur, any significant costs relating to the assessment and
remediation of Year 2000 issues.
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," "expect, "
"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 on 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.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - N/A
Item 4. Submission of Matters to a Vote of Security Holders
A. The Company held an Annual and Special Meeting of Shareholders on
June 11, 1999 (the "Meeting"). At the record date (April 28, 1999),
8,829,470 shares of common stock were issued and outstanding, with
shareholders having cumulative voting rights regarding the election of
directors. At the Meeting six nominees were elected to serve as
Directors of the Company for a term expiring at the 2000 annual
meeting of shareholders. Also voted on at the Meeting were
propositions to 1) elect two or more directors by a single resolution
as opposed to electing each director nominee separately, 2) amend the
1997 Stock Option Plan to increase the number of shares of the
Company's common stock reserved for issuance by 250,000 shares, and 3)
reappoint Arthur Andersen LLP as auditor of the Company and authorize
the directors to set the auditor's remuneration. All directors
nominated were elected and all propositions passed. The details of the
vote are as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST WITHHELD NON-VOTES ABSTENTIONS
--- ------- -------- --------- -----------
NOMINEES FOR DIRECTORS
<S> <C> <C> <C> <C> <C>
Robert E. Rigney 6,042,579 - 9,133 1,865,414 912,344
Ben F. Barnes 6,042,579 - 9,133 1,865,414 912,344
Paul H. Farrar 6,042,579 - 9,133 1,865,414 912,344
Bobby J. Fogle 6,042,579 - 9,133 1,865,414 912,344
Shingyi Ho 6,042,579 - 9,133 1,865,414 912,344
James C. Roe 6,042,579 - 9,133 1,865,414 912,344
PROPOSITION VOTES
Proposition 1 - Single ballot
for director election 5,833,985 - 5,025 1,919,728 1,070,732
Proposition 2 - Increase in
Shares for 1997 Stock Option
Plan 3,614,030 33,100 147,875 4,131,816 902,649
Proposition 3 - Reappoint
Auditors 6,018,959 - 2,300 1,893,967 914,244
</TABLE>
Item 5. Other Information - N/A
Item 6. Exhibits and Reports on Form 8-K - None
14
<PAGE>
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: August 5, 1999 By: /s/Bobby J. Fogle
--------------------
Bobby J. Fogle
Vice President,Finance and
Chief Financial Officer
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PENDARIES PETROLEUM LTD. CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD
ENDED JUNE 30, 1999 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-31-1998
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,732
<SECURITIES> 0
<RECEIVABLES> 148
<ALLOWANCES> 253
<INVENTORY> 0
<CURRENT-ASSETS> 7,133
<PP&E> 21,805
<DEPRECIATION> (734)
<TOTAL-ASSETS> 28,204
<CURRENT-LIABILITIES> 76
<BONDS> 0
0
0
<COMMON> 32,580
<OTHER-SE> (4,451)
<TOTAL-LIABILITY-AND-EQUITY> 28,204
<SALES> 71
<TOTAL-REVENUES> 147
<CGS> 0
<TOTAL-COSTS> 459
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (312)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (312)
<EPS-BASIC> (0.4)
<EPS-DILUTED> (0.4)
</TABLE>
